Chapter 5 Practice Quiz

What is the price elasticity of demand in Exhibit 18-1 ? a. 0 b. -1 c. negative infinity d. 1

A. 0

Edith buys 9 magazines per week when the price is $3. She buys 11 magazines per week when their price is $2. Edith's price elasticity of demand is a. -1/2 = -0.5 b. -2/3 = -0.667 c. -1.0

A. The difference between 9 and 11 units is 2 and the average quantity is 10. The difference between $3 and $2 is 1 and the average price is 2.5. 2/10 / 1/2.5 = 2/10 x 2.5/1 = 5/10 = 1/2 = .5. * most authors drop the negative sign, McEachern does not in his book.

A perfectly inelastic demand curve is a. a vertical straight line b. a horizontal straight line c. a downward-sloping straight line d. an upward-sloping straight line

A. a vertical straight line

Which of the following is likely to have the most elastic demand? a. beef steak b. beef (including steak, ribs, burgers, etc.) c. meat (including beef, pork, chicken, etc.) d. protein foods (including meat, cheese, eggs, etc.)

A. beef steak

Which supply curve tends to be more elastic in Exhibit 18-3? a. both S and S1 have the same elasticity b. S is more elastic at lower prices, and S' is more elastic at higher prices c. S d. S1

A. both S and S1 have the same elasticity

When demand is price inelastic, total revenue is a. directly related to quantity demanded b. inversely related to quantity demanded c. directly related to price d. not related to either price or quantity demanded

A. directly related to quantity demanded

Other things being equal, the price elasticity of demand for a product will be more elastic a. if spending on the item is a very large proportion of the household's budget b. if spending on the item is a very small proportion of the household's budget c. when the price of the product is very low d. for a product with no close substitutes

A. if spending on the item is a very large proportion of the household's budget

If a firm facing a perfectly inelastic demand curve raises its price, a. it will still sell exactly the same amount of output as it did at the lower price b. it will lose some, but not all, of its sales c. its sales will decrease to zero d. its sales will increase

A. it will still sell exactly the same amount of output as it did at the lower price

Substitutes are defined as products with a. positive cross-price elasticity of demand b. negative cross-price elasticity of demand c. positive income elasticity of demand d. negative income elasticity of demand

A. positive cross-price elasticity of demand

Price elasticity of demand is calculated as a. the percentage change in quantity demanded divided by the percentage change in price b. the percentage change in price divided by the percentage change in quantity demanded c. the absolute change in quantity demanded divided by the absolute change in price

A. the percentage change in quantity demanded divided by the percentage change in price

Tax incidence refers to a. who bears the burden of the tax b. the principle of taxation being applied c. the percent of a dollar of earned income which a typical household in that country pays in taxes d. the percent of government spending which is financed by taxes rather than by borrowing or by printing money

A. who bears the burden of the tax

Governments tend to tax products a. with inelastic demand, because it leads to higher revenue b. with elastic demand, because it leads to higher revenue c. with elastic demand, because it leads to higher business profit d. which they think are beneficial to society, because taxes lead to greater production

A. with inelastic demand, because it leads to higher revenue

What is the price elasticity of demand between $20 and $40 in Exhibit 18-2? a. -1 b. -3/7 c. -2 1/3 d. -7

B. -3/7

If price elasticity of demand is -0.5, a. a 1% decrease in quantity demanded leads to a 0.5% decrease in price b. a 1% decrease in price leads to a 0.5% increase in quantity demanded c. a 50% decrease in price leads to a 1% increase in quantity demanded d. demand is elastic

B. a 1% decrease in price leads to a 0.5% increase in quantity demanded

A perfectly elastic demand curve is a. a vertical straight line b. a horizontal straight line c. a downward-sloping straight line d. an upward-sloping straight line

B. a horizontal straight line

A linear, downward-sloping demand curve has a. constant slope and constant elasticity b. constant slope and varying elasticity c. varying slope and constant elasticity d. varying slope and varying elasticity

B. constant slope and varying elasticity

If a 5% increase in price leads to an 8% decrease in quantity demanded, demand is a. perfectly elastic b. elastic c. unit elastic d. inelastic

B. elastic

The most important determinant of price elasticity of supply is a. price elasticity of demand b. how rapidly costs increase when a firm increases its output c. whether the production process relies heavily on capital or on labor

B. how rapidly costs increase when a firm increases its output

If a firm raises the price of its product, its total revenue will a. always increase b. increase only if demand is price inelastic c. increase only if demand is price elastic d. remain constant, regardless of price elasticity of demand

