978-0132479431 Chapter 5 Part 1

1

Foundations of Microeconomics, 5e (Bade/Parkin)

Chapter 5 Elasticities of Demand and Supply

5.1 The Price Elasticity of Demand

1) The price elasticity of demand is a measure of

A) the equilibrium price of a product.

B) buyers' responsiveness to changes in the price of a product.

C) the amount of a product purchased when income increases.

D) whether a product is a substitute or a complement.

E) how much a change in demand affects the equilibrium price.

Skill: Level 1: Definition

Section: Checkpoint 5.1

Author: PH

AACSB: Reflective thinking

2) The price elasticity of demand measures which of the following?

A) the slope of the demand curve

B) the rate at which demand changes when price changes

C) how responsive the quantity demanded is to changes in price

D) the percentage-slope of the demand curve

E) None of these correctly defines what price elasticity of demand measures.

Skill: Level 1: Definition

Section: Checkpoint 5.1

Author: TS

AACSB: Reflective thinking

3) The price elasticity of demand measures the extent to which the quantity demanded changes

when

A) the price of the good changes.

B) the price of a related good changes.

C) the expected future price of a good changes.

D) consumer preferences change.

E) both the demand and supply of the good change.

Skill: Level 1: Definition

Section: Checkpoint 5.1

Author: SB

AACSB: Reflective thinking

2

4) The price elasticity of demand measures the ________ that results from a ________.

A) change in quantity demanded; change in price

B) change in price; change in the quantity demanded

C) percentage change in price; percentage change in the quantity demanded

D) percentage change in the quantity demanded; percentage change in price

E) percentage change in the quantity demanded; change in price

Skill: Level 1: Definition

Section: Checkpoint 5.1

Author: SA

AACSB: Reflective thinking

5) The elasticity of demand is used to

A) determine if consumers will or will not buy a product.

B) measure how responsive consumers are to a change in price.

C) determine in what direction the demand curve shifts if income changes.

D) find the market equilibrium.

E) determine if a change in price results in a shortage or a surplus.

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: SA

AACSB: Reflective thinking

6) To determine the price elasticity of demand, we

A) need information on consumers' incomes.

B) need to know how much is available.

C) compare the percentage change in the quantity demanded to the percentage change in the

price.

D) compare the change in the quantity to the change in price.

E) divided the quantity by the price.

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: SA

AACSB: Reflective thinking

3

7) If the price of a good rises, then moving along a demand curve the percentage change in the

quantity demanded will be

A) positive.

B) negative.

C) zero.

D) either positive, negative, or zero depending on how the demand curve shifted.

E) undefined.

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: SB

AACSB: Reflective thinking

8) If we ignore the negative or positive sign, the midpoint method of calculating a percentage

change in price between two points on a demand curve results in

A) a smaller percentage change if the price rises than if it falls.

B) the same percentage, regardless of whether the price increases or decreases.

C) the price elasticity of demand.

D) the price elasticity of supply.

E) a higher percentage change if the price rises than if it falls.

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: SB

AACSB: Reflective thinking

9) Suppose the price of a box of cereal rises from $4 to $6. Using the midpoint method, what is

the percentage change in price?

A) 50 percent

B) 40 percent

C) 33 percent

D) 67 percent

E) None of the above answers is correct.

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: SB

AACSB: Analytical reasoning

4

10) Suppose the price of a DVD rose from $15 to $17 and the quantity demanded decreased from

1,000 per month to 900 per month. Using the midpoint formula, the ________ percent change in

price lead to a ________ percent change in the quantity demanded.

A) 12.5; 10.5

B) 13.3; 10.0

C) 11.8; 11.1

D) 8.0; 9.5

E) None of the above answers are correct.

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: CD

AACSB: Analytical reasoning

11) Suppose the local university charges $85 per credit hour. If tuition increases from $85 to $93

per credit hour, using the midpoint method, what is the percentage change in price?

A) 8.99 percent

B) 8.00 percent

C) 9.41 percent

D) 8.62 percent

E) 9.12 percent

Skill: Level 3: Using models

Section: Checkpoint 5.1

Author: JC

AACSB: Analytical reasoning

12) Using the midpoint method, if the price of an airline ticket from Orlando to Pittsburgh falls

from $275 to $238, the percentage change in price is

A) 1442 percent.

B) 14.42 percent.

C) 15.54 percent.

D) 13.45 percent.

E) 68.00 percent.

Skill: Level 3: Using models

Section: Checkpoint 5.1

Author: JC

AACSB: Analytical reasoning

5

13) If the demand for a good is elastic, then

A) people do not change the quantity they demand when the price of the good changes.

B) a change in price leads to a smaller percentage change in the quantity demanded.

C) people substantially decrease the quantity of the good they buy if its price increases by a

small percentage.

D) a change in the quantity demanded is smaller than the change in price.

E) the quantity demanded divided by the price exceeds 1.00.

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: SA

AACSB: Reflective thinking

14) When the percentage change in the quantity demanded exceeds the percentage change in

price, then demand is

A) inelastic.

B) unit elastic.

C) elastic.

D) irrelevant.

E) undefined.

Skill: Level 1: Definition

Section: Checkpoint 5.1

Author: JC

AACSB: Analytical reasoning

15) If the percentage change in price is 10 percent and the demand is elastic, then the percentage

change in the quantity demanded

A) is greater than 0 percent but less than 10 percent.

B) is larger than 10 percent.

C) equals 0 percent.

D) equals 10 percent.

E) More information is needed to determine the magnitude of the change in the quantity

demanded.

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: SB

AACSB: Analytical reasoning

6

16) If the price of a six-pack of Pepsi falls from $4 to $3 and the quantity purchased increases 80

percent, then demand is

A) inelastic.

B) elastic.

C) unit elastic.

D) perfectly inelastic.

E) perfectly elastic.

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: TS

AACSB: Analytical reasoning

17) Suppose the Chicago Enforcers football team lowers ticket prices by 13 percent and as a

result the quantity of tickets demanded increases by 21 percent. This response means that the

demand for Enforcer tickets is

A) inelastic.

B) elastic.

C) unit elastic.

D) perfectly inelastic.

E) perfectly elastic.

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: JC

AACSB: Analytical reasoning

18) If the price elasticity of demand for moose hunting lessons is 4.23, then the demand for

moose hunting lessons is

A) elastic.

B) unit elastic.

C) inelastic.

D) perfectly unit elastic.

E) perfectly elastic.

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: JC

AACSB: Analytical reasoning

7

19) Suppose the demand for peaches sold from one roadside stand in Georgia is perfectly elastic.

As a result, a 7 percent increase in the price charged by the owner of this stand leads to

A) zero peaches sold by this stand.

B) no change in the quantity demanded at this stand.

C) a 7 percent decrease in the quantity demanded at this stand.

D) a 7 percent decrease in demand at this stand.

E) a virtually infinite increase in the quantity demanded at this stand.

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: JC

AACSB: Analytical reasoning

20) When the percentage change in the quantity demanded is less than the percentage change in

price, then demand is

A) inelastic.

B) unit elastic.

C) elastic.

D) irrelevant.

E) undefined.

Skill: Level 1: Definition

Section: Checkpoint 5.1

Author: JC

AACSB: Analytical reasoning

21) If the percentage change in the quantity demanded is not zero but is less than the percentage

change in the price, demand is

A) elastic.

B) inelastic.

C) unit elastic.

D) perfectly elastic.

E) perfectly inelastic.

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: SB

AACSB: Analytical reasoning

8

22) If the price elasticity of demand for razors is 0.32, the demand for razors is

A) elastic.

B) unit elastic.

C) inelastic.

D) perfectly inelastic.

E) perfectly elastic.

Skill: Level 1: Definition

Section: Checkpoint 5.1

Author: JC

AACSB: Analytical reasoning

23) Perfectly inelastic demand means that consumers

A) are willing to buy any quantity of the good at a given price, but none at higher prices.

B) decrease their consumption as price rises.

C) increase their consumption as price rises.

D) will buy a certain quantity, regardless of price.

E) will buy a huge, almost infinite amount more, if the price falls just a little.

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: SB

AACSB: Reflective thinking

24) Suppose the demand for rescue services in our national parks is perfectly inelastic. This fact

would mean that a 31 percent increase in rescue fees leads to a

A) 31 percent decrease in the quantity demanded.

B) 31 percent increase in demand.

C) 31 percent decrease in demand.

D) no change in the quantity demanded.

E) decrease in the quantity demanded to 0 rescues.

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: JC

AACSB: Reflective thinking

9

25) When the percentage change in the quantity demanded equals the percentage change in price,

then demand is

A) inelastic.

B) unit elastic.

C) elastic.

D) irrelevant.

E) undefined.

Skill: Level 1: Definition

Section: Checkpoint 5.1

Author: JC

AACSB: Analytical reasoning

26) If the price elasticity of demand for opera tickets in Chicago is 1.00, then the demand for

opera tickets in Chicago is

A) unit elastic.

B) elastic.

C) perfectly inelastic.

D) inelastic.

E) perfectly elastic.

Skill: Level 1: Definition

Section: Checkpoint 5.1

Author: JC

AACSB: Analytical reasoning

27) Suppose a local photographer increases his prices by 8 percent and quantity demanded

decreases by the same percentage. This set of facts indicates that the demand for his services is

A) inelastic.

B) elastic.

C) unit elastic.

D) perfectly elastic.

E) perfectly inelastic.

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: JC

AACSB: Analytical reasoning

10

28) Which of the following does NOT influence the price elasticity of demand?

A) the amount by which the demand curve shifts when the price of another good changes

B) the number of substitutes available to consumers

C) the price of the good relative to total income

D) the time period buyers have to respond to a price change

E) whether the good is a necessity or a luxury.

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: TS

AACSB: Reflective thinking

29) If a substitute good is easy to find, then demand for a good is

A) elastic.

B) inelastic.

C) unit elastic.

D) perfectly inelastic.

E) Substitutes don't have any effect on elasticity.

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: SB

AACSB: Reflective thinking

30) The demand for a good is more elastic if the

A) good is a necessity.

B) good has few substitutes.

C) good is narrowly defined.

D) supply of the good is plentiful.

E) Both answers B and C are correct.

