EXAM 1 STUDY GUIDE (Unit 2)

D

(Figure: Demand Curves) The figure shows four different demand curves for four products: A, B, C and D. Which of the products has a perfectly elastic demand curve? A. product D B. product A C. product C D. product B

C

A Smoothie King manager has estimated that the price elasticity of demand for exotic fruit smoothies is 2. If the store increases menu prices by 5%, she can expect the quantity of exotic fruit smoothies sold to decrease by _____ and total revenue to _____. A. 10%; rise B. 5%; stay constant C. 10%; fall D. 2.5%; fall

A

An individual demand curve is a graph: A. that plots the quantity of an item that someone plans to buy, at each price. B. that plots the market price of a product at different points in time. C. that plots the quantity of an item that someone plans to buy, at one single price point. D. that plots the quantity of an item that a seller plans to sell, at each price.

C

Because of declining stocks in the Caspian Sea, Beluga caviar prices recently increased by a whopping 25% (to about $700 per ounce). As a result, purchases of Beluga caviar decreased by 5%. The price elasticity of demand for Beluga caviar is A. 5. B. 2. C. 0.2. D. 0.5.

D

Butter producers know that the price elasticity of demand for butter is 0.2. If they want to increase sales by 4%, they will have to lower price by: A. 0.1%. B. 1%. C. 4%. D. 20%.

A

If the price of herring increases by 8%, and the quantity demanded falls by 20%, demand is _____. This increase in price will therefore lead to a _____ in total revenue. A. elastic; decrease B. inelastic; increase C. unit-elastic; unchanged D. normal; mismatch

D

Income elasticity of demand measures how responsive the: A. quantity supplied of one good is to price changes of another good. B. price of good is to price changes of another good. C. quantity demanded of one good is to changes in demand for another good. D. quantity demanded of a good is to changes in income.

D, B

a. Consumer surplus is equal to the difference between A. the minimum price a buyer is willing to pay and the market price. B. the minimum price a seller is willing to accept and the market price. C. the maximum price a seller is willing to accept and the market price. D. the maximum price a buyer is willing to pay and the market price. b. Consumer surplus is shown graphically as the area A. above the supply curve and below the market price. B. under the demand curve and above the market price. C. under the demand curve and below the market price. D. above the supply curve and above the market price.

D

(Figure: Leonard's Demand for Pecan Pie) Look at Leonard's weekly demand curve for slices of pie. How many slices of pie is Leonard willing to buy at $3 per slice? A. 9 slices B. 3 slices C. 7 slices D. 5 slices

A

(Figure: Mia's Demand Curve for Ice Cream) The accompanying graph shows Mia's demand curve for ice cream, how many cones would Mia be willing to buy at $5 per cone? A. 3 cones B. 12 cones C. 5 cones D. 9 cones

A

(Figure: Peanut Butter and Jelly) In the United States, peanut butter and jelly are considered complementary items. Which graph illustrates the impact of a rise in the price of peanut butter on the jelly market? A. Graph A B. Graph B C. Graph C D. Graph D

D

Demand for soda outside an airport is more elastic than inside of the airport because: A. necessities have less elastic demand. B. specific brands tend to have more elastic demand than categories of goods. C. fewer choices means more elastic demand. D. more choices makes demand more elastic.

C, E

Demand is best described as A. the additional satisfaction derived from a quantity of goods and services obtained when income increases. B. the total satisfaction that consuming a good provides people at different prices. C. the quantity of a good or a service that people are willing and able to purchase at different possible prices. D. the quantity of a good or service that consumers will substitute when the price of a good changes. E. the quantity of a good or a service that people will offer for sale at different possible prices. The law of demand says that A. as the price of a good decreases, buyers are willing and able to purchase less. B. buyers demand lower prices. C. higher prices cause less demand. D. higher prices cause buyers to demand more. E. as the price of a good increases, buyers are willing and able to purchase less.

D

The price of product A is cut by 50%. As a result, the quantity demanded of product B rises by 50%. The cross-price elasticity of demand between product A and product B is _____, and they are _____. A. -0.75; complements B. 1.25; complements C. -1.25; complements D. -1; complements

B

The relationship between price expectations and demand is A. negative; when future prices are expected to rise, current demand will fall. B. positive; when future prices are expected to rise, current demand will rise. C. positive; future prices are generally expected to rise. D. negative; when future prices are expected to fall, current demand will rise.

