ECON 102 Chapter 6 Practice Test Question Bank

In May 2011, the average price of gasoline in the United States was $3.76 per gallon and consumers bought 5 percent less gasoline than they had during May 2010, when the average price was $2.79 per gallon. Based on these numbers, what was the price elasticity of demand for gasoline from May 2010 to May 2011?

-0.33

Refer to Figure 6-7. What is the value of the price elasticity of supply between g and h?

2

What factors would make you more sensitive or less sensitive to price when purchasing gasoline?

A number of factors are likely to affect your sensitivity to changes in gasoline prices, including your income level, whether you live in an area with good public transportation, and whether you live within walking distance of your school or job.

Refer to Figure 6-5. Identify the two goods which are substitutes.

Good X and Good Z

Suppose at the going wage rate of $20 per hour, firms can hire as many hours of janitorial services as it desires. If any firm tries to lower the wage rate to $19, it will not be able to hire any janitor. What does this indicate about the supply curve for janitorial services?

Supply is perfectly elastic.

Consider the following pairs of items: a. shampoo and condistion b. iPhones and earbuds c. a laptop computer and a desktop computer d. beef and pork e. air-travel and weed killer Which of the pairs listed will have a negative cross-price elasticity?

a and b only

Which of the following goods would have the most inelastic demand?

bread

The demand for gasoline in the short run is

inelastic because there are no good substitutes for gasoline.

If demand is inelastic, the absolute value of the price elasticity of demand is

less than one

The price elasticity of an upward-sloping supply curve is always

positive

When demand is elastic, a fall in price causes total revenue to rise because

the increase in quantity sold is large enough to offset the lower price.

The price elasticity of supply is equal to

the percentage change in quantity supplied divided by the percentage change in price.

A demand curve which is ________ represents perfectly inelastic demand, and a demand curve which is ________ represents inelastic demand.

vertical; downward sloping

Suppose at a price of $50, Yoshi's Jazz Bar sells 20 tickets to its nightly jazz performance and at a price of $40, it sells 25 tickets. Based on this information, the demand for Yoshi's jazz performance is elastic.

false

Refer to Figure 6-2. The absolute value of the price elasticity of demand at points a and b is 1. What is the value of Pb?

$40

Jaycee Jeans sold 40 pairs of jeans at a price of $40. When it lowered its price to $20, the quantity sold increased to 60 pairs. Calculate the absolute value of the price elasticity of demand. Use the midpoint formula.

0.6

At a price of $100, Beachside Canoe Rentals rented 11 canoes. When it increased its rental price to $125, 9 canoes were rented. Calculate the absolute value of the price elasticity of demand for canoe rentals, using the midpoint formula.

0.9

Suppose Tinsel Town Videos lowers the price of its movie club membership by 10 percent and as a result, CineArts Videos experienced a 16 percent decline in its movie club membership. What is the value of the cross-price elasticity between the two movie club memberships?

1.6

Suppose the price of gasoline is $3.50 per gallon, the quantity of gasoline demanded is 150 billion gallons per year, the price elasticity of demand for gasoline is -0.06, and the federal government decides to increase the excise tax on gasoline by $1.00 per gallon, which increases the price of gasoline by $0.75 per gallon. What is the new equilibrium quantity of gasoline demanded after the tax is imposed?

148.27 billion gallons per year

The price elasticity of supply for umbrellas is 2. Suppose you're told that following a price increase, quantity supplied increased by 30 percent. What was the percentage change in price that brought this about?

15 percent

The price elasticity of the supply of teenage labor services is approximately 1.36. Suppose the minimum wage rises from $7.25 per hour to $8.75. Using the midpoint formula, calculate the approximately change in the quantity supplied of teenage labor.

25.5 percent

Refer to Figure 6-3. Using the midpoint formula, calculate the absolute value of the price elasticity of demand between e and f.

3.125

Suppose the cross-price elasticity of demand between grapefruit juice and orange juice is approximately 6. What does this mean?

A 1 percent decrease in the price of grapefruit juice leads to a 6 percent increase in orange juice consumption.

Studies show that the income elasticity of demand for wine is approximately five. What does this mean?