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: SA

AACSB: Reflective thinking

11

31) If a good has many close substitutes, then its demand is most likely

A) elastic.

B) inelastic.

C) unit elastic.

D) perfectly inelastic.

E) elastic or inelastic depending on whether the price of the good is increasing or decreasing.

Skill: Level 1: Definition

Section: Checkpoint 5.1

Author: CD

AACSB: Reflective thinking

32) If a product is narrowly defined, it is likely to

A) have many substitutes and therefore its demand is elastic.

B) have few substitutes, and therefore its demand is less elastic.

C) be unique, and therefore its demand is inelastic.

D) be unique and have many substitutes.

E) have a larger proportion of income spent on it.

Skill: Level 1: Definition

Section: Checkpoint 5.1

Author: PH

AACSB: Reflective thinking

33) Of the following, which good has the most elastic demand?

A) food

B) breakfast food

C) cereal

D) Post Raisin Bran

E) Post Raisin Brand purchased at a Safeway grocery store

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: SB

AACSB: Reflective thinking

12

34) The price elasticity of demand for Red Delicious apples, a certain type of apple, is likely

A) elastic.

B) inelastic.

C) perfectly elastic.

D) perfectly inelastic.

E) unit elastic.

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: KG

AACSB: Reflective thinking

35) Which of the following statements is correct?

A) The demand for New Balance shoes is more elastic than the demand for shoes in general.

B) The demand for salt is very elastic.

C) The demand for luxuries is less elastic than the demand for necessities.

D) The demand for a narrowly defined good is less elastic than the demand for a more broadly

defined good.

E) The larger the proportion of income spent on a good, the smaller the elasticity of demand.

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: SA

AACSB: Reflective thinking

36) One reason why the demand for gasoline is inelastic is because

A) substitutes for gas abound.

B) substitutes for gas are hard to find.

C) gasoline is a luxury item.

D) people have a long time to shop around for automobiles that use less gas.

E) buses run on diesel fuel rather than gasoline.

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: JC

AACSB: Reflective thinking

13

37) The longer the time that has elapsed since the price of a good changed, the

A) more elastic the demand for that good.

B) steeper the demand curve.

C) less elastic the demand for that good.

D) smaller the amount of that good bought.

E) fewer substitutes available for the good.

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: SA

AACSB: Reflective thinking

38) As more time passes, the price elasticity of gasoline

A) increases.

B) decreases.

C) stays the same.

D) becomes perfectly inelastic.

E) becomes perfectly elastic.

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: KG

AACSB: Reflective thinking

39) Demand for a product tends to be more elastic the longer the time period considered because

A) sellers have more time to expand production.

B) buyers have more time to search for substitutes.

C) price increases over time make the price larger relative to buyers' incomes.

D) the inverse relationship between the price and the quantity demanded weakens over time.

E) buyers get used to the new price.

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: TS

AACSB: Reflective thinking

14

40) The long-run price elasticity of demand for electricity is ________ than the short-run price

elasticity of demand for electricity.

A) greater than

B) less than

C) equal to

D) not comparable to

E) unrelated to

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: KG

AACSB: Reflective thinking

41) A product's price elasticity of demand is likely to be greater

A) if it only has a few substitutes.

B) if consumers spend a small proportion of income on the product.

C) the less time consumers have to adjust to price changes.

D) if the product is a luxury good rather than a necessity.

E) Both answers C and D are correct.

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: PH

AACSB: Reflective thinking

42) The demand for luxury suites at basketball games is more elastic if

A) these suites are a necessity.

B) these suites are a luxury item.

C) few close substitutes exist for these suites.

D) basketball fans have little time to look for alternative suites.

E) poorer fans cannot afford luxury suites.

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: JC

AACSB: Reflective thinking

15

43) The demand for a necessity generally is

A) very elastic.

B) infinitely elastic.

C) unaffected by income.

D) inelastic.

E) unit elastic.

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: SA

AACSB: Reflective thinking

44) The demand for necessities generally is ________ the demand for luxury goods.

A) as elastic as

B) more elastic than

C) less elastic than

D) flatter than

E) not comparable to

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: SB

AACSB: Reflective thinking

45) If a good is a necessity, it has ________ substitutes and its demand is ________.

A) poor; elastic

B) poor; inelastic

C) many; elastic

D) many; inelastic

E) many; precisely unit elastic

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: CD

AACSB: Reflective thinking

16

46) You are more sensitive to a change in price if you

A) spend a lot of your income on the good.

B) spend a small percentage of your income on the good.

C) buy very little of the good.

D) do not buy the good regularly.

E) have a very inelastic demand for the good.

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: SB

AACSB: Reflective thinking

47) We calculate the price elasticity of demand as the

A) ratio of the percentage change in the quantity demanded to the percentage change in price.

B) change in quantity divided by the change in price.

C) ratio of the percentage change in the price to the percentage change in quantity.

D) percentage change in the quantity demanded divided by the percentage change in income.

E) equilibrium quantity divided by the equilibrium price.

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: SA

AACSB: Reflective thinking

48) What is the formula for the price elasticity of demand? The percentage change in the

A) quantity demanded divided by the percentage change in the price of a substitute or

complement.

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

C) quantity demanded divided by the percentage change in price.

D) quantity demanded divided by the percentage change in income.

E) equilibrium quantity demanded divided by the equilibrium price.

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: PH

AACSB: Reflective thinking

17

49) Demand is price inelastic if ________ percentage change in the price leads to a ________

percentage change in the quantity demanded.

A) a small; large

B) a large; small

C) any; large

D) Both answers A and B are correct.

E) None of the above answers is correct.

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: SA

AACSB: Reflective thinking

50) If a 10 percent price increase generates a 10 percent decrease in quantity demanded, then

demand is

A) unit elastic.

B) elastic.

C) perfectly inelastic.

D) perfectly elastic.

E) inelastic.

Skill: Level 3: Using models

Section: Checkpoint 5.2

Author: KG

AACSB: Analytical reasoning

51) If a 10 percent price increase generates a 20 percent decrease in quantity demanded, then

demand is

A) elastic.

B) perfectly inelastic .

C) perfectly elastic.

D) inelastic.

E) unit elastic.

Skill: Level 3: Using models

Section: Checkpoint 5.2

Author: KG

AACSB: Analytical reasoning

18

52) If a 30 percent price increase generates a 20 percent decrease in quantity demanded, then

demand is

A) inelastic.

B) elastic.

C) unit elastic.

D) perfectly elastic.

E) perfectly inelastic .

Skill: Level 3: Using models

Section: Checkpoint 5.2

Author: KG

AACSB: Analytical reasoning

53) The price of furnace filters increased by 5 percent and the quantity demanded did not change.

The price elasticity of demand for furnace filters is

A) perfectly inelastic.

B) inelastic.

C) elastic.

D) unit elastic.

E) perfectly elastic.

Skill: Level 3: Using models

Section: Checkpoint 5.2

Author: KG

AACSB: Analytical reasoning

54) If a 2 percent change in price leads to a ________ percent change in the quantity demanded,

then demand is ________.

A) 2; elastic

B) 1; unit elastic

C) 3; inelastic

D) 1; inelastic

E) 0; perfectly elastic

Skill: Level 3: Using models

Section: Checkpoint 5.1

Author: CD

AACSB: Analytical reasoning

19

55) If a 2 percent change in price leads to a ________ percent change in the quantity demanded,

then demand is ________.

A) 2; elastic

B) 1; unit elastic

C) 3; inelastic

D) 4; elastic

E) 0; perfectly elastic

Skill: Level 3: Using models

Section: Checkpoint 5.1

Author: CD

AACSB: Analytical reasoning

56) If the price elasticity of demand for a good is 2, then a 10 percent increase in the price of that

good ________ the quantity demanded by ________ percent.

A) increases; 20

B) decreases; 2

C) decreases; 10

D) decreases; 20

E) increases; 8

Skill: Level 3: Using models

Section: Checkpoint 5.1

Author: SA

AACSB: Analytical reasoning

57) When the price of tacos rise 4 percent, the quantity demanded decreases 10 percent. What is

the price elasticity of demand for tacos?

A) 40.0

B) 25.0

C) 0.4

D) 2.5

E) 10.0

Skill: Level 3: Using models

Section: Checkpoint 5.1

Author: SB

AACSB: Analytical reasoning

20

58) Suppose the price of a ticket to a Lenny Kravitz concert is $41 and at that price, the quantity

of tickets demanded is 17,000 per concert. Using the midpoint method of calculating percentage

changes, if Mr. Kravitz raises the price to $48 and the quantity demanded decreases to 16,000,

the price elasticity of demand for his concert tickets is

A) 15.73.

B) 6.06.

C) 1.00.

D) 0.39.

E) 0.93.

Skill: Level 3: Using models

Section: Checkpoint 5.1

Author: JC

AACSB: Analytical reasoning

59) When the price of a burrito increases from $2 to $4, the quantity demanded decreases from

50 to 40. Using the midpoint method, the price elasticity of demand equals

A) 1/3.

B) 3.

C) 2.

D) 1.

E) 1/2.

Skill: Level 3: Using models

Section: Checkpoint 5.2

Author: KG

AACSB: Analytical reasoning

60) When the price of Cosmopolitan magazine decreases from $5 to $3, the quantity demanded

increases from 600,000 to 1,000,000 copies each month. Using the midpoint method, the price

elasticity of demand equals

A) 1.

B) 3.

C) 2.

D) 1/3.

E) 1/2.

Skill: Level 3: Using models

Section: Checkpoint 5.2

Author: KG

AACSB: Analytical reasoning

21

61) If a 4 percent change in the price of a good leads to a 3 percent change in quantity demanded,

the price elasticity of demand equals

A) 1.33.

B) 0.75.

C) 4.00.

D) 3.44.

E) None of the above answers are correct.

Skill: Level 3: Using models

Section: Checkpoint 5.1

Author: CD

AACSB: Analytical reasoning

62) A 10 percent increase in price leads to a 20 percent decrease in the quantity demanded. The

price elasticity of demand is equal to

A) 0.5.

B) 1.0.

C) 2.0.

D) 20.0.

E) 10.0.

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: TS

AACSB: Analytical reasoning

63) A firm can sell 10 units if the price is $100 and can sell 8 units if the price is $125. Using the

midpoint method, what is the price elasticity of demand?