C, A, B

People buy more of a good when the price falls. There are several theoretical explanations for this behavior. Match the explanation for why people buy more at lower prices with the proper term. A. Income effect B. Total effect C. Substitution effect 1. An increase in quantity demands that comes from consumers having a greater incentive to buy a good whose price is relatively lower. 2. An increase in quantity demands that are attributable to changes in purchasing power as the price of a good falls. 3. An increase in quantity demands attributable to the combination of the income and substitution effect.

C

If income rises by 10% and the quantity demanded of an item rises by 20%, the income elasticity of demand for this item is: A. -2. B. 0.5. C. 2. D. -0.5.

A

If income rises by 20% and the quantity demanded of an item falls by 20%, the income elasticity of demand for this item is: A. -1. B. 1. C. -2. D. -0.5.

D

(Figure: Market for Avocados) The figure shows the market for avocados. If the seller changes the price per avocado from $1.50 to $1.75, the change in total revenue is: A. $162,750 B. $150,000 C. $312,750 D. $12,750

D

(Figure: Market for Holiday Cruises) Which graph shows the effect of an impending slowdown on the market for cruise holidays? A. Graph B B. Graph D C. Graph C D. Graph A

C

(Figure: Market for Tourism) A hotel in Cape Cod, Massachusetts, is completely booked during August. However, in September, tourism drops significantly and some hotel rooms remain empty. Which of the graphs depicts this scenario? A. Graph B B. Graph C C. Graph A D. Graph D

D

A linear demand curve has: A. a uniform elasticity of demand. B. a elasticity of demand equal to the inverse of the slope at all prices. C. a positive elasticity of demand. D. elastic, inelastic, and unit-elastic segments.

D

Consider the table below. Assuming the law of demand holds, the cell labeled "?" could be which of the following quantities? $ of Movie | # of Mo $15 175 $17 ? A. 183 B. 191 C. 175 D. 163 E. 177

D

Diminishing marginal benefit A. does not affect a buyer's decision. B. means that consumers are willing to pay more for additional units of an item. C. can be observed in the upward slope of the supply curve. D. can be observed in the downward slope of the demand curve.

B

If Tesla cars become less expensive, what will happen in the market for other electric cars? A. The quantity demanded of Teslas will fall. B. The demand for other electric cars will fall. C. The quantity demanded of Teslas will not change. D. The demand for other electric cars will rise.

B

If an item is a necessity rather than a luxury, its demand curve will be: A. perfectly inelastic. B. relatively steep. C. relatively flat. D. perfectly elastic.

B

If the price of emergency visits to the dentist rose, we would expect: A. a large decline in the number of emergency visits to the dentist. B. only a slight decline in the number of emergency visits to the dentist. C. the number of emergency visits to the dentist to increase. D. the total income of dentists to fall dramatically.

A

Suppose the percent change in the quantity demanded for water for any price change is zero. The demand curve for water is _____, and the price elasticity of demand is perfectly _____ A. vertical; perfectly inelastic B. horizontal; perfectly inelastic C. vertical; perfectly elastic D. horizontal; perfectly elastic

C

Taking the absolute value of the cross-price elasticity of demand is incorrect because it would: A. remove the ability to tell whether the two products have inelastic demand or elastic demand. B. cause the value of the cross-price elasticity of demand to become smaller. C. remove the ability to tell whether the two products are substitutes or complements. D. cause the value of the cross-price elasticity of demand to become zero.

D

Telefon, a wireless communications company, tested the effect of a reduction in the price of its monthly service. Telefon lowered its rate from $36 to $30 per month and found that the number of users tripled. This means that the: A. demand for cell phone service is inelastic in this price range. B. demand curve for cell phone service shifted to the right. C. supply curve for cell phone service shifted to the left. D. demand for cell phone service is elastic in this price range.

D

The Rational Rule for Buyers A. compares the cost of production of an item to the price of the item. B. compares the total benefit of all units to the total price of all units purchased. C. only applies to buyers who are buying necessities as opposed to luxury items. D. compares the benefit of buying an additional unit of the item to the cost of that item.

A

When the percentage change in price is greater than the percentage change in quantity demanded, demand is said to be: A. inelastic. B. unit-elastic. C. elastic. D. perfectly inelastic.

