PRACTICE TEST 5 (ELASTICITY)

Which of the following generalizations is not correct? a.The price elasticity of demand is greater for necessities than it is for luxuries. b.The larger an item is in one's budget, the greater the price elasticity of demand. c.The price elasticity of demand is greater the longer the time period under consideration. d.The larger the number of close substitutes available, the greater will be the price elasticity of demand for a particular product.

a

Gigantic State University raises tuition for the purpose of increasing its revenue so that more faculty can be hired. GSU is assuming that the demand for education at GSU is a.relatively inelastic. b.decreasing. c.relatively elastic. d.perfectly elastic.

a

If the demand for bacon is relatively elastic, a 10 percent decline in the price of bacon will a.increase the amount demanded by more than 10 percent. b.increase the amount demanded by less than 10 percent. c.decrease the amount demanded by more than 10 percent. d.decrease the amount demanded by less than 10 percent.

a

If the demand for product X is inelastic, a 4 percent decrease in the price of X will a.increase the quantity of X demanded by less than 4 percent. b.increase the quantity of X demanded by more than 4 percent. c.decrease the quantity of X demanded by more than 4 percent. d.decrease the quantity of X demanded by less than 4 percent.

a

Refer to the diagram. Total revenue at price P1 is indicated by area(s) a.A +B. b.A. c.C +D. d.A +C.

a

Refer to the information and assume the stadium capacity is 5,000. If the Mudhens' management charges $7 per ticket, a.there will be 1,000 empty seats. b.some fans who want to see the game will find that tickets are not available. c.there will be 2,000 empty seats. d.the game will be sold out.

a

Suppose that a 10 percent increase in the price of normal good Y causes a 20 percent increase in the quantity demanded of normal good X. The coefficient of cross elasticity of demand is a.positive, and therefore these goods are substitutes. b.negative, and therefore these goods are substitutes. c.positive, and therefore these goods are complements. d.negative, and therefore these goods are complements.

a

Suppose the price elasticity of demand for bread is 0.20. If the price of bread falls by 10 percent, the quantity demanded will increase by a.2 percent and total expenditures on bread will fall. b.2 percent and total expenditures on bread will rise. c.20 percent and total expenditures on bread will fall. d.20 percent and total expenditures on bread will rise.

a

Suppose the price of local cable TV service increased from $16.20 to $19.80 and as a result the number of cable subscribers decreased from 224,000 to 176,000. Along this portion of the demand curve, price elasticity of demand is a.1.2. b.8.0. c.1.6. d.0.8.

a

The elasticity of demand for a product is likely to be greater, a.the greater the amount of time over which buyers adjust to a price change. b.the smaller the number of substitute products available. c.if the product is a necessity, rather than a luxury good. d.the smaller the proportion of one's income spent on the product.

a

The price elasticity of demand coefficient measures a.buyer responsiveness to price changes. b.the slope of the demand curve. c.the extent to which a demand curve shifts as incomes change. d.how far business executives can stretch their fixed costs.

a

A perfectly inelastic demand schedule a.cannot be shown on a two-dimensional graph. b.can be represented by a line parallel to the vertical axis. c.rises upward and to the right but has a constant slope. d.can be represented by a line parallel to the horizontal axis.

b

A supply curve that is parallel to the horizontal axis suggests that a.the relationship between price and quantity supplied is inverse. b.a change in demand will change the equilibrium quantity but not price. c.the industry is organized monopolistically. d.a change in demand will change price in the same direction.

b

Assume that a 4 percent increase in income across the economy produces an 8 percent increase in the quantity demanded of good X. The coefficient of income elasticity of demand is a.negative, and therefore X is an inferior good. b.positive, and therefore X is a normal good. c.negative, and therefore X is a normal good. d.positive, and therefore X is an inferior good.

b

In which of the following instances will total revenue decline? a.Price falls and demand is elastic. b.Price rises and demand is elastic. c.Price rises and supply is elastic. d.Price rises and demand is inelastic.

b

The diagram concerns supply adjustments to an increase in demand (D1 to D2) in the immediate market period, the short run, and the long run. On the basis of this illustration, we can conclude that a.the amount of time producers have to adjust to a change in demand is not a determinant of supply elasticity. b.S1 reflects a longer adjustment period for producers than does S2. c.S2 reflects a longer adjustment period for producers than does S1. d.short-run adjustments are more economically efficient than are long-run adjustments.

b

The supply of product X is elastic if the price of X rises by a.8 percent and quantity supplied rises by 8 percent. b.5 percent and quantity supplied rises by 7 percent. c.10 percent and quantity supplied remains the same. d.7 percent and quantity supplied rises by 5 percent.