B. increase only if demand is price inelastic

What is the price elasticity of demand in the segment of the demand curve below $40 and above $20 in Exhibit 18-2? a. elastic b. inelastic c. unit elastic d. 0

B. inelastic

A perfectly elastic supply curve a. has no relevance, since real-world supply curves are never perfectly elastic b. is a horizontal straight line c. is a vertical straight line d. is not a straight line

B. is a horizontal straight line

In calculating price elasticity of demand, we use average price and average quantity as our base value because a. it reduces the complexity of the formula and makes the calculation easier b. the resulting measure is then not influenced by whether price is rising or falling c. we would get the same answer if we use the initial price and quantity

B. the resulting measure is then not influenced by whether price is rising or falling

A characteristic of many unregulated agricultural markets is that a. total farm revenue increases when there are bumper (large) crops and decreases when there are meager (small) crops b. total farm revenue decreases when there are bumper crops and it increases when there are meager crops c. total farm revenue increases when demand decreases and decreases when demand increases

B. total farm revenue decreases when there are bumper crops and it increases when there are meager crops

What is the price elasticity of supply between $10 and $20 on supply curve S in Exhibit 18-3? a. 0 b. infinity c. 1 d. 2

C. 1

What is the price elasticity of supply between $20 and $40 on supply curve S1 in Exhibit 18-3? a. 0 b. infinity c. 1 d. 2

C. 1

When price increases from $45 to $55, the quantity supplied increases from 20 units to 30 units. The price elasticity of supply is a. 1/2 = 0.5 b. 1.0 c. 2.0

C. 2.0

Income elasticity of demand is important to producers because it indicates a. the probable decrease in sales when price is raised b. the probable increase in quantity supplied when price is raised c. how a firm's sales react to movements of the economy through the business cycle d. how a firm's total revenue changes in response to a price increase

C. how a firm's sales react to movements of the economy through the business cycle

Advertising is related to price elasticity of demand a. in no way whatsoever b. in that producers try to convince consumers that their particular product is a close substitute for virtually all other products in the industry c. in that producers try to convince consumers that their particular product is unique, with no close substitutes

C. in that producers try to convince consumers that their particular product is unique, with no close substitutes

Luxury goods are usually a. price inelastic b. income inelastic c. income elastic d. goods with negative income elasticity

C. income elastic

Economists distinguish between normal and inferior goods using a. price elasticity of demand b. price elasticity of supply c. income elasticity of demand d. tax incidence

C. income elasticity of demand

The burden of a sales tax a. falls on consumers, who must pay the entire tax b. falls on producers, who must pay the entire tax c. is paid partly by consumers and partly by producers, depending on price elasticity of demand and price elasticity of supply

C. is paid partly by consumers and partly by producers, depending on price elasticity of demand and price elasticity of supply

If a firm whose product faces a perfectly elastic demand curve raises its price, a. it will sell exactly the same amount of output as it did at the lower price b. it will lose some, but not all, of its sales c. its sales will decrease to zero d. its sales will increase

C. its sales will decrease to zero

Without making an adjustment such as finding the absolute values of the percentage changes, the price elasticity of demand would be negative because a. price and demand are directly related b. price and demand are inversely related c. price and quantity demanded are inversely related

C. price and quantity demanded are inversely related

Which of the following is not a cause of special problems in U.S. agricultural markets? a. many factors which determine farm production are beyond the farmer's control b. the demand for farm products tends to be price inelastic c. the demand for farm products tends to be income elastic

C. the demand for farm products tends to be income elastic

Price elasticity of demand and price elasticity of supply are both influenced by a. the availability of close substitutes for the product b. the proportion of the consumer's budget spent on the product c. the length of the adjustment period considered

C. the length of the adjustment period considered

Cross-price elasticity of demand is used to determine whether a. a product is an inferior or normal good b. a product is a necessity or a luxury c. two products are substitutes or complements d. price and total revenue are directly or inversely related

C. two products are substitutes or complements

When the demand curve is linear with the typical downward slope, a firm can receive the greatest total revenue by a. charging the highest price possible b. selling the most output possible c. producing where demand is inelastic d. producing where demand is unit elastic

D. producing where demand is unit elastic

In market economies, most production and consumption decisions are guided by a. government decree b. foreign countries (imports and exports) c. monopolists' desires to maximize profits d. individual choice under the price system

D. A business will only sell what consumers want to buy.

Matt bought 6 CDs last month, when the price was $14. This month, when the price of CDs increased to $16, Matt bought only 4 CDs. Matt's price elasticity of demand is a. -1/3 = -0.333 b. -3/7 = -0.429 c. -7/3 = -2.333 d. -3

D. The difference between the quantities demanded is 2 and the average quantity is 5. The difference between the prices is 2 and the average price is 15. So: 2/5 divided by 2/15 = 2/5 x 15/2 = 30/10 = 3 * Again, McEachern uses the negative sign.