A) 0.75

B) 1.00

C) 1.25

D) 0.50

E) 0.0

Skill: Level 3: Using models

Section: Checkpoint 5.1

Author: TS

AACSB: Analytical reasoning

22

64) When the price of a cup of coffee falls from $3.00 to $2.50, the quantity demanded increases

from 1,000 per month to 1,150 per month. Using the midpoint method, the price elasticity of

demand is

A) 0.77.

B) 1.30.

C) 0.07.

D) 3.00.

E) 2.50.

Skill: Level 3: Using models

Section: Checkpoint 5.1

Author: CD

AACSB: Analytical reasoning

65) During last year the price of regular unleaded gasoline in Oakland, California increased 11.0

percent. If the price elasticity of demand for gasoline was 0.13, the price hike means that the

quantity demanded decreased by

A) 1.43 percent.

B) 8.46 percent.

C) 0.16 percent.

D) 4.31 percent.

E) 6.46 percent.

Skill: Level 3: Using models

Section: Checkpoint 5.1

Author: JC

AACSB: Analytical reasoning

66) If the price elasticity of demand for a product is 2.5, then a price increase of 1.5 percent

decreases the quantity demanded by

A) 1.55 percent.

B) 3.50 percent.

C) 5.00 percent.

D) 3.75 percent.

E) 1.00 percent.

Skill: Level 3: Using models

Section: Checkpoint 5.1

Author: PH

AACSB: Analytical reasoning

23

67) Suppose the University of Oklahoma increases the price of student football tickets for the

2008 season by 30 percent. If the price elasticity of demand for student tickets is 1.22, the price

increase leads to

A) a 36.6 percent decrease in the quantity demanded.

B) a 30 percent decrease in the quantity demanded.

C) a 1.22 percent decrease in the quantity demanded.

D) 28.78 percent decrease in the quantity demanded.

E) no change in the quantity demanded.

Skill: Level 3: Using models

Section: Checkpoint 5.1

Author: JC

AACSB: Analytical reasoning

68) Using the data in the table above, when the price of a skirt rises from $20 to $35, what is the

price elasticity of demand? (Use the midpoint method.)

A) 0.33

B) 0.25

C) 1.00

D) 1.33

E) 3.00

Skill: Level 3: Using models

Section: Checkpoint 5.1

Author: PH

AACSB: Analytical reasoning

69) Using the data in the table above, the demand for skirts is

A) elastic.

B) unit elastic.

C) inelastic.

D) indeterminate.

E) perfectly inelastic.

Skill: Level 3: Using models

Section: Checkpoint 5.1

Author: PH

AACSB: Analytical reasoning

24

70) The data in the table above give two points on the demand curve for pizza. Using the

midpoint method, when the price of a pizza falls from $10 to $9, what is the percentage change

in price?

A) 8.2 percent

B) 15.5 percent

C) 10.5 percent

D) 5.0 percent

E) 1.0 percent

Skill: Level 3: Using models

Section: Checkpoint 5.1

Author: PH

AACSB: Analytical reasoning

71) The data in the table above give two points on the demand curve for pizza. Using the

midpoint method, when the price of a pizza falls from $10 to $9, what is the percentage change

in the quantity demanded?

A) 22.2 percent

B) 10.0 percent

C) 15.5 percent

D) 5.2 percent

E) 25 percent

Skill: Level 3: Using models

Section: Checkpoint 5.1

Author: PH

AACSB: Analytical reasoning

25

72) The data in the table above give two points on the demand curve for pizza. Using the

midpoint method, when the price of a pizza falls from $10 to $9, what is the price elasticity of

demand?

A) 0.5

B) 0.6

C) 0.9

D) 2.1

E) 8.6

Skill: Level 3: Using models

Section: Checkpoint 5.1

Author: PH

AACSB: Analytical reasoning

73) In the figure above, using the midpoint method, the price elasticity of demand when the price

falls from $8 to $7 is equal to

A) 2.50.

B) 1.63.

C) 0.40.

D) 0.62.

E) 1.00.

Skill: Level 3: Using models

Section: Checkpoint 5.1

Author: CD

AACSB: Analytical reasoning

26

74) In the figure above, using the midpoint method, the price elasticity of demand when the price

falls from $7 to $6 is equal to

A) 2.50.

B) 1.63.

C) 0.40.

D) 0.62.

E) 1.00.

Skill: Level 3: Using models

Section: Checkpoint 5.1

Author: CD

AACSB: Analytical reasoning

75) In the figure above, using the midpoint method, the price elasticity of demand when the price

falls from $6 to $5 is equal to

A) 2.50.

B) 1.63.

C) 1.10.

D) 0.91.

E) 1.00.

Skill: Level 3: Using models

Section: Checkpoint 5.1

Author: CD

AACSB: Analytical reasoning

76) In the mid-1970s, Newsweek magazine reported that the city of Atlanta lowered its city bus

fares from 40 cents to 15 cents a passenger. The number of bus riders increased by 15 percent

after the fare cut. This set of results indicates that the demand for bus rides in Atlanta at that time

was

A) unit elastic.

B) perfectly inelastic.

C) elastic.

D) inelastic.

E) perfectly elastic.

Skill: Level 4: Applying models

Section: Checkpoint 5.1

Author: TS

AACSB: Analytical reasoning

27

77) When hamburger is $3 per pound, Ms. Rush buys 6 pounds. When hamburger is $2 per

pound, Ms. Rush buys 10 pounds. Describe Ms. Rush's demand between these two prices.

A) elastic

B) unit elastic

C) inelastic

D) perfectly inelastic

E) perfectly elastic

Skill: Level 3: Using models

Section: Checkpoint 5.1

Author: SB

AACSB: Analytical reasoning

78) Economists use elasticity to measure the responsiveness of quantity to a change in price

rather than the slope of the demand curve because elasticity is

A) independent of the units of measurement.

B) dependent on the units of measurement.

C) easier to calculate.

D) harder to calculate.

E) always negative whereas the slope is always positive.

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: SB

AACSB: Reflective thinking

79) Which of the following is correct?

i. All linear demand curves have a constant slope and a constant price elasticity of demand.

ii. The price elasticity of demand changes while moving along a downward-sloping linear

demand curve.

iii. The magnitude of the slope of all linear demand curves is equal to the price elasticity of

demand.

A) i only

B) ii only

C) iii only

D) i and ii

E) i, ii, and iii

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: TS

AACSB: Reflective thinking

28

80) Moving downward along a linear (straight-line) downward sloping demand curve, the

A) slope is constant.

B) price is constant.

C) quantity is constant.

D) elasticity is constant.

E) None of the above answers is correct.

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: SB

AACSB: Reflective thinking

81) Moving downward along a linear (straight-line) downward-sloping demand curve, the

A) price elasticity of demand does not change.

B) quantity demanded decreases.

C) demand becomes more elastic.

D) demand becomes less elastic.

E) total revenue never changes.

Skill: Level 3: Using models

Section: Checkpoint 5.1

Author: SB

AACSB: Reflective thinking

82) As you move up along a straight-line demand curve,

A) the price elasticity of demand decreases in size.

B) the price elasticity of demand increases in size.

C) total revenue always decreases.

D) total revenue always increases.

E) total revenue never changes.

Skill: Level 3: Using models

Section: Checkpoint 5.1

Author: CD

AACSB: Reflective thinking

29

83) Which of the following statements is correct for the price elasticity of demand along a linear,

downward-sloping demand curve?

A) The price elasticity of demand is constant because the slope is constant.

B) At low prices, demand is elastic but at high prices demand is inelastic.

C) At high prices, demand is elastic but at low prices demand is inelastic.

D) The price elasticity of demand is not defined for a linear demand curve because the slope is

constant.

E) None of the above answers is correct.

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: TS

AACSB: Reflective thinking

84) At the midpoint of a linear, downward-sloping demand curve, the price elasticity of demand

is

A) greater than one.

B) equal to one.

C) less than one but greater than zero.

D) zero.

E) infinite.

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: TS

AACSB: Reflective thinking

85) Along a linear (straight-line) downward-sloping demand curve, demand is unit elastic at

A) the highest price.

B) the lowest price.

C) the midpoint.

D) all points on the linear demand curve.

E) None of the above because linear demand curves are never unit elastic.

Skill: Level 3: Using models

Section: Checkpoint 5.1

Author: SB

AACSB: Reflective thinking

30

86) Total revenue equals

A) price multiplied by the price elasticity of demand.

B) quantity multiplied by the price elasticity of demand.

C) price multiplied by quantity.

D) price times quantity multiplied by the price elasticity of demand.

E) the percentage change in the price multiplied by the percentage change in the quantity.

Skill: Level 1: Definition

Section: Checkpoint 5.1

Author: SB

AACSB: Reflective thinking

87) The price of the good multiplied by the quantity sold is its

A) total revenue.

B) total cost.

C) total spending.

D) total income.

E) total quantity.

Skill: Level 1: Definition

Section: Checkpoint 5.1

Author: KG

AACSB: Reflective thinking

88) Total revenue equals

A) price × quantity sold.

B) profit - cost.

C) price.

D) quantity sold - cost.

E) cost × price.

Skill: Level 1: Definition

Section: Checkpoint 5.1

Author: JC

AACSB: Reflective thinking

31

89) The total revenue test says

i) Demand is elastic if a decrease in price results in an increase in total revenue.

ii) Total revenue is maximized when demand is elastic.

iii) Total revenue is minimized when demand is unit elastic.

A) i only

B) i and ii

C) ii and iii

D) i, ii and iii

E) ii only

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: CD

AACSB: Reflective thinking

90) If demand is price inelastic and the price is lowered, which of the following occurs?

A) the quantity sold decreases

B) the total expenditure increases and the total revenue decreases

C) the total revenue of the firms selling the product is unchanged

D) the total revenue of the firms selling the product decreases

E) the total expenditure decreases and the total revenue increases

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: MR

AACSB: Reflective thinking

91) If demand is inelastic and the price falls, the total revenue

A) rises.

B) falls.

C) remains constant.

D) might rise, fall, or remain constant.

E) becomes negative.

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: SB

AACSB: Reflective thinking

32

92) Total revenue increases if the price of the good

A) rises and demand is elastic.

B) rises and demand is inelastic.

