Chapter 5

If Susan's income increases by 20% and, as a result, she buys 10% more lattes, then: lattes are a luxury good. lattes are a normal good. lattes are an inferior good. lattes are a substitute for a normal good.

lattes are a normal good. Normal goods are defined as having an income elasticity between 0 and 1. In this case lattes have an income elasticity of 10/20 = 0.5.

Charming Accessories, Inc., sold a total of 32 headbands. If the headbands were sold at a price of $2 each, what is the total revenue? $64 $16 $34 $30

$64 Total revenue = Quantity × Price. The solution to the equation is 32 × $2 = $64.

When the increase in price for a new video game is 10%, the increase in quantity supplied of that new video game is 10%. What is the price elasticity of supply for that video game? 100 20 1 10

1 Price elasticity of supply = Percentage change in quantity supplied/Percentage change in price. The solution to the equation is 10%/10% = 1/1 = 1.

Lindsay recently received a 50% raise at her firm. As a result, her consumption of sushi increased by 25%. What is Lindsay's income elasticity of demand for sushi? 1 2 1/2 1/4

1/2 Income elasticity of demand = Percentage change in quantity demanded/Percentage change in income. The solution to the equation is 25%/50%, or 1/2.

If the price of coffee increases from $2.00 to $2.50 per cup, then what is the percentage change in price? −25% 25% 20% −20%

25% The solution to the equation is: [($2.50 − $2.00)/$2.00} × 100 = (0.5/2) × 100 = 0.25 × 100 = 25%.

When the increase in price for a new video game is 30%, the increase in quantity supplied of a new video game is 90%. What is the price elasticity of supply for that video game? 3 1/3 27% 60%

3 Price elasticity of supply = Percentage change in quantity supplied/Percentage change in price. The solution to the equation is 90%/30% = 3/1 = 3.

Price rises from $10 to $12, and the quantity demanded falls from 200 units to 100 units. Using the midpoint method, what is the price elasticity of demand between these two prices? 0.18 1.86 3.67 0.27

3.67 The solution is {(Q1 − Q1/0) / [(Q1 + Q0) / 2]} / {(P1 − P0) / [(P0 + P1) / 2]] = the absolute value of (100 − 200)/[(100 + 200)/2] divided by (12 − 10)/[(10 + 12)/2

When the increase in price for a new video game is 10%, the increase in quantity supplied of that new video game is 60%. What is the price elasticity of supply for that video game? 1/6 6 27% 60%

6 Price elasticity of supply = Percentage change in quantity supplied/Percentage change in price. The solution to the equation is 60%/10% = 6/1 = 6.

Which of the following values of Ed represents the largest price elasticity of demand? 1 7 0 5

7 The price elasticity of demand is always a negative number. Economists use the absolute value of the computed price elasticity of demand. Therefore, −7 represents the largest elasticity.

Assume that a firm is selling its product at the price that corresponds to the midpoint of its demand curve. If the firm increases the price of its product, what will happen to total revenue? It will decrease. It will stay the same. It will increase. It will fall to zero.

It will decrease. At the midpoint of the demand curve the elasticity is equal to one. Above that point, demand is elastic, and an increase in price will result in a large enough decrease in quantity demanded that total revenue will decrease.

Assume that the demand for taxi service is inelastic. If the price of taxi service increases, what will happen to total revenue? It will increase. It will decrease. It will fall to zero. It will stay the same.

It will increase. Total revenue will increase when the price is increased on a product with inelastic demand.

What will happen to the quantity demanded of a perfectly inelastic product when the price increases by 10%? It will increase by 10%. It will drop to zero. It will not change. It will decrease by 10%.

It will not change. If the demand for a product is perfectly inelastic, the quantity demanded does not change when price changes.

Which of the following is the correct expression for the price elasticity of demand? Percentage change in price/Percentage change in quantity demanded Percentage change in quantity demanded/Percentage change in price Percentage change in quantity demanded plus percentage change in price Percentage change in price plus percentage change in quantity demanded

Percentage change in quantity demanded/Percentage change in price The correct expression is percentage change in quantity demanded/Percentage change in price.