D

Which factor does NOT determine the price elasticity of demand? A. the number of available substitutes B. the time available to adjust to price changes C. whether or not the good is a necessity D. the slope of the supply curve

D

If demand is _____, a higher price yields _____ total revenue. A. elastic; higher B. inelastic; lower C. inelastic; no change in D. elastic; lower

D

Jonathan's income falls by 15%. He decides to cut down his purchases of high-end restaurant meals by 20%. His income elasticity of demand for high-end restaurant meals is: A. -0.75. B. 1.33. C. 0.75. D. 1.33.

A, C, B

Identify the scenarios as examples of elastic, inelastic, or unit elastic demand. a. When Ruko, a device used to stream movies at home, increases prices by 39 percent, total revenue decreases by 57 percent. A. elastic B. inelastic C. unit elastic b. When Cinema Supreme decreases ticket prices by 26 percent, total revenue does not change. A. elastic B. inelastic C. unit elastic c. When Bluebox, a streaming service for foreign television shows and movies, increases its prices by 59 percent, total revenue increases by 25 percent. A. elastic B. inelastic C. unit elastic

C

If a consumer has more time to search for a low-cost alternative for an item, the demand curve for that item will be: A. equal to zero. B. relatively more inelastic. C. relatively more elastic. D. relatively steep.

B

If the price of a good increases by 15%, and quantity demanded changes by 5%, then the price elasticity of demand is equal to: A. 0.75. B. approximately 0.33. C. approximately 1.33. D. 1.

D

Milk and cereal are an example of complementary goods. Which definition best describes this relationship? A. goods related in such a way that an increase in price of one leads to an increase in the demand for the other B. goods related in such a way that an increase in quantity demanded of one leads to a increase in the price of the other C. goods related in such a way that an decrease in price of one leads to a decrease in the demand for the other D. goods related in such a way that an increase in price of one leads to a decrease in the demand for the other

B

Milk is an inexpensive good that most would consider a necessity. You would therefore expect its demand to be: A. elastic. B. inelastic. C. unit-elastic. D. driven by the supply price.

D

Milk producers know that the price elasticity of demand for whole milk is 0.1. If they want to increase sales by 5%, they will have to lower price by: A. 0.1%. B. 1%. C. 5%. D. 50%.

C

North Carolina State University recently raised its tuition by 12%. A survey was then conducted to determine how many students would transfer to another university as a result. It was found that only about 1 in 300 responses indicated they would transfer. Based on this information, the price elasticity of demand for education at this university is: A. 1. B. highly elastic. C. highly inelastic. D. 0.

A

On a hot sweltering day, you feel thirsty and buy an ice-cold soft drink, which you gulp down. Whether you buy the second drink or not, will depend on A. the marginal benefit from the second soft drink and if it will outweigh the price of the soft drink. B. the total amount of soft drinks that you have consumed that week. C. how you feel about soft drinks. D. the price of the soft drink.

B

The income effect of an increase in the price of salmon A. is the change in the demand for other types of fish, say trout, that results from a decrease in purchasing power. B. refers to the effect on a consumer's purchasing power which causes the consumer to buy less salmon, holding all other factors constant. C. refers to the relative price effect - salmon is more expensive compared to other types of fish - which causes the consumer to buy less salmon. D. is the change in the demand for salmon when income increases.

D

The price elasticity of demand for an item is impacted by: A. whether or not the item is a necessity. B. the time available to adjust to price changes. C. the number of available substitutes. D. all of these options.

A

The price elasticity of demand for canned fruit is calculated as 0.75. Given this, demand is: A. inelastic. B. elastic. C. unit-elastic. D. positively sloped.

C

The price elasticity of demand for fresh cilantro has been estimated to be 2.22. If a new insecticide and fertilizer treatment yields a 20% increase in the nation's fresh cilantro crop, how will that affect total revenue from fresh cilantro, all other things equal? A. Total revenue will remain unchanged. B. Total revenue will fall. C. Total revenue will rise. D. The information is insufficient to answer the question.

D

The price elasticity of demand for gasoline tends to be rather inelastic as: A. there are many available substitutes. B. it takes up a large part of a consumer's budget. C. we are in the long run instead of the short run. D. there are few or no available substitutes.