A one percent increase in income leads to a five percent increase in wine consumption.

Suppose the current price of oil is $90 a barrel and the quantity supplied is 800 million barrels per day. If the price elasticity of supply for oil in the short run is estimated at 0.5, use the midpoint formula to calculate the percentage change in quantity supplied when the price of oil rises to $98 a barrel.

Current price: $90 New price: $98 Average price: (98+90)/2 = $94 % Change in price: (98-90)/94=8.51% 0.50 = % change in Qs / 8.51% % change in Qs = 4.26%

Jonah lives in a small town where there is only one Mexican restaurant. Which of the following is likely to be true about the price elasticity of demand for meals at the Mexican restaurant?

Demand is likely to be relatively inelastic.

When is demand perfectly elastic? When is demand perfectly inelastic? What are the values of the price elasticity of demand when demand is perfectly elastic or perfectly inelastic? What do perfectly elastic and perfectly inelastic demand curves look like?

Demand is perfectly elastic when an increase in price causes quantity demanded to fall to zero or an increase in price will not increase sales. (PED= infinity and a horizontal straight line). Demand is perfectly inelastic in a situation in which no matter how much product is on the market, the price of the product remains the same. (PED=0 and a vertical straight line).

Using cross-sectional data from the two Housing Assistance Supply Experiment (HASE) sites--Brown County, Wisconsin, and St. Joseph County, Indiana, John Mulford of Rand Research estimates that the long-run "permanent" income elasticity of housing expenditures to be 0.45 for owners. Using this information, what is likely to happen to housing expenditures if the government increases income transfers to recipients in HASE sites?

Housing expenditures will increase, but not significantly.

Which of the following statements is true about the price elasticity of demand along a downward sloping linear demand curve?

It is elastic at high prices and inelastic at low prices.

Refer to Figure 6-1. A perfectly inelastic demand curve is shown in

Panel A

Refer to Figure 6-6. A perfectly elastic supply curve is shown in

Panel B

Refer to Figure 6-6. A unit-elastic supply curve is shown in

Panel C

Refer to Figure 6-6. The supply curve on which price elasticity changes at every point is shown in

Panel D

Rank these three items in terms of the elasticity of the demand for them at any given price, from most elastic to least elastic: hot beverages, coffee and Peets' Coffee.

Peets' Coffee, coffee, hot beverages

Suppose the demand curve for a product is represented by a typical downward-sloping curve. Now suppose the demand for this product decreases. Which of the following statements accurately predicts the resulting decrease in price?

The more elastic the supply curve, the smaller the price decrease.

According to a study of the price elasticities of products sold in supermarkets, the price elasticity of demand for toothpaste is estimated at -0.45. Which of the following could explain why the price elasticity of demand for toothpaste is so low?

There are few close substitutes for toothpaste.

Which of the following items is likely to have the highest income elasticity of demand?

There are few close substitutes for toothpaste.

Consider the following types of demand curves: a. a vertical demand curve b. a horizontal demand curve c. a linear downward-sloping demand curve Which of the demand curves listed exhibits a price elasticity of demand coefficient that remains constant along the demand curve?

a and b only

The Mass Rapid Transit (MRT) System in Hong Kong has been running significant losses. Transport Ministry officials have argued over whether to raise fares to combat the losses. One argument against a fare increase is that it will aggravate traffic congestion on the streets during peak commuter hours. Suppose that the current fare is $4 and the government is considering raising it to $6. Officials estimate that this reduces the number of rides purchased from 10,000 to 8,000 per day. a. What is the estimated elasticity of demand for MRT rides? b. What does this elasticity of demand suggest to you about what will happen to total revenue earned by the transit system? c. Last year, the MRT system incurred a loss of $50,000 per day. Do you think the fare increase will resolve the deficit problem as well as Ministry officials anticipate? Explain.

a. -0.5556 b. With every 1% increase in price there is a -0.55% decrease in the number of commuters. c. I don't think the fare increase will resolve the deficit problem as well as the Ministry anticipates because even if they raise it a little, they will still be losing commuters. And eventually it would be too high for anyone to use.