C) rises and demand is unit elastic.

D) falls and supply is inelastic.

E) falls and demand is unit elastic.

Skill: Level 3: Using models

Section: Checkpoint 5.1

Author: PH

AACSB: Reflective thinking

93) You own a small store. Your cashier thinks you should raise prices to increase your total

revenue and your customer thinks you should lower prices to increase your total revenue. The

cashier thinks the price elasticity of demand is ________ and the customer believes the price

elasticity of demand is ________.

A) inelastic; elastic

B) elastic; inelastic

C) elastic; elastic

D) inelastic; inelastic

E) unit elastic; elastic

Skill: Level 3: Using models

Section: Checkpoint 5.1

Author: KG

AACSB: Reflective thinking

94) Products X, Y, and Z have price elasticities of 3.0, 0.80, and 1.0 respectively. Total revenue

decreases if the price of

A) product X falls.

B) product Y falls.

C) product Z falls.

D) product X or product Z fall.

E) product Y or product Z fall.

Skill: Level 3: Using models

Section: Checkpoint 5.1

Author: PH

AACSB: Analytical reasoning

33

95) If a 2 percent rise in price leads to a 4 percent decrease in quantity demanded, then demand is

A) elastic and total revenue decreases.

B) elastic and total revenue increases.

C) inelastic and total revenue decreases.

D) elastic, but we cannot tell what happens to total revenue without more information.

E) total revenue decreases but we cannot tell if the demand is elastic or inelastic without more

information.

Skill: Level 3: Using models

Section: Checkpoint 5.1

Author: CD

AACSB: Analytical reasoning

96) If the demand for insulin is inelastic, an increase in insulin prices leads to

A) less total revenue for insulin makers.

B) more total revenue for insulin makers.

C) no change in total revenue for insulin makers.

D) first a decrease, then an increase in total revenue for insulin makers.

E) total revenue probably changes but we need more information about the change in total

expenditures on insulin to determine if the total revenue rises, falls, or stays the same.

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: JC

AACSB: Analytical reasoning

97) If the price elasticity of demand for gasoline equals 0.3, then an increase in the price of a

gallon of gasoline from $3.10 to $3.30

A) decreases total revenue.

B) increases total revenue.

C) leads to no change in total revenue.

D) makes the demand for gasoline elastic.

E) Both answers B and D are correct.

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: PH

AACSB: Analytical reasoning

34

98) If a Pizza Hut raises the price of a slice of pizza from $3.00 to $3.25, the quantity demanded

decreases from 1,500 slices per week to 1,300 slices per week. The demand for slices of pizza is

________ and the total revenue received by this Pizza Hut ________.

A) elastic; decreases

B) inelastic; decreases

C) elastic; increases

D) inelastic; increases

E) unit elastic; does not change

Skill: Level 3: Using models

Section: Checkpoint 5.1

Author: CD

AACSB: Analytical reasoning

99) If an Atlanta bakery raises the price of their rye bread by 11 percent and the quantity

demanded decreases by 11 percent, then the demand for the rye bread is ________ and the

bakery's total revenue ________.

A) unit elastic; does not change

B) unit elastic; increases

C) unit elastic; decreases

D) elastic; does not change

E) inelastic; does not change

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: JC

AACSB: Analytical reasoning

100) Suppose the Oakland Raiders football team increases their season ticket prices and total

revenue from ticket sales falls, but not to zero. This fact means that the demand for Raiders

tickets is

A) inelastic.

B) elastic.

C) unit elastic.

D) perfectly elastic.

E) perfectly inelastic.

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: JC

AACSB: Reflective thinking

35

101) After long hair for men became popular, barbers found that their incomes fell. In an attempt

to boost their incomes, many barbers raised the price of a haircut and yet their total revenue fell

even more. What can explain this result?

A) The demand for haircuts by barbers is elastic because of many substitutes.

B) The demand for haircuts by barbers became inelastic after the increase in price.

C) Haircuts are inferior products.

D) The demand for haircuts by barbers is inelastic because most people need haircuts.

E) None of the above can explain the phenomenon.

Skill: Level 4: Applying models

Section: Checkpoint 5.1

Author: TS

AACSB: Reflective thinking

102) Taco Bell firm raises the price of its tacos. The price elasticity of demand for Taco Bell

tacos equals 5.0. What happens to the Taco Bell's total revenue?

A) nothing

B) it increases

C) it decreases

D) it becomes negative

E) It might change, but more information is needed to determine if it increases, decreases, or

does not change.

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: TS

AACSB: Analytical reasoning

103) Pizza Hut lowers the price of its pizza. The price elasticity of demand for Pizza Hut pizza

equals 0.3. What happens to the Pizza Hut's total revenue?

A) nothing

B) it increases

C) it decreases

D) it becomes negative

E) It might change, but more information is needed to determine if it increases, decreases, or

does not change.

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: TS

AACSB: Analytical reasoning

36

104) KFC raises the price of its grilled chicken. The price elasticity of demand for KFC grilled

chicken is 0.8. What happens to the KFC's total revenue?

A) nothing

B) it increases

C) it decreases

D) it becomes negative

E) It might change, but more information is needed to determine if it increases, decreases, or

does not change.

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: TS

AACSB: Analytical reasoning

105) A Minnesota snowmobile dealer lowers its prices in February by 16 percent and the

quantity demanded increases by 2 percent. Thus the demand for snowmobiles from this dealer is

________ and the dealer's total revenue will ________.

A) elastic; increase

B) elastic; decrease

C) inelastic; increase

D) inelastic; decrease

E) unit elastic; decrease

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: JC

AACSB: Analytical reasoning

37

106) In the figure above, what is the total revenue at point A?

A) $20

B) $150

C) $170

D) $3,000

E) 150 quantity units

Skill: Level 3: Using models

Section: Checkpoint 5.1

Author: SB

AACSB: Analytical reasoning

107) In the figure above, using the midpoint method, what is the price elasticity of demand

between points A and B?

A) 0.05

B) 0.13

C) 0.43

D) 1.00

E) 2.33

Skill: Level 3: Using models

Section: Checkpoint 5.1

Author: SB

AACSB: Analytical reasoning

38

108) In the figure above, what happens to total revenue as we move from point A to point B?

A) It increases.

B) It decreases.

C) It remains constant.

D) It becomes negative.

E) More information about the elasticity of demand is needed to determine if it increases,

decreases, or does not change.

Skill: Level 3: Using models

Section: Checkpoint 5.1

Author: SB

AACSB: Analytical reasoning

109) In the figure above, using the midpoint method, what is the price elasticity of demand when

the price falls from $8 to $7?

A) 4.0

B) 5.0

C) 0.5

D) 0.4

E) 0.25

Skill: Level 3: Using models

Section: Checkpoint 5.1

Author: PH

AACSB: Analytical reasoning

39

110) In the figure above, if the price falls from $8 to $7 demand is

A) elastic.

B) inelastic.

C) unit elastic.

D) income elastic.

E) perfectly elastic.

Skill: Level 3: Using models

Section: Checkpoint 5.1

Author: PH

AACSB: Analytical reasoning

111) In the figure above, when the price falls from $8 to $7, total revenue

A) increases from $120 to $210 so demand is elastic.

B) decreases from $210 to $120 so demand is inelastic.

C) increases from $120 to $210 so demand is inelastic.

D) decreases from $210 to $120 so demand is elastic.

E) increases from $120 to $210 but more information is needed to determine whether demand is

elastic, inelastic, or unit elastic.

Skill: Level 3: Using models

Section: Checkpoint 5.1

Author: PH

AACSB: Analytical reasoning

112) A firm raises the price it charges. The firm's total revenue decreases. What can we conclude

about the price elasticity of demand?

A) demand is elastic

B) demand is unit elastic

C) demand is inelastic

D) demand is perfectly inelastic

E) not enough information given to conclude anything about price elasticity of demand

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: TS

AACSB: Reflective thinking

40

113) A firm raises the price it charges. The firm's total revenue does not change. What can we

conclude about the price elasticity of demand?

A) demand is elastic

B) demand is unit elastic

C) demand is inelastic

D) demand is perfectly elastic

E) not enough information given to conclude anything about price elasticity of demand

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: TS

AACSB: Reflective thinking

114) A firm lowers the price it charges. The firm's total revenue decreases. What can we

conclude about the price elasticity of demand?

A) demand is elastic

B) demand is unit elastic

C) demand is inelastic

D) demand is perfectly elastic

E) not enough information given to conclude anything about price elasticity of demand

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: TS

AACSB: Reflective thinking

115) If, when the price falls, total revenue increases, demand is

A) elastic.

B) inelastic.

C) unit elastic.

D) perfectly inelastic.

E) None of the above answers is correct because total revenue always decreases when the price

of the good falls.

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: SB

AACSB: Reflective thinking

41

116) If a 20 percent increase in the price of a movie ticket leads to a 16 percent decrease in the

quantity of tickets demanded, which of the following is correct?

A) total expenditures by buyers increases

B) total revenue of sellers of the product decreases

C) total expenditures by buyers is constant

D) total expenditures by buyers increases and total revenue received by sellers decreases

E) None of the above answers is correct.

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: TS

AACSB: Reflective thinking

117) If an individual's expenditure on a good increases when the price increases, that individual's

demand for the good is

A) elastic.

B) inelastic.

C) unit elastic.

D) perfectly elastic.

E) None of the above answers is correct because an individual's expenditure on a good never

increases when the price increases.

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: SB

AACSB: Reflective thinking

118) The price elasticity of demand for an agricultural product is 0.4. This value means that,

when the quantity decreases 1 percent, the price

A) falls 4 percent.

B) rises 4 percent.

C) falls 2.5 percent.

D) rises 2.5 percent.

E) rises 0.25 percent.

Skill: Level 4: Applying models

Section: Checkpoint 5.1

Author: SB

AACSB: Analytical reasoning

42

119) Suppose the price elasticity of demand for addicts of a drug is 0.11 and 3.46 for casual

users. If the government legalized the drug and then implemented a tax on it so that its price rose,

expenditure by addicts would ________ and expenditure by casual users would ________.

