Chapter 5 Elasticity and Its Applications

Test B
1

The elasticity of demand measures a. the increase in demand as additional buyers enter the market. b. a buyers responsiveness to a change in the price of a good. c. how much less of a good consumers will demand when incomes fall. d. the increase in supply that will occur from an increase in the price of a good. ANSW !" b. a buyers responsiveness to a change in the price of a good. T#$ " % & #1" ' S (T)*N" 1 *+, (T)- " 1 !AN'*%" #
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'emand is said to be inelastic if a. consumers hardly respond to a change in price. b. consumers respond substantially to a change in price. c. consumers respond directly to a change in income. d. the change in /uantity demanded is e/ual to the change in price. ANSW !" a. consumers hardly respond to a change in price. T#$ " % & #1" ' S (T)*N" 1 *+, (T)- " 1 !AN'*%" #
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The elasticity of demand for lu1uries tends to be a. greater than 1. b. e/ual to 1. c. less than 1. d. e/ual to 2. ANSW !" c. less than 1. T#$ " % & #1" ' S (T)*N" 1 *+, (T)- " 1 !AN'*%" #
3

%ilky Way candy bars tend to have an elastic demand because a. the candy bar market is too broadly defined. b. there are many close substitutes for %ilky Ways. c. %ilky Ways are considered by some to be a necessity. d. it is usually eaten /uickly and therefore the time hori4on is short. ANSW !" b. there are many close substitutes for %ilky Ways. T#$ " % & #1" ' S (T)*N" 1 *+, (T)- " . !AN'*%" #
5

conomists compute elasticity using the midpoint method primarily because it a. is the simplest method to compute elasticity. b. uses the same e/uation that is used to compute slope. c. automatically rounds /uantities to the nearest whole unit. d. gives the same answer regardless of the direction of change. ANSW !" d. gives the same answer regardless of the direction of change. T#$ " % & #1" ' S (T)*N" 1 *+, (T)- " . !AN'*%" #

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5. (hapter 59 lasticity and )ts Applications

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'emand is elastic if elasticity is a. e/ual to 1. b. e/ual to 2. c. less than 1. d. greater than 1. ANSW !" d. greater than 1. T#$ " % & #1" ' S (T)*N" 1 *+, (T)- " . !AN'*%" # NOTE: THE FOLLOWING QUESTION IS REPEATED FROM THE ON-LINE QUI STUDENTS MA" HA#E ALREAD" SEEN THIS QUESTION AND ITS ANSWER!
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ES! "OUR

A demand curve that is a downward<sloping straight line will have a. a positive slope. b. higher elasticity at the top than at the bottom. c. lower elasticity at the top than at the bottom. d. constant elasticity throughout its length. ANSW !" b. higher elasticity at the top than at the bottom. T#$ " % & #1" ' S (T)*N" 1 *+, (T)- " . !AN'*%" #
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When the price of $okemon cards are >.528 the /uantity demanded is 322 cards per day. When the price falls to >.328 the /uantity demanded increases to :22. ?iven this information and using the midpoint method8 you know that the demand for $okemon cards is a. elastic. b. inelastic. c. unit elastic. d. perfectly inelastic. ANSW !" a. elastic. T#$ " % & #1" S (T)*N" . *+, (T)- " 0 !AN'*%" #
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A perfectly inelastic demand is a. vertical because buyers purchase the same amount whether the price rises or falls. b. negatively sloped because buyers decrease their purchases when the price rises. c. positively sloped because buyers respond by increasing their purchases when price rises. d. hori4ontal because buyers increase their purchases by huge amounts with slight changes in price. ANSW !" a. vertical because buyers purchase the same amount whether the price rises or falls. T#$ " % & #1" ' S (T)*N" 1 *+, (T)- " . !AN'*%" #
12

Total revenue changes as one moves down a linear demand curve by a. decreasing. b. increasing. c. decreasing8 then increasing. d. increasing8 then decreasing. ANSW !" d. increasing8 then decreasing. T#$ " % & #1" ' S (T)*N" 1 *+, (T)- " . !AN'*%" #
11

)f the demand for bagels is elastic8 an increase in the price of bagels will a. increase total revenue of bagel sellers. b. decrease total revenue of bagel sellers. c. not change total revenue of bagel sellers. d. There is not enough information to answer this /uestion. ANSW !" b. decrease total revenue of bagel sellers. T#$ " % & #1" ' S (T)*N" 1 *+, (T)- " . !AN'*%" # NOTE: THE FOLLOWING QUESTION IS REPEATED FROM THE ON-LINE QUI STUDENTS MA" HA#E ALREAD" SEEN THIS QUESTION AND ITS ANSWER! ES! "OUR

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(hapter 59 lasticity and )ts Applications 50

1.