For each pair of items below determine which product would have the higher price elasticity of demand (in absolute value). a. insulin for a diabetic or aspirin for someone suffering a headache. b. a new whirlpool 27 cu.ft side-by-side refrigerator or electricity to power your all-electric home c. a can of Red Bull or soft drinks in general

a. Aspirin b. whirlpool refrigerator c. soft drinks in general

If a firm wanted to know whether the demand for its product was elastic, unit-elastic, or inelastic, then the firm could

change price a little bit and observe what happens to total revenue.

Between 1950 and 2011 the number of acres devoted to wheat production in the United States ________ and the price of wheat ________.

declined; decreased

If at a price of $24, Octavia sells 36 home-grown orchids and at $30 she sells 24 home-grown orchids, the demand for her orchids is

elastic

If, for a given percentage increase in price, quantity supplied increases by a proportionately larger percentage, then supply is

elastic

If at a price of $50, Ghani sells 20 hand-made leather cell-phone covers but at a price of $60, zero units are sold. Based on this information, the demand for his cell-phone covers is

elastic or perfectly elastic

If, when price changes by 35 percent, the quantity demanded changes by 7 percent, then the absolute value of the price elasticity of demand is 5.

false

In recent years, the prices of new domestically produced cars have been falling. Suppose consumers respond by reducing their demand for used cars and mass transport services such as bus travel. This information suggests that the cross-price elasticity between new cars and used cars, and the cross-price elasticity between new cars and bus travel are negative.

false

The demand for gasoline is perfectly inelastic because most people need gasoline to drive their cars.

false

The demand for most farm products is relatively inelastic. A drought that reduces the supply of farm products will also cause farm revenues to fall.

false

The price elasticity of supply is calculated as the change in supply divided by the change in price.

false

When Audrina raised the price of her home made cookies, her total revenue increased. This suggests that the demand for Audrina's cookies is elastic.

false

The demand for most farm products is relatively inelastic. All else constant, what is the effect on farm revenues as a result of the introduction of new and better farm equipment which increases in productivity?

farm revenues decrease

A demand curve that is horizontal indicates that the commodity

has a large number of substitutes.

According to an article in the Wall Street Journal, unlike airlines, even elite hotels don't have sophisticated systems that can react quickly to changes in demand. Even if they could, many hoteliers say people don't respond that much to lower rates. "We've tested this, cutting our rates by $50 [per night], and we didn't see an appreciable response in occupancy," says Jim Schultenover, a vice president for Ritz-Carlton. Source: Jesse Drucker, "In Times of Belt-Tightening, We Seek Reasonable Rates," Wall Street Journal, April 6, 2001. Based on the information above, the demand for hotel rooms is

inelastic

If the price elasticity of demand for canned soup is estimated at -1.62. What happens to sales revenue if the price of canned soup rises?

it falls

Seth is a competitive body builder. He says he has to have his 12-oz package of protein powder to "feed his muscles" every day. On the basis of this information, what can you conclude about his price elasticity of demand for protein powder?

it is perfectly inelastic

The demand for all carbonated beverages is likely to be ________ the demand for Dr. Pepper.

less elastic than

Cross-price elasticity of demand is calculated as the

percentage change in quantity demanded of one good divided by percentage change in price of a different good.

At a price of $8 per dozen, Chuy sells 40 dozen homemade tamales per week. When he raised her price to $12 per dozen, he still sold 40 dozen per week. Based on this information, the demand for his tamales is

perfectly inelastic

If firms do not increase their quantity supplied when price changes, then supply is

perfectly inelastic

The cross-price elasticity of demand between an unlimited texting option and an unlimited call minutes option offered from a cell phone provider would be

positive if subscribers consider the services substitutes for each other.