What will happen to the quantity demanded of a unitary elastic product when its price increases by 5%? Quantity demanded will increase by 5%. Quantity demanded will stay the same. Quantity demanded will drop to zero. Quantity demanded will decrease by 5%.

Quantity demanded will decrease by 5%. For products with unitary elastic demand, the percentage of quantity demanded precisely equals the percentage of change in price.

What will happen to the quantity demanded of a perfectly inelastic product when its price increases by 5%? Quantity demanded will increase by 5%. Quantity demanded will decrease by 5%. Quantity demanded will drop to zero. Quantity demanded will stay the same.

Quantity demanded will stay the same. For products with perfectly inelastic demand, quantity demanded does not change when price changes.

What happens to total revenue when the price drops below the unitary elasticity point on a linear demand curve? Total revenue drops to zero. Total revenue decreases. Total revenue stays the same. Total revenue increases.

Total revenue decreases. Total revenue decreases when price drops below the unitary elastic point on a linear demand curve.

If the price of apples causes quantity demanded to fall on the elastic portion of the (linear) demand curve, what will an increase in price do to total revenue? Total revenue will fall. Total revenue will stay the same because the demand curve is linear. Total revenue will rise. Total revenue will fall to zero.

Total revenue will fall. Because quantity demanded falls on the elastic portion of the demand curve, an increase in price will cause a large reduction in quantity demanded, lowering total revenue.

If the price of apples causes quantity demanded to fall on the inelastic portion of the (linear) demand curve, what will a decrease in price do to total revenue? Total revenue will rise. Total revenue will stay the same because the demand curve is linear. Total revenue will fall. Total revenue will fall to zero.

Total revenue will fall. Because quantity demanded falls on the inelastic portion of the demand curve, a decrease in price will cause only a small increase of quantity demanded, decreasing total revenue.

If the price of apples causes quantity demanded to fall on the elastic portion of the (linear) demand curve, what will a DECREASE in price do to total revenue? Total revenue will rise. Total revenue will stay the same because the demand curve is linear. Total revenue will fall to zero. Total revenue will fall.

Total revenue will rise. Because quantity demanded falls on the elastic portion of the demand curve, a decrease in price will cause a large increase in quantity demanded, increasing total revenue.

Assume that the price elasticity of demand for T-shirts is unitary elastic. If a surf shop increases the price of its T-shirts, what will happen to the total revenue from T-shirt sales? Total revenue will decrease. Total revenue will increase. Total revenue will fall to zero. Total revenue will stay the same.

Total revenue will stay the same. Total revenue will stay the same when the price is increased on a product with unitary demand because the percentage change in quantity demanded is exactly equal to the percentage change in price.

Which product is likely to have a lower elasticity of demand? a pack of gum a car a house a refrigerator

a pack of gum In general, the smaller the percent of household income spent on the product, the lower the elasticity of demand.

Which of the following is an example of an inelastic supply? a product that has a price elasticity of supply that equals 3.5 a product that has a price elasticity of supply that equals 2.5 a product that has a price elasticity of supply that equals 1 a product that has a price elasticity of supply that equals 0.1

a product that has a price elasticity of supply that equals 0.1 A product has inelastic supply when the price elasticity of supply is less than 1.

Which of the following products has (approximately) the largest price elasticity of demand? medical care private education automobiles air travel

air travel Air travel has an estimated price elasticity of demand of 2.4, so its price elasticity is fairly elastic.

Which of the following is most price elastic? furniture air travel shrimp restaurant meals

air travel The price elasticity of demand for air travel is 2.4.

Inelastic supply curves: are vertical. always cross the quantity axis. always cross the price axis. always pass through the origin.

always cross the quantity axis. Inelastic supply curves always cross the horizontal or quantity axis.

Which of the following is most price inelastic? cigarettes pesticides taxi service medical care

cigarettes The price elasticity of demand for cigarettes is 0.2.

If a 30% change in the price of grape soda leads to a 45% change in quantity demanded, price elasticity of demand for grape soda is considered: perfectly inelastic. inelastic. elastic. unit elastic.

elastic. If price elasticity is greater than 1, then price elasticity of demand is elastic.

