Microeconomics 2106 Homework Set #6

When a product's price increases from $800 to $1,200, the quantity demanded decreases from 11,000 to 9,000. Based on this information, the price elasticity of demand (in absolute terms) is estimated to be equal to: A. 0.5. B. 2.0. C. 0.25. D. 4.0.

A. 0.5.

Exhibit 6-1 The elasticity in the vicinity of five different points along a demand curve varies as follows: Point A B C D E Elasticity 1.25 0.3 1.0 0.2 2.1 Refer to Exhibit 6-1. At which of these points would a price increase be accompanied by an increase in total revenue? A. B and D B. A and E C. A, C, and E D. A and D

A. B and D

A price cut will increase the total revenue a firm receives if the demand for its product is: A. elastic. B. inelastic. C. unit elastic. D. unit inelastic.

A. elastic.

A steel mill raises the price of steel by 7%, which results in a 20% reduction in the quantity of steel demanded. The demand curve facing this firm is: A. elastic. B. inelastic. C. unit elastic. D. unit inelastic.

A. elastic.

If the cross price elasticity between Goods A and B equals -1.3, then a reduction in the price of Good B will: A. increase the demand for Good A and increase Good A's price as a result. B. increase the demand for Good A and decrease Good A's price as a result. C. decrease the demand for Good A and increase Good A's price as a result. D. decrease the demand for Good A and decrease Good A's price as a result.

A. increase the demand for Good A and increase Good A's price as a result.

If the demand for apples is highly elastic and the supply is highly inelastic, then if a tax is imposed on apples it will be paid: A. largely by the sellers of apples. B. largely by the buyers of apples. C. equally by the sellers and buyers of apples. D. by the government.

A. largely by the sellers of apples.

Unlike its competitors, one glass producer can use its equipment to make either windows for houses or windows for cars. Other things equal, compared to its competitors, its supply curve of windows for cars would be: A. more elastic than the supply curves of competitors. B. less elastic than the supply curves of competitors. C. greater than the supply curves of competitors. D. less than the supply curves of competitors.

A. more elastic than the supply curves of competitors.

The income elasticities of Products A and B and their cross-price elasticities with respect to Product C are as follows: Income Elasticity Cross-price elasticity Product A +1.7 -0.6 Product B -0.8 +0.9 From this information, one can conclude that: A. Product A is inferior, Product B is normal, Product A is a complement to Product C, and Product B is a substitute for Product C. B. Product A is normal, Product B is inferior, Product A is a complement to Product C, and Product B is a substitute for Product C. C. Product A is normal, Product B is inferior, Product A is a substitute for Product C, and Product B is a complement to Product C. D. Product A is inferior, Product B is normal, Product A is a substitute for Product C, and Product B is a complement to Product C.

B. Product A is normal, Product B is inferior, Product A is a complement to Product C, and Product B is a substitute for Product C.

If the cross price elasticity of demand for tacos with respect to burritos equals +2.5, then: A. a 1% increase in the quantity of burritos purchased will lead to a 2.5% increase in the price of a taco. B. a 10% increase in the price of a burrito will lead to a 25% increase in the quantity of tacos demanded at a given price. C. a 1% decrease in the price of a burrito will lead to a 2.5% increase in the quantity of tacos demanded at a given price. D. a 1% increase in the quantity of tacos purchased will lead to a 2.5% increase in the price of a burrito.

B. a 10% increase in the price of a burrito will lead to a 25% increase in the quantity of tacos demanded at a given price.

If the short run elasticity of demand for bus service is 1.01, we would expect the long run elasticity of demand to be: A. relatively inelastic. B. greater than 1.01. C. equal to 1.01. D. less than 1.01.

B. greater than 1.01.

A recent study at a liberal arts college concluded that demand elasticity is 0.91 for college courses. The administration is considering a tuition increase to help balance the budget. An economist might advise the school to: A. decrease tuition in order to increase revenue by boosting enrollment. B. increase tuition in order to increase revenue. C. leave tuition unchanged as a change in tuition is unlikely to enhance the school's budget by increasing revenue. D. decrease tuition because demand for courses is elastic.

B. increase tuition in order to increase revenue.

The following schedule represents a portion of Tim's demand for video rentals each month. Price Quantity demanded per month $4 8 $3 9 $2 10 Along this portion of Tim's demand curve for video rentals, price elasticity of demand is: A. equal to zero. B. less than one. C. equal to one. D. greater than one.

B. less than one.

Chicken and fish are substitutes. Therefore, the cross elasticity of demand between chicken and fish should be: A. negative. B. positive. C. zero. D. All of the above are possible.