Total revenue equals

price per unit times quantity sold

If a 35 percent increase in price of golf balls led to an 42 percent decrease in quantity demanded, then the demand for golf balls is

relatively elastic

If, for a given percentage decrease in price, quantity supplied decreases by a proportionately smaller percentage, then supply is

relatively inelastic

If, for a given percentage increase in price, quantity demanded falls by a proportionately smaller percentage, then demand is

relatively inelastic

Suppose the demand for milk is relatively inelastic. What happens to sales revenue if the government imposes a price floor above the free market equilibrium price in the market for milk?

sales revenue rises

In September 2006, the Food and Drug Administration recommended that Americans avoid eating bagged raw spinach in the wake of an outbreak of E. coli bacteria. Following this recommendation, the food industry looked at alternatives and many turned to arugula. One Chicago distributor claimed, "The sale of the stuff has gone through the roof." Based on this information,

the cross-price elasticity between arugula and spinach is positive

If a firm is in an antitrust court case being accused of monopolizing a product, the firm would hire an economist to show

the cross-price elasticity of demand between the firm's good and another is positive.

When demand is unit-elastic, a change in price causes total revenue to stay the same because

the percentage change in quantity demanded exactly offsets the percentage change in price

Suppose a decrease in the supply of wheat results in an increase in revenue. This indicates that

the resulting increase in price is proportionately greater than decrease in quantity sold.

If the cross-price elasticity of demand between Breeze Detergent and Faber Detergent is a relatively large positive number, then it indicates that

the two brands of detergent are close substitutes.

Demand for staples such as dairy products and bread is likely to be both income and price inelastic.

true

Firms estimate the price elasticity of demand for new products by conducting market experiments in which firms try different prices and observe the resulting change in quantity demanded.

true

Which of the following statements about the price elasticity of demand is correct?

Demand is more elastic in the long run than it is in the short run.

Refer to Figure 6-1. The demand curve on which elasticity changes at every point is given in

Panel C

Explain the relationship between price elasticity of demand and total revenue.

The price elasticity of demand describes how the changes in the price for goods and the demand for the same goods relate. As these two things interact with each other, it is able to change the total revenue for the firm.

Refer to Figure 6-1. A perfectly elastic demand curve is shown in

Panel B

Suppose the California Nurses Union successfully secured a 12 percent increase in the wages of registered nurses. If a hospital responds by reducing the quantity of registered nurses hired and increasing the quantity of physician's assistants hired, what conclusion can you draw?

The cross-price elasticity of demand between registered nurses and physician's assistants is positive.

If the cross-price elasticity of demand for computers and software is negative, this means the two goods are

complements

Income elasticity measures

how a good's quantity demanded responds to change in buyers' incomes.

As high gasoline prices persisted into the first part of 2011, consumers began driving less and using public transportation more. Over time, this caused the demand curve for gasoline to become ________ and the quantity of gasoline demanded to ________.

more elastic; fall

Last year, Sefton purchased 60 pounds of potatoes to feed his family of five when his household income was $30,000. This year, his household income fell to $20,000 and Sefton purchased 80 pounds of potatoes. All else constant, Sefton's income elasticity of demand for potatoes is

negative, so Sefton considers potatoes to be an inferior good.

Apple introduced the iPhone to the market in June 2007. Within two months, it had become clear that the price elasticity of demand for iPhones was

significantly higher than had been expected.

If the market for a product is broadly defined, then

there are few substitutes for the product and the demand for the product is relatively inelastic.

If a firm's goal is to maximize revenue, it will price its product to correspond to the unit-elastic segment of its demand curve.

true

If the demand for a product is elastic, the quantity demanded changes by a larger percentage than the percentage change in price.

true

If the market for a product is narrowly defined, then there are likely to be many substitutes for the product and the demand for the product is relatively elastic.

true

Necessities tend to have more inelastic demands than luxuries.

true

Suppose the supply curve for digital cameras shifts to the right. This will cause a relatively large decrease in the price of digital cameras if both demand and supply are inelastic.

true

The value of the price elasticity of supply depends primarily on how quickly firms can acquire inputs to increase quantity supplied when price increases.

true

When there are few substitutes available for a good, demand tends to be relatively inelastic.

true

If a firm lowered the price of the product it sells and found that total revenue did not change, then the demand for its product is

unit-elastic

Refer to Figure 6-6. A perfectly inelastic supply curve is shown in

Panel A

Suppose a 4 percent increase in price results in a 2 percent increase in the quantity supplied of a good. Calculate the price elasticity of supply and characterize the product.