A) increase; increase

B) increase; decrease

C) decrease; increase

D) decrease; decrease

E) not change; decrease

Skill: Level 3: Using models

Section: Checkpoint 5.1

Author: JC

AACSB: Analytical reasoning

120) The price elasticity of demand is a measure of the extent to which the quantity demanded of

a good changes when ________ changes and all other influences on buyers' plans remain the

same.

A) income

B) the price of a related good

C) the price of the good

D) the demand alone

E) both the demand and the supply simultaneously

Skill: Level 1: Definition

Section: Checkpoint 5.1

Author: STUDY GUIDE

AACSB: Reflective thinking

121) Suppose the price of a movie falls from $9 to $7. Using the midpoint method, what is the

percentage change in price?

A) 33 percent

B) -33 percent

C) 25 percent

D) -25 percent

E) -97 percent

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: STUDY GUIDE

AACSB: Analytical reasoning

43

122) Suppose the price of a tie rises from $45 to $55. Using the midpoint method, what is the

percentage change in price?

A) 10 percent

B) -10 percent

C) 20 percent

D) -20 percent

E) 100 percent

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: STUDY GUIDE

AACSB: Analytical reasoning

123) Demand is elastic if

A) consumers respond strongly to changes in the product's price.

B) a large percentage change in price brings about a small percentage change in quantity

demanded.

C) a small percentage change in price brings about a small percentage change in quantity

demanded.

D) the quantity demanded is not responsive to price changes.

E) the demand curve is vertical.

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: STUDY GUIDE

AACSB: Reflective thinking

124) During the winter of 2008-2009, the price of fuel oil increased enormously but the quantity

demanded decreased only a little. This response indicates that the demand for fuel oil was

A) inelastic.

B) elastic.

C) unit elastic.

D) perfectly elastic.

E) perfectly inelastic.

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: STUDY GUIDE

AACSB: Reflective thinking

44

125) If substitutes for a good are readily available, the demand for that good

A) does not change substantially if the price rises.

B) does not change substantially if the price falls.

C) is inelastic.

D) is elastic.

E) Both answers A and B are correct.

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: STUDY GUIDE

AACSB: Reflective thinking

126) If the price of a product increases by 5 percent and the quantity demanded decreases by 5

percent, then the elasticity of demand is

A) 0.

B) 1.

C) indeterminate.

D) 5.

E) 25.

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: STUDY GUIDE

AACSB: Analytical reasoning

127) The price of a bag of pretzels rises from $2 to $3 and the quantity demanded decreases from

100 to 60. What is the price elasticity of demand?

A) 1.0

B) 1.25

C) 40.0

D) 20.0

E) 0.80

Skill: Level 3: Using models

Section: Checkpoint 5.1

Author: STUDY GUIDE

AACSB: Analytical reasoning

45

128) When a firm raises the price of its product, what happens to its total revenue?

A) If demand is elastic, total revenue decreases.

B) If demand is unit elastic, total revenue increases.

C) If demand is inelastic, total revenue decreases.

D) If demand is elastic, total revenue increases.

E) If demand is unit elastic, total revenue decreases.

Skill: Level 3: Using models

Section: Checkpoint 5.1

Author: STUDY GUIDE

AACSB: Reflective thinking

5.2 The Price Elasticity of Supply

1) What is measured by the price elasticity of supply?

A) The price elasticity of supply measures how responsive producers are to changes in the price

of other goods.

B) The price elasticity of supply measures how responsive producers are to changes in income.

C) The price elasticity of supply measures how responsive producers are to changes in the price

of a product.

D) The price elasticity of supply is a measure of the slope of the supply curve.

E) The price elasticity of supply measures how responsive producers are to changes in the cost of

producing a product.

Skill: Level 1: Definition

Section: Checkpoint 5.2

Author: PH

AACSB: Reflective thinking

2) The price elasticity of supply measures the

A) percentage change in supply from a percentage change in demand.

B) extent to which the quantity supplied of a good changes when the price of a good changes,

other things remaining the same.

C) the slope of the supply curve.

D) how the equilibrium price changes in response to a change in the equilibrium quantity

supplied.

E) Both answers B and C are correct.

Skill: Level 1: Definition

Section: Checkpoint 5.2

Author: SA

AACSB: Reflective thinking

46

3) The price elasticity of supply is always a positive value because

i. there is a direct relationship between the price and the quantity supplied.

ii. as the equilibrium price increases, the equilibrium quantity also always increases.

iii. buyers are willing to pay a higher price for larger quantities.

A) i only

B) ii only

C) iii only

D) i and ii

E) ii and iii

Skill: Level 2: Using definitions

Section: Checkpoint 5.2

Author: TS

AACSB: Reflective thinking

4) The opportunity cost of producing a good rises only slightly as the quantity produced

increases. This good has

A) an inelastic demand.

B) an elastic demand.

C) an elastic supply.

D) an inelastic supply.

E) a perfectly elastic supply.

Skill: Level 2: Using definitions

Section: Checkpoint 5.2

Author: SA

AACSB: Reflective thinking

5) For a product with a constant or gently increasing opportunity cost of producing additional

units, as more is produced, we expect that

A) demand is price elastic.

B) supply is price elastic.

C) demand is price inelastic.

D) supply is price inelastic.

E) demand is unit elastic.

Skill: Level 2: Using definitions

Section: Checkpoint 5.2

Author: TS

AACSB: Reflective thinking

47

6) It is very difficult for Gourmet Chocolatier to find inexpensive and available inputs for the

business. Because of this, we predict that Gourmet Chocolatier’s supply to be

A) inelastic.

B) perfectly elastic.

C) elastic.

D) unit elastic.

E) nonexistent.

Skill: Level 3: Using models

Section: Checkpoint 5.2

Author: KG

AACSB: Reflective thinking

7) The price of lumber increased by 10 percent and the quantity supplied increased by 20

percent. The supply of lumber is

A) inelastic.

B) perfectly elastic.

C) perfectly inelastic.

D) unit elastic.

E) elastic.

Skill: Level 3: Using models

Section: Checkpoint 5.2

Author: KG

AACSB: Analytical reasoning

8) The price of beef increased by 20 percent and the quantity supplied increased by 10 percent.

The supply of beef is

A) elastic.

B) perfectly elastic.

C) perfectly inelastic.

D) inelastic.

E) unit elastic.

Skill: Level 3: Using models

Section: Checkpoint 5.2

Author: KG

AACSB: Analytical reasoning

48

9) If the price of a scooter increases by 20 percent and the quantity supplied of scooters increases

by 30 percent, then supply is

A) elastic and the elasticity of supply equals 1.5.

B) inelastic and the elasticity of supply equals 1.5.

C) elastic and the elasticity of supply equals 0.66.

D) inelastic and the elasticity of supply equals 0.66.

E) either elastic or inelastic but more information about the elasticity of demand is needed to

determine which.

Skill: Level 3: Using models

Section: Checkpoint 5.2

Author: SA

AACSB: Analytical reasoning

10) Suppose the current price of barley is $7 per bushel and at that price 100,000 bushels are

grown by a Colorado farmer. If the price of barley rises to $8 and quantity supplied increases to

130,000 bushels, then using the midpoint method, the price elasticity of supply for barley equals

A) 13.33.

B) 26.78.

C) 1.96.

D) 0.51.

E) Zero.

Skill: Level 3: Using models

Section: Checkpoint 5.2

Author: JC

AACSB: Analytical reasoning

11) Jess owns a sandwich shop. The price of a sandwich recently increased from $5 to $7. Jess

responded by increasing the quantity of sandwiches she supplied from 70 to 90 per day. Using

the midpoint method, Jess’s price elasticity of supply is equal to

A) 1.33.

B) 0.75.

C) 3.00.

D) 4.00.

E) 1.50.

Skill: Level 3: Using models

Section: Checkpoint 5.2

Author: KG

AACSB: Analytical reasoning

49

12) The price of one bedroom apartments in Cheyenne increased from $55,000 to $65,000 and

the quantity of apartment for sale increased from 25 to 30. Using the midpoint method, the price

elasticity of supply for apartments in Cheyenne is equal to

A) 0.916.

B) 0.75.

C) 1.09.

D) 2.18.

E) 0.08.

Skill: Level 3: Using models

Section: Checkpoint 5.2

Author: KG

AACSB: Analytical reasoning

13) Suppose an increase in demand causes the price to increase from $2 to $4 and the quantity to

increase from 1,000 to 1,800. Using the midpoint method, the elasticity of supply equals

A) 0.86.

B) 1.17.

C) 2.74.

D) 0.68.

E) None of the above answers is correct.

Skill: Level 3: Using models

Section: Checkpoint 5.2

Author: CD

AACSB: Analytical reasoning

14) Suppose a decrease in demand causes the price to decrease from $4 to $3 and the quantity to

decrease from 1,000 to 700. Using the midpoint method, the elasticity of supply equals

A) 0.81.

B) 1.24.

C) 2.83.

D) 0.18.

E) None of the above answers is correct.

Skill: Level 3: Using models

Section: Checkpoint 5.2

Author: CD

AACSB: Analytical reasoning

50

15) When the price of a product increases from $35 to $45, the quantity supplied increases from

30 units to 40 units per week. Using the midpoint method, the price elasticity of supply is

A) 0.00.

B) -1.1.

C) 1.14.

D) 1.35.

E) 0.88.

Skill: Level 3: Using models

Section: Checkpoint 5.2

Author: PH

AACSB: Analytical reasoning

16) If the price of a DVD increases from $12 to $20 and the quantity of DVDs supplied increases

from 100,000 per hour to 118,000 per hour, using the midpoint formula the elasticity of supply

equals

A) 0.33.

B) 2.94.

C) 3.08.

D) 0.23.

E) -3.08.

Skill: Level 3: Using models

Section: Checkpoint 5.2

Author: CD

AACSB: Analytical reasoning

17) If the price of a good decreases from $9 to $6 and the quantity supplied decreases from 1,500

to 1,300, using the midpoint formula the elasticity of supply equals

A) 0.20.

B) 2.80.

C) 0.36.

D) 0.40.

E) 3.20.

Skill: Level 3: Using models

Section: Checkpoint 5.2

Author: CD

AACSB: Analytical reasoning

51

18) If the price doubles and the quantity supplied also doubles, the price elasticity of supply for

the good is

A) -1.

B) 1.

C) -2.

D) 2.

E) 100 percent.

