Chapter 4 Concept Quiz

If income increases by 10% and the demand for tuna decreases by 20%, tuna is A. a luxury good B. an inferior good C. a necessity D. a substitute

B. an inferior good The consumption of inferior goods decreases as income goes up. For example, spending on used cars decreases as income increases while spending on new cars increases.

The price of peanut butter increases from $2.50 to $3.00 and the quantity of jelly demanded falls from 30 jars to 24 jars. Calculate the cross-price elasticity of demand. A. 9/11 B. -9/11 C. 11/9 D. -11/9

D. -11/9

Suppose that demand for automobiles increases by 25% when consumers' income increases by 20%. What is the income elasticity of demand for automobiles? A. 1.25 B. 0.80 C. 0.05 D. -1.25

A. 1.25

Over a longer period of time, supply becomes A. relatively more elastic. B. relatively more inelastic. C. perfectly inelastic. D. Time does not affect supply elasticity.

A. relatively more elastic. As illustrated by the graph below, if a price change persists through time, supply becomes more elastic as one moves from the immediate run (S1 below) to the short run (S2 below) to the long run (S3 below). A longer time horizon allows a producer to seek additional options to capitalize on price increases and shift factors of production to the most efficient combination.

For which of the following goods would you expect demand to be the most responsive to a rise in price? A. spaghetti B. electricity C. hospital emergency room visits D. water for a shower

A. spaghetti Consumers will be the most responsive to a change in the price of spaghetti. Since there are many close substitutes available for spaghetti, consumers will switch to another similar product in response to a small rise in the price of spaghetti.

When a supplier has a limited ability to make quick adjustments to quantity supplied, the elasticity of supply is A. 1 B. less than 1 C. more than 1 D. 0

B. less than 1

If the cross-price elasticity of demand for two goods is zero, the two goods are A. complements. B. not related. C. substitutes. D. normal.

B. not related. If the coefficient of the cross-price elasticity of demand between two goods is zero, this tells us there is no relationship between them. If the price of one goes up, it will not affect the quantity demanded of the other.

A supply curve that has a ________ slope represents a more elastic supply curve. A. steeper B. perfectly vertical C. flatter D. One cannot conclude anything about elasticity from the slope of a supply curve.

C. Flatter Refer to this figure and notice a supply curve with a flatter slope shows a producer's increased responsiveness to a change in price. Curves with flatter slopes show that, for any given change in price, the change in quantity supplied is greater than for the same given change in price on a flatter sloped curve.

For which of the following goods is supply the most responsive to a change in price? A. oceanfront land B. cellphone tower C. hot dog vendor D. gasoline

C. Hot Dog Vendor Of the answer choices, a hot dog vendor can most easily respond to changes in price. If prices go up, the vendor can quickly add another cart to increase the quantity supplied. If prices go down, the hot dog vendor can quickly remove a cart to decrease the quantity of hot dogs supplied.

Demand for a good is elastic if quantity demanded ___________ in response to a small price change. A. changes very little B. stays the same C. changes significantly D. changes either very little or substantially

C. changes significantly Elasticity measures how much the quantity demanded of a good changes in response to a change in the price of the good. If the quantity demanded changes significantly as a result of a price change, then demand is elastic.

The income elasticity of demand is ___________ for normal goods. A. less than zero B. equal to zero C. greater than zero D. sometimes greater than zero and sometimes less than zero

C. greater than zero

In which time period is demand most elastic? A. immediate run B. short run C. long run D. Elasticity is the same for all time periods.

C. long run In the immediate run, consumers have no time to adjust their behavior to changes in price; therefore, demand is inelastic. See D1 in the figure. In the short run, the consumers have some time to adjust their behavior to changes in price; therefore, demand is more elastic than in the immediate run. See D2 in the figure. In the long run a decision maker has the luxury of time to make a full adjustment to market conditions. The flexibility of additional time makes demand most elastic in the long run. See D3 in the figure.

Price elasticity of supply is always positive except when supply is A. relatively elastic. B. relatively inelastic. C. perfectly inelastic. D. either relatively elastic or relatively inelastic.

C. perfectly inelastic When supply is perfectly inelastic, the price elasticity of supply is zero. This means that supply is not able to respond at all to a change in price. For example, the price elasticity of supply of the Liberty Bell is perfectly inelastic.

Suppose the price of IBM computers falls from $2,500 to $2,000 and the quantity demanded increases from 10,000 to 20,000. Calculate the price elasticity of demand. A. 0 B. 1/3 = 0.33 C. 1 D. -3

D. -3