(orporation A#B has a linear demand curve for its product. The company is currently producing on the lower portion of its demand curve. )ncreasing the price of the product will a. not affect the companys total revenue. b. increase the companys total revenue. c. decrease the companys total revenue. d. increase the companys total cost of production. ANSW !" b. increase the companys total revenue. T#$ " % & #1" ' S (T)*N" 1 *+, (T)- " . !AN'*%" #
10

When a change in the price of a good results in no change in total revenue you know that the demand for this product is a. elastic. b. perfectly inelastic. c. inelastic. d. unit elastic. ANSW !" d. unit elastic. T#$ " % & #1" ' S (T)*N" 1 *+, (T)- " . !AN'*%" #
13

)f a : percent increase in income results in a 0 percent decrease in the /uantity demanded of macaroni8 then the income elasticity of demand for macaroni is a. negative and therefore macaroni is an inferior good. b. negative and therefore macaroni is a normal good. c. positive and therefore macaroni is an inferior good. d. positive and therefore macaroni is a normal good. ANSW !" a. negative and therefore macaroni is an inferior good. T#$ " % & #1" S (T)*N" 1 *+, (T)- " . !AN'*%" #
15

The cross<price elasticity of demand determines whether goods are a. normal or inferior. b. elastic or inelastic. c. lu1uries or necessities. d. complements or substitutes. ANSW !" d. complements or substitutes. T#$ " % & #1" ' S (T)*N" 1 *+, (T)- " . !AN'*%" #
1:

The price elasticity of supply measures how responsive a. sellers are to a change in price. b. buyers are to a change in price. c. buyers are to a change in income. d. sellers are to a change in buyers income. ANSW !" a. sellers are to a change in price. T#$ " % & #1" ' S (T)*N" . *+, (T)- " 0 !AN'*%" #

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53 (hapter 59 lasticity and )ts Applications

1;

*n the graph shown8 the elasticity of supply from point + to point (8 using the midpoint method would be appro1imately a. 2.5 b. 2.:. c. 2.=: d. 1.1 ANSW !" c. 2.=: T#$ " % & #1" ' S (T)*N" 1 *+, (T)- " . !AN'*%" #
1=

The price elasticity of supply for a good will be greater Cmore elasticD the a. more necessary the good is considered. b. broader the market is defined. c. more close substitutes the good has. d. longer the time period being considered. ANSW !" d. longer the time period being considered. T#$ " % & #1" ' S (T)*N" . *+, (T)- " 0 !AN'*%" #
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)f two supply curves pass through the same point and one is steep and the other is flat8 which of the following would be correctE a. The flatter supply curve is more elastic. b. The steeper supply curve is more elastic. c. The elasticity of supply will be the same for both curves. d. )t is impossible to tell the elasticity of supply for either curve unless you are given actual numbers to compute the elasticity of both curves. ANSW !" a. The flatter supply curve is more elastic. T#$ " % & #1" ' S (T)*N" . *+, (T)- " 0 !AN'*%" #
.2

A vertical supply curve tells us that a. suppliers will not respond to a change in price. b. an infinite /uantity will be supplied at a given price. c. suppliers will refuse to sell the product at the current market price. d. if the price of the product increases /uantity supplied will decrease substantially. ANSW !" a. suppliers will not respond to a change in price. T#$ " % & #1" ' S (T)*N" . *+, (T)- " 3 !AN'*%" #

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(hapter 59 lasticity and )ts Applications 55

.1

)f the elasticity of supply of a product is 2.58 then we know that supply is a. elastic. b. inelastic. c. unit elastic. d. perfectly inelastic. ANSW !" b. inelastic. T#$ " % & #1" ' S (T)*N" . *+, (T)- " 0 !AN'*%" #
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&nowing that the demand for wheat is inelastic8 if wheat farmers wanted to increase their total revenue they should all a. plant more wheat so that they would be able to sell more each year. b. increase spending on fertili4er in an attempt to produce more on the acres they farm. c. voluntarily plow under a certain percent of their wheat crop to raise the price. d. advertise in an attempt to get consumers to buy more wheat. ANSW !" c. voluntarily plow under a certain percent of their wheat crop to raise the price. T#$ " % & #1" ' S (T)*N" 0 *+, (T)- " 5 !AN'*%" #
.0

A firm would be willing to supply 522 frisbees per day at a price of >0.22 each. At a price of >5.22 each the firm would be willing to supply 1122 frisbees. Fsing the midpoint method8 the elasticity of supply would be a. 2.:;. b. 2.;5. c. 1.2. d. 1.5. ANSW !" d. 1.5. T#$ " % & #1" ' S (T)*N" . *+, (T)- " 3 !AN'*%" #
.3