Skill: Level 3: Using models

Section: Checkpoint 5.2

Author: PH

AACSB: Analytical reasoning

19) If the price elasticity of supply for a good is 0.75, then

A) the percentage change in the quantity supplied is less than the percentage change in price.

B) the supply is elastic.

C) an increase in the price boosts the quantity supplied by a larger percentage.

D) the supply is inelastic so the demand must also be inelastic.

E) None of the above answers is correct.

Skill: Level 3: Using models

Section: Checkpoint 5.2

Author: SA

AACSB: Analytical reasoning

20) If the percentage change in the price of a good exceeds the percentage change in the quantity

supplied, then the supply is

A) elastic.

B) inelastic.

C) unit elastic.

D) perfectly elastic.

E) perfectly inelastic.

Skill: Level 2: Using definitions

Section: Checkpoint 5.2

Author: SA

AACSB: Analytical reasoning

52

21) If a small percentage change in the price brings a very large percentage change in the

quantity supplied, then the supply is almost perfectly ________ and the supply curve is almost

________.

A) elastic; vertical

B) elastic; horizontal

C) inelastic; horizontal

D) inelastic ; vertical

E) elastic; 45 degrees

Skill: Level 2: Using definitions

Section: Checkpoint 5.2

Author: SA

AACSB: Analytical reasoning

22) If the supply curve is ________, the elasticity of supply is ________.

A) vertical; infinite

B) vertical; 0

C) horizontal; 1

D) horizontal; 0

E) a straight, upward sloping line through the origin; 0

Skill: Level 3: Using models

Section: Checkpoint 5.2

Author: CD

AACSB: Reflective thinking

53

23) The figure above shows the supply curve for a good with a

A) perfectly elastic supply.

B) perfectly inelastic supply.

C) elastic supply.

D) inelastic supply.

E) unit elastic supply.

Skill: Level 3: Using models

Section: Checkpoint 5.2

Author: PH

AACSB: Analytical reasoning

24) If the price elasticity of supply for a good is 10, then supply is

A) elastic.

B) inelastic.

C) unit elastic.

D) perfectly elastic.

E) perfectly inelastic.

Skill: Level 1: Definition

Section: Checkpoint 5.2

Author: SB

AACSB: Reflective thinking

54

25) If wheat can be produced at a constant opportunity cost, then the supply of wheat is

A) elastic.

B) inelastic.

C) unit elastic.

D) perfectly inelastic.

E) perfectly elastic.

Skill: Level 2: Using definitions

Section: Checkpoint 5.2

Author: JC

AACSB: Analytical reasoning

26) If the quantity supplied and the price change by the same percentage, then supply is

A) elastic.

B) inelastic.

C) unit elastic.

D) perfectly elastic.

E) perfectly inelastic.

Skill: Level 1: Definition

Section: Checkpoint 5.2

Author: SB

AACSB: Analytical reasoning

27) When the percentage change in the quantity supplied equals the percentage change in price,

the supply is

A) elastic.

B) inelastic.

C) unit elastic.

D) perfectly elastic.

E) perfectly inelastic.

Skill: Level 1: Definition

Section: Checkpoint 5.2

Author: JC

AACSB: Analytical reasoning

55

28) When the percentage change in the quantity supplied is less than the percentage change in

price, the supply is

A) elastic.

B) inelastic.

C) unit elastic.

D) perfectly unit elastic.

E) perfectly elastic.

Skill: Level 1: Definition

Section: Checkpoint 5.2

Author: JC

AACSB: Analytical reasoning

29) The fact that there is a very limited amount of land in Hong Kong means the supply of new

apartments in Hong Kong is

A) inelastic.

B) elastic.

C) unit elastic.

D) perfectly elastic.

E) limited by the demand.

Skill: Level 2: Using definitions

Section: Checkpoint 5.2

Author: JC

AACSB: Reflective thinking

30) Because the price elasticity of supply for jumbo jets is 0.35, the supply of jumbo jets is

A) elastic.

B) unit elastic.

C) inelastic.

D) perfectly elastic.

E) perfectly inelastic.

Skill: Level 2: Using definitions

Section: Checkpoint 5.2

Author: JC

AACSB: Reflective thinking

56

31) If a 20 percent increase in the price of a good does not change the quantity supplied, the

A) supply is perfectly inelastic.

B) supply is unit elastic.

C) supply is perfectly elastic.

D) supply is elastic.

E) None of the above answers is correct.

Skill: Level 2: Using definitions

Section: Checkpoint 5.2

Author: SA

AACSB: Reflective thinking

32) The figure above shows the supply curve for a good with a

A) perfectly elastic supply.

B) perfectly inelastic supply.

C) elastic supply.

D) inelastic supply.

E) unit elastic supply.

Skill: Level 3: Using models

Section: Checkpoint 5.2

Author: PH

AACSB: Analytical reasoning

57

33) Which of the following explains why supply is more elastic as more time passes?

A) It is difficult or impossible to increase the quantity produced in a short period of time.

B) Consumers have more time to search for substitutes.

C) Sellers try to take advantage of a high price in the short term.

D) The supply curve becomes generally steeper as more time passes.

E) There is no explanation for this phenomenon.

Skill: Level 2: Using definitions

Section: Checkpoint 5.2

Author: TS

AACSB: Reflective thinking

34) Suppose a good can be produced using commonly available resources. The elasticity of

supply is

A) negative.

B) greater than zero but less than 1.

C) greater than 1.

D) zero.

E) More information is needed to make a determination about the size of the elasticity of supply.

Skill: Level 2: Using definitions

Section: Checkpoint 5.2

Author: CD

AACSB: Reflective thinking

35) One reason why the price elasticity of supply for DVD players is greater than one is that

A) the cost of producing DVD players is small.

B) the storage of DVD players is not possible.

C) DVD players can be easily stored.

D) the demand for DVD players is fairly large.

E) DVD players require relatively advanced technology for their production.

Skill: Level 2: Using definitions

Section: Checkpoint 5.2

Author: JC

AACSB: Reflective thinking

58

36) The price elasticity of supply is a measure of the extent to which the quantity supplied of a

good changes when the

A) cost of producing the product increases.

B) quantity of the good demanded increases.

C) supply increases.

D) price changes.

E) number of firms supplying the good changes.

Skill: Level 1: Definition

Section: Checkpoint 5.2

Author: STUDY GUIDE

AACSB: Reflective thinking

37) When the percentage change in the quantity supplied is twice the percentage change in price,

then supply is

A) elastic.

B) inelastic.

C) unit elastic.

D) perfectly inelastic.

E) perfectly elastic.

Skill: Level 1: Definition

Section: Checkpoint 5.2

Author: STUDY GUIDE

AACSB: Analytical reasoning

38) When the price of a textbook is $95, the quantity of textbooks supplied is 90 million a year

and when the price rises to $105, the quantity of textbooks supplied is 110 million a year. The

supply of textbooks is

A) elastic

B) perfectly elastic

C) inelastic

D) perfectly inelastic

E) unit elastic.

Skill: Level 3: Using models

Section: Checkpoint 5.2

Author: MyEconLab Web Site

AACSB: Analytical reasoning

59

39) Supply is unit elastic when the

A) supply curve is upward sloping.

B) price elasticity of supply is positive.

C) percentage change in the quantity supplied equals the percentage change in price.

D) supply curve is horizontal.

E) supply curve is vertical.

Skill: Level 2: Using definitions

Section: Checkpoint 5.2

Author: MyEconLab Web Site

AACSB: Analytical reasoning

40) The supply of beachfront property on St. Simon's Island is

A) elastic.

B) unit elastic.

C) negative.

D) inelastic.

E) perfectly elastic.

Skill: Level 2: Using definitions

Section: Checkpoint 5.2

Author: STUDY GUIDE

AACSB: Reflective thinking

41) Goods that can be produced at a constant or very gently rising opportunity cost have

A) an elastic demand.

B) an inelastic demand.

C) an inelastic supply.

D) an elastic supply.

E) a unit elastic demand.

Skill: Level 2: Using definitions

Section: Checkpoint 5.2

Author: MyEconLab Web Site

AACSB: Reflective thinking

60

42) For a product with a rapidly increasing opportunity cost of producing additional units,

A) demand is price elastic.

B) supply is price elastic.

C) demand is price inelastic.

D) supply is price inelastic.

E) the demand curve is vertical.

Skill: Level 2: Using definitions

Section: Checkpoint 5.2

Author: STUDY GUIDE

AACSB: Reflective thinking

43) When supply is perfectly inelastic, the supply curve is

A) upward sloping but not a straight line.

B) vertical.

C) downward sloping.

D) horizontal.

E) a straight line with a 45 degree slope that goes through the origin.

Skill: Level 2: Using definitions

Section: Checkpoint 5.2

Author: MyEconLab Web Site

AACSB: Reflective thinking

44) The greater the amount of time that passes after a price change, the

A) less elastic supply becomes.

B) more elastic supply becomes.

C) more negative supply becomes.

D) steeper the supply curve becomes.

E) None of the above answers is correct.

Skill: Level 2: Using definitions

Section: Checkpoint 5.2

Author: STUDY GUIDE

AACSB: Reflective thinking

61

45) Many manufactured goods have an ________ supply if production plans have only a short

period to change and as time passes and all production adjustments are made, the supply of the

good ________ from the initial response.

A) inelastic; increases

B) elastic; decreases

C) elastic; increases

D) inelastic; decreases

E) inelastic; does not change

Skill: Level 2: Using definitions

Section: Checkpoint 5.2

Author: MyEconLab Web Site

AACSB: Reflective thinking

46) The price elasticity of supply equals the percentage change in the

A) quantity demanded divided by the percentage change in the price of a substitute or

complement.

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

C) quantity demanded divided by the percentage change in price.

D) supply divided by the percentage change in the demand.

E) quantity supplied divided by the percentage change in the quantity demanded.

Skill: Level 2: Using definitions

Section: Checkpoint 5.2

Author: STUDY GUIDE

AACSB: Reflective thinking

47) If a firm supplies 200 units at a price of $50 and 100 units at a price of $40, using the

midpoint method, what is the price elasticity of supply?

