Final Exam Review

How would the following changes in price affect total revenue? That is, would total revenue increase, decrease, or remain unchanged? a. Price falls and demand is inelastic. b. Price rises and demand is elastic. e. Price rises and demand is inelastic. f. Price falls and demand is elastic. g. Price falls and demand is of unit elasticity.

(a) Total revenue decreases (b) Total revenue decreases (e) Total revenue increases (f) Total revenue increases (g) No change

The income elasticities of demand for movies, dental services, and clothing have been estimated to be +3.4, +1, and +.5, respectively. Interpret these coefficients. What does it mean if an income elasticity coefficient is negative?

All are normal goods—income and quantity demanded move in the same direction. These coefficients reveal that a 1 percent increase in income will increase the quantity of movies demanded by 3.4 percent, of dental services by 1 percent, and of clothing by 0.5 percent. A negative coefficient indicates an inferior good—income and quantity demanded move in the opposite direction.

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

B. more elastic in the long run because there is time for firms to enter or leave the industry.

Research has found that an increase in the price of beer would reduce the amount of marijuana consumed. Is cross elasticity of demand between the two products positive or negative? Are these products substitutes or complements? What might be the logic behind this relationship?

If the cross elasticity is negative, this implies that an increase in the price of one good results in a decrease in the quantity purchased of another good. This implies that the goods are compliments; as the price of one good increases, it reduces the consumption of other goods (purchased less). The cross elasticity of the two products above is negative. Thus, the products appear to be complementary. As one drinks beer, one also smokes

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. What is the rationale for each group in terms of elasticity of demand?

Railroad Company thinks that the demand elasticity is inelastic, while opponents think it otherwise

Suppose the cross elasticity of demand for products A and B is +3.6 and for products C and D is -5.4. What can you conclude about how products A and B are related? Products C and D?

The cross elasticity relates the percentage change in quantity to the percentage change in price of a different good. If the cross elasticity is positive this implies that and increase in the price of one good results in an increase in the quantity purchased of another good. This implies the goods are substitutes, as the price of one good increases substitute into the other good (purchase more). This implies that goods A and B are substitutes and that goods C and D are compliments. For reference, if the cross elasticity is negative this implies that and increase in the price of one good results in a decrease in the quantity purchased of another good. This implies that the goods are compliments; as the price of one good increases, reduce the consumption of the other good (purchase less).

Suppose the income elasticity of demand for toys is +2.00. This means that: a. a 10 percent increase in income will increase the purchase of toys by 20 percent b. a 10 percent increase in income will increase the purchase of toys by 2 percent c. a 10 percent increase in income will decrease the purchase of toys by 2 percent d. toys are an inferior good

a. a 10 percent increase in income will increase the purchase of toys by 20 percent

Price elasticity of demand is generally: a. greater in the long run than in the short run b. greater in the short run than the long run c. the same in both short run and the long run d. greater for "necessities" than it is for "luxuries"

a. greater in the long run than in the short run

A firm can sell as much as it wants at a constant price. Demand is thus: a. perfectly inelastic b. perfectly elastic c. relatively inelastic d. relatively elastic

a. perfectly inelastic

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

a. the supply of old baseball cards is price inelastic

If the supply of product X is perfectly elastic, an increase in the demand for it will increase; a. equilibrium quantity but reduce equilibrium price b equilibrium quantity, but equilibrium price will be unchanged c. equilibrium price but reduce equilibrium quantity d. equilibrium price, but equilibrium quantity will be unchanged

b equilibrium quantity, but equilibrium price will be unchanged

If the demand for farm products is price inelastic, a good harvest will cause farm revenues to: a. increase b. decrease b. be unchanged d. either increase or decrease, depending on what happens to supply

b. decrease

The price elasticity of demand for beef is about .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. increase by approximately 12 percent. b. decrease by approximately 12 percent c. decrease by approximately 32 percent d. decrease by approximately 26 percent

b. decrease by approximately 12 percent

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

b. decrease the quantity of X demanded by less than 4 percent

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

b. goods for which the income elasticity coefficient is relatively high and positive

The larger the positive cross elasticity coefficient of demand between products X and Y, the: a. stronger their complementariness b. greater their substitutability c. smaller the price elasticity of demand for both products d. the less sensitive purchases of each are to increase in income

b. greater their substitutability

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

b. increase the amount demanded by more than 10 percent

Other things the same, if a price change causes total revenue to change in the opposite direction, demand is: a. perfectly inelastic b. relatively elastic c. relatively inelastic d. of unit elasticity

b. relatively elastic

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

b. tea to be positive, but negative for cream

We would expect: a. the demand for Coca-Cola to be less price elastic than the demand for soft drinks in general b. the demand for Coca- Cola to be more price elastic than the demand for soft drink in general c. no relationship between the price elasticity of demand for Coca-Cola and the price elasticity of demand for soft drinks in general d. none of these to hold true

b. the demand for Coca- Cola to be more price elastic than the demand for soft drink in general

