Chapter 5 (Exam 1)

Which of the following is likely to have the largest elasticity of supply? A) The producer of vanilla ice cream B) The producer of yachts C) A dentist

A) The producer of vanilla ice cream

Rank the following in order from the least elastic demand to most elastic: A) Sudafed cold and allergy medicine B) Allergy medicine that is prescribed by a physician C) Any over-the-counter allergy medicine

1) B) Allergy medicine that is prescribed by a physician 2) C) Any over-the-counter allergy medicine 3) A) Sudafed cold and allergy medicine

Rank the following from the least elastic (inelastic) to most elastic. (Hint: think about the substitutes for each of these goods when ranking them). A) Demand for cookies B) Demand for food C) Demand for dessert D) Demand for Oreos

1) B) Demand for food 2) C) Demand for dessert 3) A) Demand for cookies 4) D) Demand for Oreos

Ceteris paribus, an increase in an inelastic demand will cause _______change in the equilibrium quantity than the same increase in an elastic demand. A) A greater B) A smaller C) The same

A) A greater

When the federal government subsidizes higher education in the form of direct subsidies to universities, it results in: A) An increase in the supply of higher education B) A decrease in the supply of higher education C) An increase in the demand for higher education D) A decrease in the demand for higher education

A) An increase in the supply of higher education

A business should ___________ the price of a good with an inelastic demand if it wants to increase revenues. A) Increase B) Decrease

A) Increase

A major city was thinking about increasing its bus fares and commissioned a study to estimate the price elasticity of demand. The study estimated that elasticity was 0.4. What action should the city have taken to increase revenue from bus fares? A) Increase fares B) Decrease fares C) Do not change fares

A) Increase fares

Is the demand for a container of salt likely to be inelastic or elastic? Why? A) Inelastic because salt is a necessary dietary component B) Elastic because there are lots of substitutes for salt C) Inelastic because for most people salt is a very small part of their budget D) Elastic because people only buy salt in the long-run

A) Inelastic because salt is a necessary dietary component or C) Inelastic because for most people salt is a very small part of their budget

If the income elasticity of a good is 0.8, what do we know about the good? A) It is a normal good. B) It is an inelastic good. C) It is an inferior good. D) It is an elastic good.

A) It is a normal good

If you were selling a product with an elasticity of 1.6 and you wanted to increase your revenue, what should you do to the price? A) Lower price B) Increase price C) Do not change price

A) Lower price

If the government taxes car producers, what will happen in the market for cars? A) The supply curve will shift to the left. B) The demand curve will shift to the right. C) There will be a movement along the supply curve to the left. D) There will be a movement along the demand curve to the right.

A) The supply curve will shift to the left.

Sometimes consumers purchase goods because of "conspicuous consumption"; i.e., they want others to know that they can afford to buy the goods. There are many examples of these goods, such as Rolex watches, Coach purses, and flying first class. What would you expect the income elasticity of demand to be for these goods? A) These are luxury goods, so income elasticity would be greater than 1. B) These are normal goods, so income elasticity would be greater than 1. C) These are inferior goods, so income elasticity would be greater than 1.

A) These are luxury goods, so income elasticity would be greater than 1.

Demand is said to be _______ when the quantity demanded is very responsive to changes in price. A) elastic B) unit elastic C) inelastic D) independent

A) elastic

The price elasticity of demand for tickets to local baseball games is estimated to be equal to 0.89. In order to boost ticket revenues, an economist would advise: A) increasing the price of game tickets because demand is inelastic. B) not changing the price of game tickets because demand is unit elastic. C) increasing the price of game tickets because demand is elastic. D) decreasing the price of game tickets because demand is elastic.

A) increasing the price of game tickets because demand is inelastic.

If the supply curve for aspirin is perfectly elastic, then a reduction in demand will cause the equilibrium price to: A) stay the same and the equilibrium quantity to fall. B) fall and the equilibrium quantity to fall. C) rise and the equilibrium quantity to stay the same. D) rise and the equilibrium quantity to fall.

A) stay the same and the equilibrium quantity to fall.

If cola and iced tea are good substitutes for consumers, then it is likely that: A) their cross price elasticities are greater than zero. B) their price elasticities of demand are less than one. C) their income elasticities are less than zero. D) their price elasticities of supply are less than one .

A) their cross price elasticities are greater than zero.

A 25 percent decrease in the price of breakfast cereal leads to a 20 percent increase in the quantity of cereal demanded. As a result: A) total revenue will decrease. B) total revenue will increase. C) total revenue will remain constant. D) the elasticity of demand will increase.

A) total revenue will decrease.

Billy Bob's Barber Shop knows that a 5 percent increase in the price of their haircuts results in a 15 percent decrease in the number of haircuts purchased. What is the elasticity of demand facing Billy Bob's Barber Shop? A) 0.15 B) 3.0 C) 0.10 D) 0.05

B) 3.0

Which of the following goods would be the most likely to be subject to a government-imposed tax? A) Cereal B) Bottles of alcohol, such as whiskey and gin C) Shoes

B) Bottles of alcohol, such as whiskey and gin

A business should ___________ (increase/decrease) the price of a good with an elastic demand if it wants to increase revenues. A) Increase B) Decrease

B) Decrease

If the country enters a period of prosperity, resulting in consumer incomes increasing by 4% and the income elasticity of a good is 0.8, what will happen to the demand for that good as a result? A) Demand will increase by 1.2% B) Demand will increase by 3.2% C) Demand will increase by 4.8%

B) Demand will increase by 3.2%

The suppliers of ____________ are more likely to have a tax imposed on their production. A) Jewelry B) Gasoline