A) 0.33

B) 1.00

C) 3.00

D) 5.00

E) 8.50

Skill: Level 3: Using models

Section: Checkpoint 5.2

Author: STUDY GUIDE

AACSB: Analytical reasoning

62

48) If the quantity supplied increases by 8 percent when the price rises by 2 percent, the price

elasticity of supply is ________ .

A) 10.0

B) 6.0

C) 0.25

D) 16.0

E) 4.0

Skill: Level 3: Using models

Section: Checkpoint 5.2

Author: STUDY GUIDE

AACSB: Analytical reasoning

49) If the price of a a good increases by 10 percent and the quantity supplied increases by 5

percent, then the elasticity of supply is

A) greater than one and supply is elastic.

B) negative and supply is inelastic.

C) less than one and supply is elastic.

D) less than one and supply is inelastic.

E) greater than one and supply is inelastic.

Skill: Level 2: Using definitions

Section: Checkpoint 5.2

Author: STUDY GUIDE

AACSB: Analytical reasoning

5.3 Cross Elasticity and Income Elasticity

1) The extent to which the demand for a good changes when the price of a substitute or

complement changes, other things remaining the same, is measured as the

A) income elasticity of demand.

B) cross elasticity of demand.

C) price elasticity of demand.

D) price elasticity of supply.

E) cross income elasticity of demand.

Skill: Level 1: Definition

Section: Checkpoint 5.3

Author: JC

AACSB: Reflective thinking

63

2) The cross elasticity of demand is a measure of how

A) responsive consumers are to changes in the price of a product.

B) responsive suppliers are to changes in the price of a product.

C) demand for a product changes when the price of a substitute or complement changes.

D) total revenue changes when the price of a product changes.

E) demand for a product changes when income changes.

Skill: Level 1: Definition

Section: Checkpoint 5.3

Author: PH

AACSB: Reflective thinking

3) If we are trying to determine if two different products are substitutes, complements, or not

related at all, we should find the value of the

A) price elasticity of demand for both goods.

B) price elasticity of supply for both goods.

C) income elasticity of demand for both goods.

D) cross elasticity of demand.

E) price elasticity of demand and the price elasticity of supply for both goods.

Skill: Level 2: Using definitions

Section: Checkpoint 5.3

Author: TS

AACSB: Reflective thinking

4) If Microsoft wanted to prove to the Justice Department that its Windows software has many

substitutes that personal computer owners can use, Microsoft hopes to find

A) that the demand for Windows' is inelastic.

B) that the demand for Windows is elastic.

C) a large positive value for the cross elasticity of Windows and other software.

D) a negative income elasticity for Windows.

E) a positive income elasticity for Windows.

Skill: Level 4: Applying models

Section: Checkpoint 5.3

Author: TS

AACSB: Reflective thinking

64

5) What is the formula for the cross elasticity of demand? The percentage change in the

A) quantity demanded divided by the percentage change in the price of a substitute or

complement.

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

C) quantity demanded divided by the percentage change in price.

D) quantity demanded divided by the percentage change in income.

E) equilibrium quantity demanded divided by the equilibrium quantity supplied.

Skill: Level 2: Using definitions

Section: Checkpoint 5.3

Author: PH

AACSB: Reflective thinking

6) If a 1 percent increase in the price of X increases the quantity demanded of Y by 2 percent,

then X and Y are

A) complements and the cross elasticity of demand equals 2.

B) substitutes and the cross elasticity of demand equals 1/2.

C) substitutes and the cross elasticity of demand equals 2.

D) complements and the income elasticity of demand equals 2.

E) normal goods and the income elasticity of demand of each equals 2.

Skill: Level 3: Using models

Section: Checkpoint 5.3

Author: SA

AACSB: Analytical reasoning

7) The price of coffee rose 40 percent and the quantity of coffee demanded fell by 20 percent.

The quantity of doughnuts demanded also fell by 20 percent. From this information, we can

conclude that

A) the demand for coffee is elastic.

B) the demand for coffee is unit elastic.

C) coffee is an inferior good.

D) the cross elasticity demand between coffee and doughnuts is -0.5.

E) the income elasticity of demand for coffee is 2.

Skill: Level 4: Applying models

Section: Checkpoint 5.3

Author: PH

AACSB: Analytical reasoning

65

8) If the price of a movie rises 3 percent and, as a result, the quantity demanded of video rentals

increases 6 percent, then the cross elasticity of demand is

A) 2.

B) 1/2.

C) -1/2.

D) -2.

E) 9.

Skill: Level 3: Using models

Section: Checkpoint 5.3

Author: SB

AACSB: Analytical reasoning

9) Based on data in the table above, use the midpoint method to determine the cross elasticity of

demand for ice cream and cake.

A) the cross elasticity is -0.75

B) the cross elasticity is -1.75

C) the cross elasticity is -0.83

D) the cross elasticity is -4.0

E) the cross elasticity is -1.33

Skill: Level 3: Using models

Section: Checkpoint 5.3

Author: PH

AACSB: Analytical reasoning

10) Based on the data in the table above, ice cream and cake are ________ goods.

A) inferior

B) normal

C) substitute

D) complementary

E) Both answers B and D are correct.

Skill: Level 2: Using definitions

Section: Checkpoint 5.3

Author: PH

AACSB: Analytical reasoning

66

11) Goods are ________ when the income elasticity of demand is positive.

A) complements

B) elastic

C) inferior

D) substitutes

E) normal

Skill: Level 2: Using definitions

Section: Checkpoint 5.3

Author: KG

AACSB: Reflective thinking

12) If the price of a Brita water filtration system increases and the quantity demanded of bottled

water increases, then these two goods are

A) substitutes.

B) complements.

C) normal goods.

D) inferior goods.

E) inelastic goods.

Skill: Level 2: Using definitions

Section: Checkpoint 5.3

Author: KG

AACSB: Reflective thinking

13) The cross elasticity of demand for butter and margarine is likely to be

A) positive because they are substitutes.

B) positive because they are complements.

C) negative because they are substitutes.

D) negative because they are complements.

E) positive because they are normal goods.

Skill: Level 2: Using definitions

Section: Checkpoint 5.3

Author: PH

AACSB: Reflective thinking

67

14) Which of the following is correct?

A) The cross elasticity of demand for substitute goods is positive.

B) The cross elasticity of demand for substitute goods is negative.

C) The cross elasticity of demand equals the percentage change in demand divided by the

percentage change in income.

D) The income elasticity of demand for a normal good is negative.

E) The cross elasticity of demand for normal goods is positive.

Skill: Level 1: Definition

Section: Checkpoint 5.3

Author: SA

AACSB: Reflective thinking

15) Patrick lives near two gas stations, Exxon and Shell. If Exxon decreases the price of gas, we

predict that the quantity of gasoline demanded at Shell will

A) decrease because Exxon and Shell gas are complements.

B) decrease because Exxon and Shell gas are substitutes.

C) increase because Exxon and Shell gas are substitutes.

D) increase because Exxon and Shell gas are complements.

E) not change Exxon and Shell are different brands of gasoline.

Skill: Level 2: Using definitions

Section: Checkpoint 5.3

Author: KG

AACSB: Reflective thinking

16) If an increase in the price of green ketchup increases the demand for red ketchup, then

A) red and green ketchup are substitutes.

B) red and green ketchup are normal goods.

C) the cross elasticity of demand for these two kinds of ketchup is positive.

D) Both answers A and C are correct.

E) Both answers A and B are correct.

Skill: Level 2: Using definitions

Section: Checkpoint 5.3

Author: SA

AACSB: Reflective thinking

68

17) If a lower price for a Pepsi decreases the demand for a Coke, the cross elasticity value for

Pepsi and Coke is

A) definitely negative.

B) definitely equal to zero.

C) definitely positive.

D) definitely greater than one.

E) possibly negative, positive, or zero, but there is not enough information to decide.

Skill: Level 2: Using definitions

Section: Checkpoint 5.3

Author: TS

AACSB: Reflective thinking

18) If the cross elasticity of demand between Coke and Pepsi is 2.02, then Coke and Pepsi are

A) complements.

B) substitutes.

C) normal goods.

D) inferior goods.

E) Both answers B and C are correct.

Skill: Level 2: Using definitions

Section: Checkpoint 5.3

Author: JC

AACSB: Reflective thinking

19) If Pepsi goes on sale and decreases its price by 10 percent, and as a result, the quantity

demanded of Coca Cola decreases by 5 percent, then Pepsi and Coke are ________ goods.

A) inferior

B) normal

C) substitute

D) complementary

E) unrelated

Skill: Level 3: Using models

Section: Checkpoint 5.3

Author: PH

AACSB: Reflective thinking

69

20) Tacos and pizza are substitutes. If a 2 percent change in the price of a taco leads to a 4

percent change in the demand for pizza, the cross elasticity of demand equals

A) -1/2.

B) 1/2.

C) 2.

D) -2.

E) 4.

Skill: Level 3: Using models

Section: Checkpoint 5.3

Author: CD

AACSB: Analytical reasoning

21) Pete feeds his dog 100 percent more Pup-Peronis when Zuke’s treats increase in price by 50

percent. For Pete, Pup-Peronis and Zukes are ________ and the cross-price elasticity of demand

is ________.

A) complements; -1/2

B) substitutes; 2

C) substitutes; -2

D) complements; 2

E) substitutes; 1/2

Skill: Level 3: Using models

Section: Checkpoint 5.3

Author: KG

AACSB: Analytical reasoning

22) The cross elasticity between computers and software is

A) negative because they are substitutes.

B) positive because they are substitutes.

C) negative because they are complements.

D) positive because they are complements.

E) positive because they are normal goods.

Skill: Level 2: Using definitions

Section: Checkpoint 5.3

Author: PH

AACSB: Reflective thinking

70

23) If you know the cross-price elasticity between two goods is negative, then you know the

goods are

A) substitutes.

B) normal goods.

C) complements.

D) inferior goods.

E) inelastic goods.

Skill: Level 2: Using definitions

Section: Checkpoint 5.3

Author: KG

AACSB: Reflective thinking

24) If the price of a one good increases and the quantity demanded of a different good decreases,

then these two goods are

A) substitutes.

B) normal goods.

C) inferior goods.

D) inelastic goods.

E) complements.

Skill: Level 2: Using definitions

Section: Checkpoint 5.3

Author: KG

AACSB: Reflective thinking

25) If the cross elasticity of demand is negative, that means the goods

A) have elastic demands.