D

The slope of a demand curve is not used to measure the price elasticity of demand because A. the slope of a linear demand curve is not constant. B. the slope of the demand curve does not tell us how much quantity changes as price changes. C. the slope of a line cannot have a negative value. D. the measurement of slope is sensitive to the units chosen for price and quantity.

D

The table shows the monthly individual demand schedules of four students for soda. What is the total monthly market demand for soda at $2 per can? A. 45 cans B. 148 cans C. 99 cans D. 125 cans

A

The university hopes to raise more revenue by increasing student housing fees. This plan will work only if: A. the percent rise in price is larger in magnitude than the percent decline in quantity demanded. B. the percent rise in price is smaller in magnitude than the percent decline in quantity demanded. C. the percent decrease in price is smaller in magnitude than the percent decline in quantity demanded. D. the percent decrease in price is larger in magnitude than the percent increase in quantity demanded.

B

Two products have a cross-price elasticity of demand of 1.5. Based on this value of cross-price elasticity, which of the following products are they most likely to be? A. a brand of juice and a brand of computer B. two competing brands of soft drinks C. a brand of tea and a brand of sugar D. a brand of hot dog and a brand of hot dog bun

A

What would you expect to happen to the demand for a luxury good today, if the government announces it will stop taxing that luxury good next year? A. The demand for the luxury good will shift to the left today. B. There will be no impact on the demand for the luxury good. C. The demand for the luxury good will shift to the right today. D. Consumers will stop their consumption of the luxury good altogether.

D

Which of the following is not a demand shifter? A. The number of buyers in the market. B. The price of a substitute good. C. The price of a complementary good. D. The price of the product.

B

Which of the following scenarios does not illustrate the law of demand? A. Darren buys two pairs of jeans when they are $40 each, but only one pair when it is $60. B. Freya buys more doughnuts when the price of doughnuts is higher. C. Layla buys less tea when the price of tea rises. D. When Kit-Kats are cheaper, Mary opts to buy more Kit-Kats.

A

Which of the following statements about the price elasticity of demand is correct? A. Demand is more elastic in the long run than it is in the short run. B. The elasticity of demand for a good in general is equal to the elasticity of demand for a specific brand of the good. C. The absolute value of the elasticity of demand ranges from zero to one. D. Demand is more elastic the smaller the percentage of the consumer's budget the item takes up.

A

Why does the demand curve slope downwards? A. It slopes downward due to the law of demand. B. It slopes downward due to buyers perceiving fall in price as a fall in quality. C. It slopes downward due to the positive relationship between price and quantity demanded. D. It slopes downward due to stores lowering the prices on their products.

A

You are the manager of Frito-Lay's Cheese Puffs account, and you notice that when the price of Cheetos increases, there is an increase in demand for Cheese Puffs. What is the economic relationship between these goods that explains this behavior? A. The increase in the price of Cheetos causes an increase in the demand for Cheese Puffs; therefore, these goods are substitutes. B. The increase in the price of Cheetos causes a decrease in the demand for Cheese Puffs; therefore. these goods are complements. C. The increase in the price of Cheetos causes an increase in the demand for Cheese Puffs; therefore, these goods are complements. D. The increase in the price of Cheetos causes a decrease in the demand for Cheetos; therefore, these goods are substitutes.

A

You have been appointed head of marketing for Barry's Younique Yachts. Barry, the CEO, is interested in determining whether offering his yachts at a lower price would increase the firm's revenue. He asks you for advice. Using your knowledge of elasticity, you should tell Barry A. that he should reduce his prices. Yachts are luxury goods and therefore exhibit a high price elasticity of demand. Thus, reducing prices would increase revenue. B. that he should increase his prices. Demand for yachts is perfectly inelastic, so a price increase will cause total revenue to increase. C. that he should reduce his prices. Yachts are a necessity and therefore have a low price elasticity of demand. Thus, reducing prices would increase revenue. D. that he should increase his prices. Demand for yachts is likely to be elastic because they are so much fun to drive. Thus, increasing prices would increase revenue.

B

You manage a restaurant, and lately revenues have been rather poor. One of your waiters suggests that raising food prices will increase revenues, but your chef suggests that decreasing food prices will increase revenues. You aren't sure who is right, but you know that your waiter believes that the demand for your food is _____, and your chef believes that the demand for your food is _____. A. elastic; inelastic B. inelastic; elastic C. elastic; elastic D. inelastic; inelastic