B) Gasoline

If a man spends approximately 45% of his income on air travel and his sister only spends about 2% of her income on air travel (and that is the only difference), would the man's demand for air travel be less or more elastic than his sister's? A) Less B) More C) Cannot tell

B) More

Situation A: When a $10 per unit tax is imposed on the producer of Bippies (a candy), the equilibrium price increases by $4. Situation B: When a $10 per unit tax is imposed on the producer of Bippies, the equilibrium price increases by $2. Based on the two situations above, Bippies in Situation A has a _________ elastic supply OR has a _________ elastic demand than exists in Situation B. A) More; more B) More; less C) Less; less D) Less; more

B) More; less

If the demand curve is perfectly elastic, then an increase in supply will: A) decrease the price but result in no change in the quantity exchanged. B) increase the quantity exchanged but result in no change in the price. C) increase the price but result in no change in the quantity exchanged. D) increase both the price and the quantity exchanged.

B) increase the quantity exchanged but result in no change in the price.

If the demand curve for a life-saving medicine is perfectly inelastic, then a reduction in supply will cause the equilibrium price to: A) rise and the equilibrium quantity to fall. B) rise and the equilibrium quantity to stay the same. C) rise and the equilibrium quantity to rise. D) stay the same and the equilibrium quantity to fall.

B) rise and the equilibrium quantity to stay the same.

Demand is said to be _______ when the quantity demanded changes at the same proportion as the price. A) elastic B) unit elastic C) inelastic D) independent

B) unit elastic

The price elasticity of demand measures the: A) responsiveness of quantity demanded to a change in quantity supplied. B) responsiveness of price to a change in quantity demanded. C) responsiveness of quantity demanded to a change in price. D) responsiveness of quantity demanded to a change in income.

C) responsiveness of quantity demanded to a change in price.

Suppose you know that the price elasticity of demand for your product is 0.5, and you are thinking about raising your price by 8%. How much can you expect quantity to decrease? A) 8% B) 5% C) 4% D) We can't tell how much quantity will decrease.

C) 4%

Ceteris paribus, an increase in an inelastic demand will cause _______ change in the equilibrium price than the same increase in an elastic demand. A) A smaller B) The same C) A greater D) One cannot tell

C) A greater

When the federal government subsidizes higher education in the form of Pell grants to students, it results in A) An increase in the supply of higher education B) A decrease in the supply of higher education C) An increase in the demand for higher education D) A decrease in the demand for higher education

C) An increase in the demand for higher education

The price elasticity of demand (in absolute value) will be _________________ if demand is elastic. A) Equal to one B) Less than one C) More than one

C) More than one

A firm has a choice of raising or lowering its price. If the firm wishes to increase its revenues (the price times the quantity sold), what should it do? A) Raise price when demand is elastic, because the quantity demanded will increase. B) Lower price when demand is elastic, because the quantity demanded will decrease. C) Raise price when demand is inelastic, because the revenues gained from the price increase will be larger than the revenues lost from the smaller quantity sold. D) Lower price when demand is inelastic, because the revenues lost from the lower price will be smaller than the revenues gained from the increase in quantity sold.

C) Raise price when demand is inelastic, because the revenues gained from the price increase will be larger than the revenues lost from the smaller quantity sold.

Youth smoking seems to be more _______ than adult smoking—that is, the quantity of youth smoking will fall by a greater percentage than the quantity of adult smoking in response to a given percentage increase in price. A) unitary elastic B) inelastic C) elastic D) cross-price elastic

C) elastic

A perfectly elastic supply curve is: A) upward sloping to the right. B) downward sloping to the left. C) horizontal. D) vertical.

C) horizontal

The longer the time period considered, the more the elasticity of supply tends to: A) decrease B) remain constant C) increase D) converge to zero

C) increase

Assume that as your income increases, your consumption of burgers decreases. We can assume that your income elasticity of demand for burgers is what? A) Between 0 and 1 B) Greater than 1 C) Equal to 1 D) Negative

D) Negative

Suppose that there is currently a $2.00 per bottle tax on vodka that is levied on consumers. Legislators have decided to give consumers some relief by eliminating the tax. In order to keep tax revenues at their previous level, they decide to impose a $2.00 tax on producers. What is the net impact of these two actions? A) Consumers of vodka are made better off. B) Producers of vodka are made better off. C) The government is made better off. D) There is no change in either consumers' or producers' well-being.

D) There is no change in either consumers' or producers' well-being.

A 10 percent increase in the price of soda leads to a 20 percent increase in the quantity of iced tea demanded. It appears that: A) elasticity of demand for soda 0.5 and is inelastic. B) elasticity of demand for iced tea is 2 and is elastic. C) cross-price elasticity of demand for soda is -0.5. D) cross-price elasticity of demand for iced tea is -2.

D) cross-price elasticity of demand for iced tea is -2.

Supply is said to be _______ when the quantity supplied is very responsive to changes in price. A) independent B) inelastic C) unit elastic D) elastic

D) elastic

If the supply curve for housing is perfectly inelastic, then a reduction in demand will cause the equilibrium price to: A) rise and the equilibrium quantity to fall. B) rise and the equilibrium quantity to stay the same. C) fall and the equilibrium quantity to fall. D) fall and the equilibrium quantity to stay the same.

D) fall and the equilibrium quantity to stay the same.

Price elasticity of demand is defined as: A) the slope of the demand curve. B) the slope of the demand curve divided by the price. C) the percentage change in price divided by the percentage change in quantity demanded. D) the percentage change in quantity demanded divided by the percentage change in price.

D) the percentage change in quantity demanded divided by the percentage change in price.