b

When the percentage change in price is greater than the resulting percentage change in quantity demanded, a.demand is elastic. b.an increase in price will increase total revenue. c.a decrease in price will increase total revenue. d.demand may be either elastic or inelastic.

b

A perfectly inelastic demand curve a.has a price elasticity coefficient of unity throughout. b.has a price elasticity coefficient greater than unity. c.graphs as a line parallel to the vertical axis. d.graphs as a line parallel to the horizontal axis.

c

If demand for a product is elastic, the value of the price elasticity coefficient is a.equal to one. b.less than one. c.greater than one. d.zero.

c

If the price elasticity of demand for a product is 2.5 a price cut from $2.00 to $1.80 will a.increase the quantity demanded by about 250 percent. b.increase the quantity demanded by about 2.5 percent. c.increase the quantity demanded by about 25 percent. d.decrease the quantity demanded by about 2.5 percent.

c

If the price elasticity of demand for a product is unity, a decrease in price will a.increase the quantity demanded and increase total revenue. b.increase the quantity demanded but decrease total revenue. c.increase the quantity demanded, but total revenue will be unchanged. d.have no effect upon the amount purchased.

c

If the price of hand calculators falls from $10 to $9 and, as a result, the quantity demanded increases from 100 to 125, then a.demand is unit elastic with respect to price. b.demand is price inelastic. c.demand is price elastic. d.not enough information is given to make a statement about elasticity.

c

Refer to the diagram. In the P3P4 price range, demand is a.perfectly elastic. b.of unit elasticity. c.relatively elastic. d.relatively inelastic.

c

Suppose that the price of product X rises by 20 percent and the quantity supplied of X increases by 15 percent. The coefficient of price elasticity of supply for good X is a.positive, and therefore X is a normal good. b.negative, and therefore X is an inferior good. c.less than 1, and therefore supply is inelastic. d.more than 1, and therefore supply is elastic.

c

Suppose the supply of product X is perfectly inelastic. If there is an increase in the demand for this product, equilibrium price a.will increase, but equilibrium quantity will decline. b.will decrease, but equilibrium quantity will increase. c.will increase, but equilibrium quantity will be unchanged. d.and quantity will both decrease.

c

Suppose the total-revenue curve is derived from a particular linear demand curve. That demand curve must be a.elastic for price declines that increase quantity demanded from 5 units to 6 units. b.inelastic for price declines that increase quantity demanded from 2 units to 3 units. c.unit elastic for price increases that reduce quantity demanded from 5 units to 4 units. d.inelastic for price increases that reduce quantity demanded from 4 units to 3 units.

c

The Illinois Central Railroad once asked the Illinois Commerce Commission for permission to increase its commuter rates by 20 percent. The railroad argued that declining revenues made this rate increase essential. Opponents of the rate increase contended that the railroad's revenues would fall because of the rate hike. It can be concluded that a.both groups felt that the demand was inelastic but for different reasons. b.both groups felt that the demand was elastic but for different reasons. c.the railroad felt that the demand for passenger service was inelastic and opponents of the rate increase felt it was elastic. d.the railroad felt that the demand for passenger service was elastic and opponents of the rate increase felt it was inelastic.

c

The demand schedules for such products as eggs, bread, and electricity tend to be a.of unit price elasticity. b.relatively price elastic. c.relatively price inelastic. d.perfectly price elastic.

c

The price elasticity of demand for widgets is 0.80. Assuming no change in the demand curve for widgets, a 16 percent increase in sales implies a a.12 percent reduction in price. b.40 percent reduction in price. c.20 percent reduction in price. d.1 percent reduction in price.

c

The supply of product X is perfectly inelastic if the price of X rises by a.8 percent and quantity supplied rises by 8 percent. b.5 percent and quantity supplied rises by 7 percent. c.10 percent and quantity supplied stays the same. d.7 percent and quantity supplied rises by 5 percent.

c

A demand curve that is parallel to the horizontal axis is a.relatively inelastic. b.relatively elastic. c.perfectly inelastic. d.perfectly elastic.

d

We would expect the cross elasticity of demand between Pepsi and Coke to be a.positive, indicating normal goods. b.negative, indicating substitute goods. c.positive, indicating substitute goods. d.positive, indicating inferior goods.