Which of the following effects a product's price elasticity of demand? a. ease or difficulty of substitution b. the time factor c. how much of a necessity the product is to consumers d. all of the above

D. all of the above

Along a linear, downward-sloping demand curve, price elasticity of demand a. is impossible to calculate b. is constant and is equal to the slope c. is constant and is equal to the inverse of the slope d. becomes more elastic as price increas

D. becomes more elastic as price increases

Consumers pay a larger proportion of a sales tax if a. demand and supply are both more elastic b. demand and supply are both less elastic c. demand is more elastic and supply is less elastic d. demand is less elastic and supply is more elastic

D. demand is less elastic and supply is more elastic

If a price reduction leads to greater total revenue, demand is a. perfectly inelastic b. inelastic c. unit elastic d. elastic

D. elastic

Which of the following products would be most likely to have a perfectly inelastic supply curve? a. wheat b. cigarettes c. economic textbooks d. humidors used by President John F. Kennedy

D. humidors used by President John F. Kennedy

An inferior good is defined as one for which demand increases as a. price decreases b. price increases c. income increases d. income decreases

D. income decreases

If a firm's demand curve is illustrated in Exhibit 18-2 and it is currently charging $20, its total revenue will a. remain unchanged, if it changes its price slightly b. increase, if it lowers its price substantially c. increase, if it lowers its price slightly d. increase, if it raises its price slightly

D. increase, if it raises its price slightly

More "elastic" means a. less desirable b. less desirable c. less responsive d. more responsive

D. more responsive

The price elasticity of demand in Exhibit 18-1 is a. unit elastic b. somewhat elastic c. perfectly elastic d. perfectly inelastic

D. perfectly inelastic

Unit elastic demand occurs when a. a one-unit increase in price leads to a one-unit decrease in quantity demanded b. a 1% increase in price leads to a one-unit decrease in quantity demanded c. price elasticity of demand is positive d. price elasticity of demand is exactly -1

D. price elasticity of demand is exactly -1

Total revenue is defined as a. the net profit after the opportunity cost of all resources used has been deducted b. the change in quantity sold divided by the change in price c. price elasticity of demand times quantity sold d. price times quantity sold

D. price times quantity sold

Knowledge of price elasticity of demand a. is of no use to producers b. tells producers what will happen to total profit if they change product price c. tells producers what will happen to quantity supplied if they change product price d. tells producers what will happen to total revenue if they change product price

D. tells producers what will happen to total revenue if they change product price

The more broadly a good is defined a. the more substitutes it has, so its demand will be more elastic b. the less substitutes it has, so its demand will be more elastic c. the more substitutes it has, so its demand will be less elastic d. the less substitutes it has, so its demand will be less elastic

D. the less substitutes it has, so its demand will be less elastic

Price elasticity of supply is calculated as a. the unit change in quantity supplied caused by a $1 change in price b. the percent change in quantity supplied caused by a 1% change in price c. the dollar change in price caused by a one-unit change in quantity supplied d. the percent change in price caused by a 1% change in quantity supplied

D. the percent change in price caused by a 1% change in quantity supplied

In calculating price elasticity of demand, which of the following is assumed to be held constant? a. the price of the product itself b. the quantity demanded of the product c. total revenue received from the sale of the product d. the prices of all other products

D. the prices of all other products

Negative cross-price elasticity of demand indicates that a. the product is an inferior good b. the product is a necessity c. the product is a luxury d. the two products are complements

D. the two products are complements

Price elasticity of demand is not influenced by a. the number of substitutes available b. the proportion of the consumer's budget spent on the good c. the length of the time period under consideration d. the units of measurement used for price or for quantity demanded

D. the units of measurement used for price or for quantity demanded

John spends exactly the same dollar amount of candy bars each week, regardless of their price. John's demand curve for candy bars is a. upward-sloping b. backward-bending c. perfectly inelastic d. unit elastic

D. unit elastic

In general, "elasticity" can measure a. whether a price increase causes quantity demanded to increase or decrease b. the strength of an economy's tendency to recover from recession c. the responsiveness of decision makers to economic changes in prices

c. the responsiveness of decision makers to economic changes in prices