#ou have Gust been hired as a business consultant to determine what pricing policy would be appropriate in order to increase the total revenue of a clothing store. The first step you would take is to a. increase the prices of the stores products. b. look for ways to cut costs and increase profit for the store. c. determine the elasticity of demand for the stores products. d. suggest that the store purchase an entirely new line of clothing that they could sell more cheaply. ANSW !" c. determine the elasticity of demand for the stores products. T#$ " % & #1" ' S (T)*N" . *+, (T)- " 3 !AN'*%" # NOTE: THE FOLLOWING QUESTION IS REPEATED FROM THE ON-LINE QUI STUDENTS MA" HA#E ALREAD" SEEN THIS QUESTION AND ITS ANSWER!
.5

ES! "OUR

HA number of mass transit systems have been e1periencing declining revenues despite fare increases.I Assuming that the demand for mass transit has not changed Ci.e.8 that the demand curve has not shiftedD8 the above statement implies that a. the demand for mass transit is elastic with respect to price. b. the demand for mass transit is inelastic with respect to price. c. mass transit is an inferior good. d. revenues would have risen only if fares had been increased by a larger amount. ANSW !" a. the demand for mass transit is elastic with respect to price. T#$ " % & #1" ' S (T)*N" 0 *+, (T)- " 5 !AN'*%" #

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ANSW !" b. a buyers responsiveness to a change in the price of a good. T#$ " % & #1" ' S (T)*N" 1 *+, (T)- " 1 !AN'*%" #
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ANSW !" a. consumers hardly respond to a change in price. T#$ " % & #1" ' S (T)*N" 1 *+, (T)- " 1 !AN'*%" #
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ANSW !" c. less than 1. T#$ " % & #1" ' S (T)*N" 1 *+, (T)- " 1 !AN'*%" #
3

ANSW !" b. there are many close substitutes for %ilky Ways. T#$ " % & #1" ' S (T)*N" 1 *+, (T)- " . !AN'*%" #
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ANSW !" d. gives the same answer regardless of the direction of change. T#$ " % & #1" ' S (T)*N" 1 *+, (T)- " . !AN'*%" #
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ANSW !" d. greater than 1. T#$ " % & #1" ' S (T)*N" 1 *+, (T)- " . !AN'*%" #
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ANSW !" b. higher elasticity at the top than at the bottom. T#$ " % & #1" ' S (T)*N" 1 *+, (T)- " . !AN'*%" #
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T#$ " % & #1"

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ANSW !" a. elastic. S (T)*N" . *+, (T)- " 0 !AN'*%" #

ANSW !" a. vertical because buyers purchase the same amount whether the price rises or falls. T#$ " % & #1" ' S (T)*N" 1 *+, (T)- " . !AN'*%" #
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ANSW !" d. increasing8 then decreasing. T#$ " % & #1" ' S (T)*N" 1 *+, (T)- " . !AN'*%" #
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ANSW !" b. decrease total revenue of bagel sellers. T#$ " % & #1" ' S (T)*N" 1 *+, (T)- " . !AN'*%" #
1.

ANSW !" b. increase the companys total revenue. T#$ " % & #1" ' S (T)*N" 1 *+, (T)- " . !AN'*%" #
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ANSW !" d. unit elastic. T#$ " % & #1" ' S (T)*N" 1 *+, (T)- " . !AN'*%" #
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T#$ " % & #1"

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ANSW !" a. negative and therefore macaroni is an inferior good. S (T)*N" 1 *+, (T)- " . !AN'*%" # ANSW !" d. complements or substitutes.

T#$ " % & #1" ' S (T)*N" 1 *+, (T)- " . !AN'*%" #
1:

ANSW !" a. sellers are to a change in price. T#$ " % & #1" ' S (T)*N" . *+, (T)- " 0 !AN'*%" #
1;

ANSW !" c. 2.=: T#$ " % & #1" ' S (T)*N" 1 *+, (T)- " . !AN'*%" #
1=

ANSW !" d. longer the time period being considered. T#$ " % & #1" ' S (T)*N" . *+, (T)- " 0 !AN'*%" #
1@

ANSW !" a. The flatter supply curve is more elastic. T#$ " % & #1" ' S (T)*N" . *+, (T)- " 0 !AN'*%" #
.2

ANSW !" a. suppliers will not respond to a change in price. T#$ " % & #1" ' S (T)*N" . *+, (T)- " 3 !AN'*%" #
.1

ANSW !" b. inelastic. T#$ " % & #1" ' S (T)*N" . *+, (T)- " 0 !AN'*%" #
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ANSW !" c. voluntarily plow under a certain percent of their wheat crop to raise the price. T#$ " % & #1" ' S (T)*N" 0 *+, (T)- " 5 !AN'*%" #
.0

ANSW !" d. 1.5. T#$ " % & #1" ' S (T)*N" . *+, (T)- " 3 !AN'*%" #
.3

ANSW !" c. determine the elasticity of demand for the stores products. T#$ " % & #1" ' S (T)*N" . *+, (T)- " 3 !AN'*%" #
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ANSW !" a. the demand for mass transit is elastic with respect to price. T#$ " % & #1" ' S (T)*N" 0 *+, (T)- " 5 !AN'*%" #