c

Assume that a 3 percent increase in income across the economy produces a 1 percent decline in the quantity demanded of good X. The coefficient of income elasticity of demand for good X is a.positive and therefore X is a normal good. b.positive, and therefore X is an inferior good. c.negative, and therefore X is a normal good. d.negative, and therefore X is an inferior good.

d

Compared to coffee, we would expect the cross elasticity of demand for a.tea to be negative, but positive for cream. b.both tea and cream to be negative. c.both tea and cream to be positive. d.tea to be positive, but negative for cream.

d

Farmers often find that large bumper crops are associated with declines in their gross incomes. This suggests that a.farm products are normal goods. b.farm products are inferior goods. c.the price elasticity of demand for farm products is greater than 1. d.the price elasticity of demand for farm products is less than 1.

d

If a firm can sell 3,000 units of product A at $10 per unit and 5,000 at $8, then a.the price elasticity of demand is 0.44. b.A is an inferior good. c.A is a complementary good. d.the price elasticity of demand is 2.25.

d

If a firm finds that it can sell $13,000 worth of a product when its price is $5 per unit and $11,000 worth of it when its price is $6, then a.elasticity of demand is 0.74. b.the demand for the product is inelastic in the $6-$5 price range. c.the demand for the product must have increased. d.the demand for the product is elastic in the $6-$5 price range.

d

If the income elasticity of demand for store brand macaroni and cheese is −3.00, this means that a.store brand macaroni and cheese is a normal good. b.more store brand macaroni and cheese will be purchased when its price falls. c.store brand macaroni and cheese is a substitute for name brand macaroni and cheese. d.store brand macaroni and cheese is an inferior good.

d

Refer to the diagram. In the P1 to P2 price range, we can say a.that demand is inelastic with respect to price. b.that consumer purchases are relatively insensitive to price changes. c.nothing concerning price elasticity of demand. d.that demand is elastic with respect to price.

d

Supply curves tend to be a.less elastic in the long run because there is time for firms to enter or leave an industry. b.perfectly elastic in the long run because consumer demand will have sufficient time to adjust fully to changes in supply. c.perfectly inelastic in the long run because the law of scarcity imposes absolute limits on production. d.more elastic in the long run because there is time for firms to enter or leave the industry.

d

The diagram concerns supply adjustments to an increase in demand (D1 to D2) in the immediate market period, the short run, and the long run. Supply curves S1, S2, and S3 apply to the a.short run, long run, and immediate market period, respectively. b.immediate market period, long run, and short run, respectively. c.immediate market period, short run, and long run, respectively. d.long run, short run, and immediate market period, respectively.

d

The formula for cross elasticity of demand is percentage change in a.quantity demanded of X/percentage change in income. b.quantity demanded of X/percentage change in price of X. c.price of X/percentage change in quantity demanded of Y. d.quantity demanded of X/percentage change in price of Y.

d

The main determinant of elasticity of supply is the a.number of close substitutes for the product available to consumers. b.urgency of consumer wants for the product. c.number of uses for the product. d.amount of time the producer has to adjust inputs in response to a price change.

d

The price elasticity of demand for beef is about 0.60. Other things equal, this means that a 20 percent increase in the price of beef will cause the quantity of beef demanded to a.decrease by approximately 26 percent. b.decrease by approximately 32 percent. c.increase by approximately 12 percent. d.decrease by approximately 12 percent.

d

The price elasticity of supply measures how a.easily labor and capital can be substituted for one another in the production process. b.responsive quantity supplied is to a change in incomes. c.responsive the quantity supplied of Y is to changes in the price of X. d.responsive the quantity supplied of X is to changes in the price of Y.

d

The price of old baseball cards rises rapidly with increases in demand because a.the supply of old baseball cards in price elastic. b.the demand for old baseball cards is price elastic. c.the demand for old baseball cards is price inelastic. d.the supply of old baseball cards is price inelastic.

d

We would expect the cross elasticity of demand between dress shirts and ties to be a.positive, indicating normal goods. b.negative, indicating substitute goods. c.positive, indicating complementary goods. d.negative, indicating complementary goods.

d

Which of the following is correct? a.If demand is elastic, an increase in price will increase total revenue. b.If demand is elastic, a decrease in price will decrease total revenue. c.If demand is inelastic, an increase in price will decrease total revenue. d.If demand is elastic, a decrease in price will increase total revenue.

d

Which type of goods is most adversely affected by recessions? a.Goods for which the cross elasticity coefficient is positive. b.Goods for which the cross elasticity coefficient is negative. c.Goods for which the income elasticity coefficient is relatively low or negative. d.Goods for which the income elasticity coefficient is relatively high and positive.

d