B. positive.

If the demand is perfectly elastic, what would happen to the quantity demanded if there is a tiny increase in price? A. quantity demanded will increase proportionately B. quantity demanded will fall to zero C. quantity demanded will register a disproportionately high increase D. quantity demanded will decrease proportionately

B. quantity demanded will fall to zero

Total revenue represents the amount that: A. sellers receive for a good or service which is computed as P ÷ Q. B. sellers receive for a good or service which is computed as P x Q. C. one buyer spends on a good or service which is computed as P x Q. D. one buyer spends on a good or service which is computed as P ÷ Q.

B. sellers receive for a good or service which is computed as P x Q.

Fantastic Cuts Hair Salon knows that a 15% increase in the price of their haircuts will result in a 5% decrease in the number of haircuts sold. What is the elasticity of demand facing Fantastic Cuts? A. 0.05 B. 0.10 C. 0.33 D. 3.0

C. 0.33

The price elasticity of demand coefficient for gourmet coffee is estimated to be equal to 1.6. It is expected, therefore, that a 5% increase in price would lead to: A. a 16% decrease in the quantity of gourmet coffee demanded. B. a 16% increase in the quantity of gourmet coffee demanded. C. an 8% decrease in the quantity of gourmet coffee demanded. D. an 8% increase in the quantity of gourmet coffee demanded.

C. an 8% decrease in the quantity of gourmet coffee demanded.

The measure used to determine whether two products are substitutes or complements is called the: A. price elasticity of demand. B. income elasticity of demand. C. cross-price elasticity of demand. D. inverse elasticity of demand.

C. cross-price elasticity of demand.

If the supply curve is perfectly elastic, then an increase in demand will: A. increase both the price and the quantity exchanged. B. increase the price but result in no change in the quantity exchanged. C. increase the quantity exchanged but result in no change in the price. D. decrease the price but not change the quantity exchanged.

C. increase the quantity exchanged but result in no change in the price.

Elasticity of demand will ____ as the availability of substitutes ____. A. increase; decreases B. decrease; increases C. increase; increases D. remain unchanged; decreases

C. increase; increases

Taxes on goods with ____ demand curves will tend to raise more tax revenue for the government than taxes on goods with ____ demand curves. A. elastic; unit elastic B. elastic; inelastic C. inelastic; elastic D. unit elastic; inelastic

C. inelastic; elastic

Hot dogs and hot dog buns are complementary goods. The cross price elasticity between hot dogs and hot dog buns: A. is positive. B. is equal to zero. C. is negative. D. could be any of the above.

C. is negative.

When the price of ulcer medication increased by $20 per 100 tablets, a drug company's revenue increased by $10 million. Its elasticity of demand coefficient (in absolute terms) must be: A. zero. B. greater than one. C. less than one. D. infinitely large.

C. less than one.

If a price decrease leads to an increase in total revenue, demand must be: A. perfectly inelastic. B. relatively inelastic. C. relatively elastic. D. unit elastic.

C. relatively elastic.

The nation's largest cable TV company tested the effect of a price reduction for premium movie channels. It lowered prices from $12 to $9.95 and found that the number of customers rose by almost 50%. This means: A. the demand curve for the premium movie channels shifted to the right. B. the supply curve for premium movie channels shifted to the left. C. the demand for premium movie channels is elastic in this price range. D. the demand for premium movie channels is inelastic in this price range.

C. the demand for premium movie channels is elastic in this price range.

If the elasticity of demand for bagels is equal to 1, moving along the demand curve for bagels, an increase in price will: A. not affect the quantity purchased. B. decrease the quantity demanded and increase total revenue. C. decrease the quantity demanded and decrease total revenue. D. decrease the quantity demanded and leave total revenue unchanged.

D. decrease the quantity demanded and leave total revenue unchanged.

Shanequa and Mya have a business that provides personal fitness training services. They know that after raising their prices from $50 to $75 per hour, the quantity of hours they spent delivering training services only fell from 45 to 40 hours per week. The demand for their services is: A. elastic, with a price elasticity coefficient greater than one. B. elastic, with a price elasticity coefficient less than one. C. inelastic, with a price elasticity coefficient greater than one. D. inelastic, with a price elasticity coefficient less than one.

D. inelastic, with a price elasticity coefficient less than one.

A jeweler cut prices in his store by 20% and the dollar value of his sales (Total revenue) fell by 20%. This is indicative of: A. elastic demand. B. inelastic demand. C. perfectly elastic demand. D. perfectly inelastic demand.

D. perfectly inelastic demand.

A perfectly elastic demand curve is vertical. T/F

False

A decrease in price will cause a firm's total revenue to decrease if demand is price inelastic. T/F

True

Moving along an inelastic portion of a demand curve, the change in quantity demanded will always be proportionally less than the change in price. T/F

True

Price elasticity of demand is a measure of the relative responsiveness of the change in quantity demanded to a change in price. T/F

True

The widespread availability of e-mail has likely increased the price elasticity of demand for the services of the U.S. Postal Service. T/F

True