The midpoint method of computing elasticity: automatically converts price elasticity of demand into cross price elasticity of demand. automatically rounds quantities to two decimal places. calculates percentage changes in the usual way, by dividing the difference in the two values by the original value. gets rid of the natural bias that occurs when using the base method.

gets rid of the natural bias that occurs when using the base method. When using the base method, your answer will be different, depending on the starting point. The midpoint method eliminates that bias by averaging the price and quantity base.

The demand curve for a perfectly elastic product will be: horizontal. sloping up and to the right. sloping down and to the right. vertical.

horizontal. A perfectly elastic demand curve is represented by a horizontal line.

What type of supply curves always cross the quantity axis? inelastic supply curves elastic supply curves long-run supply curves unitary elastic supply curves

inelastic supply curves Inelastic supply curves always cross the quantity (horizontal) axis.

After Lindsay received a 30% raise at work, she bought 15% less canned cream corn. For Lindsay, which type of good is canned creamed corn? normal good inferior good luxury good income-superior good

inferior good The quantity demanded of an inferior good falls when consumer income increases.

Which of the following products has (approximately) the smallest price elasticity of demand? automobiles private education medical care vacation travel

medical care The price elastic of demand for medical care is 0.3. Medical care is a necessity and so would have the least elastic demand.

If the price elasticity of demand for a prescription medicine is 0, then the price elasticity is considered: elastic. perfectly inelastic. inelastic. unit elastic.

perfectly inelastic. If price elasticity is equal to 0, then price elasticity of demand is perfectly inelastic.

The short run is defined as a period when _______ and the number of firms in an industry cannot change. units produced employees in a firm plant capacity units shipped

plant capacity The short run is defined as a period when plant capacity and the number of firms in an industry cannot change.

Substitutes have a(n): negative cross elasticity of demand. zero cross elasticity of demand. positive cross elasticity of demand. income elasticity of demand greater than 1.

positive cross elasticity of demand. Substitutes have a positive cross price elasticity of demand. As the price of one good increases, the quantity demanded of the other good increases at every price point.

All other things remaining equal, the more inelastic demand is, the lower the incidence of taxation on: neither consumers nor producers. consumers. producers. both consumers and producers.

producers. If consumers and producers have equal price elasticities, the burden of the tax will be shared equally. The side of the market that does not change buying (demand) or producing (supply) behavior when prices rise will bear the majority of the tax burden. Because demand is inelastic, buyers' behavior will not change dramatically after the tax, and they will bear the majority of the incidence.

Which of the following is most price inelastic? gasoline cigarettes salt medical care

salt The price elasticity of demand for salt is 0.1.

The ______ is defined as a period when plant capacity and the number of firms in an industry cannot change. medium run long run market period short run

short run The short run is defined as a period when plant capacity and the number of firms in an industry cannot change.

Which of the following is least price elastic? air travel furniture restaurant meals shrimp

shrimp The price elasticity of demand for shrimp is 1.2.

When the price of product A rises, the quantity of product B that is purchased increases. Products A and B are: substitutes. complements. not related. inferior goods.

substitutes. The goods are substitutes. When the price of A rises, the quantity demanded of A decreases; since the quantity purchased of B increases we know that B is being consumed in lieu of A.

Elastic supply curves always cross: the quantity axis. the price axis. through the origin. both the price and quantity axes.

the price axis. Elastic supply curves always cross the price (vertical) axis.

Inelastic supply curves always cross: the quantity axis. the price axis. through the origin. both the price and quantity axes.

the quantity axis. Inelastic supply curves always cross the quantity (horizontal) axis.

If a 30% change in the price of hotdogs leads to a 30% change in quantity demanded, price elasticity of demand for hot dogs is considered: perfectly inelastic elastic. unit elastic. inelastic.

unit elastic. If price elasticity is equal to 1, then price elasticity of demand is unit elastic.

If a 30% decrease in the price of hotdogs leads to a 30% increase in quantity demanded, price elasticity of demand for hot dogs is considered: inelastic. elastic. perfectly inelastic. unit elastic.

unit elastic. If price elasticity is equal to 1, then price elasticity of demand is unit elastic.