Suppose that the price of peanuts fall from $3 to $2 per bushel and that, as a result, the total revenue received by peanuts farmers changes from $16 to $14 billion. Thus: a. the demand for peanuts is elastic b. the demand for peanuts is inelastic c. the demand curve for peanuts has shifted to the right d. no inference can be made as to the elasticity of demand for peanuts

b. the demand for peanuts is inelastic

It takes a considerable amount of time to increase the production of pork. This implies that: a. a change in the demand for pork will not affect its price in the short run. b. the short-run supply curve for pork is less elastic than the long-run supply curve for pork c. an increase in the demand for pork will elicit a larger supply response in the short run than in the long run d. the long-run supply curve for pork is less elastic than the short-run supply curve for pork

b. the short-run supply curve for pork is less elastic than the long-run supply curve for pork

Refer to the diagram and assume that price increase from $2 to $10. The coefficient of the price elasticity of supply (midpoint formula) relating to this price change is about: a. 5 and supply is elastic b. 1 and supply is unit elastic c. .25 and supply is inelastic d. 2.5 and supply is elastic

c. .25 and supply is inelastic

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

c. Increase the quantity demanded by about 25 percent

A supply curve that is a vertical straight line indicates that: a. production costs for this product cannot be calculated b. the relationship between price and quantity supplied is inverse. c. a change in price will have no effect on the quantity supplied d. an unlimited amount of the product will be supplied at a constant price

c. a change in price will have no effect on the quantity supplied

If a firm's demand for labor is elastic, a union-negotiated wage increase will: a. necessarily by inflationary b. cause the firm's total payroll to increase c. cause the firm's total payroll to decline d. cause a shortage of labor

c. cause the firm's total payroll to decline

Suppose Aiyanna's Pizzeria currently faces a linear demand curve and is charging a very high price per pizza and doing very little business. Aiyanna now decides to lower pizza prices by 5 percent per week for an indefinite period of time. We can expect that each successive week: a. demand will become more price elastic b. price elasticity of demand will not change as price is lowered c. demand will become less price elastic d. the elasticity of supply will increase

c. demand will become less price elastic

If the income elasticity of demand for lard is -3.00, this means that: a. lard is a substitute for butter b. lard is a normal good c. lard is an inferior good d. more lard will be purchased when it is price falls

c. lard is an inferior good

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

c. less than 1 and therefore supply is inelastic

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. negative and therefore these goods are substitutes c. positive and therefore these goods are substitutes d. positive and therefore these goods are complements

c. positive and therefore these goods are substitutes

The demand for a necessity whose cost is a small portion of one's total income is: a. perfectly price inelastic b. perfectly price elastic c. relatively price inelastic d. relatively price elastic

c. relatively price inelastic

The Illinois Central Railroad once asked the Illinois Commerce Commission for permission to increase its commuter rates by 20 percent. The railroad argued the 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 elastic but for different reasons b. both groups felt that the demand was inelastic but for different reasons c. the railroad felt that the demand for passengers 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 railroad felt that the demand for passengers service was inelastic and opponents of the rate increase felt it was elastic

Which of the following goods will be least likely suffer to decline in demand during a recession? a. dinner at a nice restaurant b. ipods c. toothpaste d. plasma screen and LCD TVs

c. toothpaste

The supply of product X is inelastic (but not perfectly inelastic) if the price of X rises by: a. 5 percent and quantity supplied rises by 7 percent b. 8 percent and quantity supplied rises by 8 percent c. 10 percent and quantity supplied remains the same d. 7 percent and quantity supplied rises by 5 percent

d. 7 percent and quantity supplied rises by 5 percent

Refer to the diagram. Between prices of $5.70 and $6.30: a. D1 is more elastic than D2 b. D2 is an inferior good and D1 is a normal good. c. D1 and D2 have identical elasticities d. D2 is more elastic than D1.

d. D2 is more elastic than D1.

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

d. a change in demand will change the equilibrium quantity but not price

Refer to the diagram. If prices falls from $10 to $2, total revenue: a. rises from a + b to a + b +D + C and demand is elastic b. falls from a + d to b + c and demand is inelastic c. rises from c + d to b + a and demand is elastic d. falls from a + b to b + c and demand is inelastic

d. falls from a + b to b + c and demand is inelastic

Refer to the table. Over the $6-$4 price range, supply is: a. perfectly elastic b. elastic c. perfectly inelastic d. inelastic

d. inelastic

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. decreasing b. relatively elastic c. perfectly elastic d. relatively inelastic.

d. relatively inelastic.

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

d. will increase, but equilibrium quantity will be unchanged

Suppose Kate's Bakery currently faces a linear demand curve for her cake and is charging a very high price per cake and doing very little business. Kate now decides to lower cake prices by 5 percent per week for an indefinite period of time. What can we can expect in each successive week in terms of revenue?

demand elasticity will decrease along the demand in each successive week, revenue will first increase then decrease.

What is the formula for measuring the price elasticity of supply? Suppose the price of apples goes up from $20 to $22 a box. In direct response, Goldsboro Farms supplies 1,200 boxes of apples instead of 1,000 boxes. Compute the coefficient of price elasticity (midpoints approach) for Goldsboro's supply. Is its supply elastic, or is it inelastic?

elasticity of supply = percentage change in quantity supplied percentage change in price Es = 1.91; supply is elastic