0.5; the product is inelastic

List the five key determinants of price elasticity of demand and explain how each determinant indicates if demand tends to be elastic or inelastic.

1. the availability of substitutes (availability decreases, inelastic. availability increases, elastic.) 2. Need (inelastic) vs. Want (elastic) 3. Time horizon. (more time, elastic. Less time, inelastic) 4. Definition of the market (broad, elastic. narrow, inelastic) 5. Price relative to income. (high price or poor, elastic. low price or wealthy, inelastic).

Suppose that the price of a money clip increases from $0.75 to $0.90 and quantity supplied rises from 8,000 units to 10,000 units. Use the midpoint formula to calculate the price elasticity of supply.

1.22

An increase in the demand for green tea raises the price of apples from $16 a pound to $20 a pound. As a result, quantity supplied increases by 30 percent. Using the midpoint formula, calculate the value of the price elasticity of supply?

1.35

Suppose the value of the price elasticity of demand is -3. What does this mean?

A 1 percent increase in the price of the good causes quantity demanded to decrease by 3 percent.

Suppose the value of the price elasticity of supply is 4. What does this mean?

A 1 percent increase in the price of the good causes quantity supplied to increase by 4 percent.

Which of the following would result in a higher absolute value of the price elasticity of demand for a product?

A wide variety of substitutes are available for the good.

Which of the following is one reason why the income of small family farms has decreased over time?

The demand for farm products is price elastic.

Suppose a frost destroys the tomato crop in California but farmers see an increase in their revenues. Which of the following best explains this?

The demand for tomatoes is price inelastic.

Refer to Figure 6-4. Which of the following statements is true about the price elasticity of demand?

The elastic portion of a straight-line downward sloping demand curve corresponds to the segment above the midpoint.

Over longer periods of time, increases in oil prices provide firms with incentives to explore and recover oil. What does this indicate about the long run price elasticity of supply for oil?

The elasticity coefficient is likely to be higher in the long run than in the short run.

Bringing oil to the market is a relatively long and costly process. The whole process from exploration to pumping significant amounts of oil can take years. What does this indicate about the price elasticity of supply for oil?

The elasticity coefficient is likely to be low and supply is highly inelastic.

The price of wheat has fallen since 1950. Which of the following explains this price decline?

The price elasticity of demand is less than 1 (in absolute value) and the income elasticity of demand for wheat is low.

The publisher of a magazine gives his staff the following information: (table in problem) He tells the staff, "Our costs are currently $150,000 more than our revenues each month. I propose to eliminate this problem by raising the price of the magazine to $3.00 per issue. This will result in our revenue being exactly equal to our cost." Refer to Table 6-2. Which of the following statements is correct?

The publisher's analysis is correct only if the demand is perfectly inelastic.

Which of the following statements about price elasticity of demand is false?

The value of the price elasticity of demand is the reciprocal of the value of the demand curve's slope.

Explain the economic concept of price elasticity of supply. How is price elasticity of supply calculated?

When demand is unit-elastic, a change in price causes total revenue to stay the same because

Which of the following products comes closest to having a perfectly inelastic demand?

cholesterol medication in general

A service station owner in Staten Island, New York, was worried that raising the price of gasoline would cause the quantity demanded to fall by so much that he would be in a worse situation than if he did not raise the price. If raising the price of gasoline would cause the owner to receive less total revenue from the sale of gasoline, the demand for gasoline is

elastic

Price elasticity of supply is used to gauge

how responsive suppliers are to price changes.

Facing stiff competition, Hendrix College, a small liberal arts institution in Conway, Ark., decided two years ago to bolster its academic offerings, promising students at least three hands-on experiences outside the classroom, including research, internships and service projects. Although it raised tuition and fees by 29 percent, enrollment in the freshman class rose by 37 percent. Source: Jonathan D. Glater and Alan Finder, "In New Twist on Tuition Game, Popularity Rises With the Price," New York Times, December 12, 2006 Based on the information above, the demand for Hendrix College education is

relatively inelastic

When there few close substitutes available for a good, demand tends to be

relatively inelastic