B) have inelastic demands.

C) are complements.

D) are substitutes.

E) are inferior.

Skill: Level 2: Using definitions

Section: Checkpoint 5.3

Author: SB

AACSB: Reflective thinking

71

26) When two goods are related such that an increase in the price of one good decreases the

quantity demanded of the other good, these goods are definitely

A) normal goods.

B) luxury goods.

C) complements.

D) substitutes.

E) inferior goods.

Skill: Level 2: Using definitions

Section: Checkpoint 5.3

Author: PH

AACSB: Reflective thinking

27) If a lower price for good X increases the demand for good Y, the cross elasticity value for the

two goods is

A) negative.

B) equal to zero.

C) positive and less than one.

D) positive and greater than one.

E) possibly negative, positive, or zero, but there is not enough information to decide.

Skill: Level 2: Using definitions

Section: Checkpoint 5.3

Author: TS

AACSB: Reflective thinking

28) If two goods are ________, then an increase in the price of one leads to ________ in the

quantity demanded of the other.

A) complements; a decrease

B) complements; no change

C) substitutes; a decrease

D) substitutes; no change

E) normal; an increase

Skill: Level 2: Using definitions

Section: Checkpoint 5.3

Author: CD

AACSB: Reflective thinking

72

29) The cross elasticity of demand for blank DVDs and DVD burners is likely to be

A) positive because they are substitutes.

B) positive because they are complements.

C) negative because they are substitutes.

D) negative because they are complements.

E) negative because with the advent of digital cameras, film and film cameras are inferior goods.

Skill: Level 2: Using definitions

Section: Checkpoint 5.3

Author: PH

AACSB: Reflective thinking

30) If the cross elasticity of demand between car insurance and new cars is -0.41, then car

insurance and new cars are

A) complements.

B) substitutes.

C) normal goods.

D) inferior goods.

E) unrelated goods.

Skill: Level 2: Using definitions

Section: Checkpoint 5.3

Author: JC

AACSB: Reflective thinking

31) If the cross elasticity of demand for DVD players and DVDs equals -2, then the products are

A) unrelated.

B) complements.

C) inferior goods.

D) substitutes.

E) normal goods.

Skill: Level 2: Using definitions

Section: Checkpoint 5.3

Author: PH

AACSB: Reflective thinking

73

32) Tennis balls and tennis rackets are complements. If a 3 percent change in the price of a tennis

racket leads to a 9 change in the quantity of tennis balls demanded, the cross elasticity of demand

equals

A) 3.

B) -3.

C) 1/3.

D) -1/3.

E) 9.

Skill: Level 3: Using models

Section: Checkpoint 5.3

Author: CD

AACSB: Analytical reasoning

33) The income elasticity of demand is a measure of

A) how demand for a product changes when the price of a substitute or complement product

changes.

B) how responsive consumers are to changes in the price of a product.

C) how responsive suppliers are to changes in the price of a product.

D) the extent to which the demand for a good changes when income changes.

E) the extent to which the supply of a good changes when the demand changes as a result of a

change in income.

Skill: Level 2: Using definitions

Section: Checkpoint 5.3

Author: PH

AACSB: Reflective thinking

34) If the income elasticity of demand for a good is 2, then when income rises 10 percent, the

quantity demanded

A) increases 2 percent.

B) increases 20 percent.

C) decreases 2 percent.

D) decreases 20 percent.

E) increases 12 percent.

Skill: Level 3: Using models

Section: Checkpoint 5.3

Author: SB

AACSB: Analytical reasoning

74

35) The income elasticity of demand is

A) positive for a normal good.

B) zero for an inferior good.

C) less than one for an income elastic normal good.

D) Only answers A and B are correct.

E) Answers A, B, and C are correct.

Skill: Level 2: Using definitions

Section: Checkpoint 5.3

Author: SA

AACSB: Reflective thinking

36) The income elasticity of demand is ________ if the good is ________ good.

A) positive; a normal

B) positive; an inferior

C) negative; a normal

D) less than one; an inferior

E) positive; a substitute

Skill: Level 2: Using definitions

Section: Checkpoint 5.3

Author: CD

AACSB: Reflective thinking

37) Assume that it is predicted that for the years after you graduate from college, the entire

economy will experience a long period of prosperity when incomes grow rapidly. What type of

industry would be the best for you to find employment if this prediction is correct? An industry

that produces a product that is

A) income elastic.

B) income inelastic.

C) inferior.

D) a substitute good.

E) none of these industries

Skill: Level 4: Applying models

Section: Checkpoint 5.3

Author: TS

AACSB: Reflective thinking

75

38) Which of the following statements is correct? The

A) income elasticity of demand for inferior goods is positive.

B) cross elasticity of demand for substitutes is negative.

C) income elasticity of demand for normal goods is positive.

D) cross elasticity of demand for complements is positive.

E) income elasticity of demand for inferior goods is zero.

Skill: Level 2: Using definitions

Section: Checkpoint 5.3

Author: SA

AACSB: Reflective thinking

39) The income elasticity of demand for skiing trips to Vermont is greater than one. Thus a trip

to Vermont for skiing is ________ good.

A) a normal

B) an inferior

C) a unit elastic

D) a price elastic

E) a price inelastic

Skill: Level 2: Using definitions

Section: Checkpoint 5.3

Author: JC

AACSB: Reflective thinking

40) People eat at restaurants less often when their incomes fall because of the recession . Eating

at restaurants must be

A) an inferior good.

B) a normal good.

C) a complement to other goods.

D) a substitute for other goods.

E) an inelastic good.

Skill: Level 2: Using definitions

Section: Checkpoint 5.3

Author: KG

AACSB: Reflective thinking

76

41) People take fewer trips by airplane when their incomes fall because of the recession. Trips

by airplane must be

A) a normal good.

B) an inferior good.

C) a substitute for other goods.

D) a complement to other goods.

E) an inelastic good.

Skill: Level 2: Using definitions

Section: Checkpoint 5.3

Author: KG

AACSB: Reflective thinking

42) Sergio’s rentals of Blu-ray movies increase by 10 percent when her income increases by 30

percent. Based on this information, we know that for Sergio Blu-ray movies

A) are complements.

B) are substitutes.

C) are inferior goods.

D) have an inelastic demand.

E) are normal goods.

Skill: Level 3: Using models

Section: Checkpoint 5.3

Author: KG

AACSB: Reflective thinking

43) Alan purchases 10 percent fewer bags of chips when his income decreases by 5 percent.

Based on only this information, we know that for Alan

A) chips are a normal good.

B) chips are a complement to salsa.

C) chips are a substitute to pretzels.

D) chips are an inferior good.

E) the price of chips fell.

Skill: Level 3: Using models

Section: Checkpoint 5.3

Author: KG

AACSB: Reflective thinking

77

44) For a good such as food, the income elasticity is likely

A) negative.

B) equal to zero.

C) positive and less than one.

D) positive and greater than one.

E) undefined because people always buy the same amount of food.

Skill: Level 3: Using models

Section: Checkpoint 5.3

Author: TS

AACSB: Reflective thinking

45) For a good such as a large screen, HD television set, the income elasticity would likely be

A) negative.

B) equal to zero.

C) positive and less than one.

D) positive and greater than one.

E) undefined because large screen, HD TVs are bought by only a handful of consumers.

Skill: Level 2: Using definitions

Section: Checkpoint 5.3

Author: TS

AACSB: Reflective thinking

46) Generally speaking, luxuries have income elasticities that are

A) larger than those of necessities.

B) smaller than those of necessities.

C) the same as those of necessities.

D) negative.

E) zero.

Skill: Level 2: Using definitions

Section: Checkpoint 5.3

Author: SB

AACSB: Reflective thinking

78

47) Assume that it is predicted that for the years after you graduate from college, the entire

economy will experience a long period of recession when incomes decrease. What type of

industry would be the best for you to find employment if this prediction is correct? An industry

that produces a product that

A) is income elastic.

B) is income inelastic.

C) is inferior.

D) is a complement.

E) none of these industries

Skill: Level 4: Applying models

Section: Checkpoint 5.3

Author: TS

AACSB: Reflective thinking

48) What is an inferior good?

A) a product of low quality that we do not want to purchase

B) a product for which demand increases when income increases, and demand decreases when

income decreases

C) a product for which demand increases when income decreases, and demand decreases when

income increases

D) a product that is complementary

E) a product that is a substitute for another, better good

Skill: Level 1: Definition

Section: Checkpoint 5.3

Author: PH

AACSB: Reflective thinking

49) A product that has a negative income elasticity of demand is ________ good.

A) a complementary

B) a substitute

C) a normal

D) an inferior

E) a negative

Skill: Level 2: Using definitions

Section: Checkpoint 5.3

Author: TS

AACSB: Reflective thinking

79

50) Goods are ________ when the income elasticity of demand is less than zero.

A) substitutes

B) complements

C) inferior

D) elastic

E) normal

Skill: Level 2: Using definitions

Section: Checkpoint 5.3

Author: KG

AACSB: Reflective thinking

51) If a product is an inferior good, then its income elasticity of demand is

A) zero.

B) positive.

C) negative.

D) indeterminate.

E) undefined.

Skill: Level 2: Using definitions

Section: Checkpoint 5.3

Author: PH

AACSB: Reflective thinking

52) If a good is inferior, then it has an income elasticity of demand that is

A) equal to zero.

B) greater than zero.

C) less than zero.

D) greater than one.

E) undefined.

Skill: Level 2: Using definitions

Section: Checkpoint 5.3

Author: SB

AACSB: Reflective thinking

80

53) If a 5 percent increase in income brings about a 10 percent decrease in the demand for a

good, then the

A) good is a normal good.

B) good is an inferior good.

C) income elasticity of demand is 0.5.

D) income elasticity of demand is 2.0.

E) income elasticity of demand is 5.0.

Skill: Level 2: Using definitions

Section: Checkpoint 5.3

Author: SA

AACSB: Reflective thinking

54) If a 10 percent increase in income leads to a 5 percent decrease in the demand for a good, the

income elasticity of demand equals ________ and the good is ________ good.

A) 1/2; a normal

B) -1/2; an inferior

C) 2; a normal

D) -2; a normal

E) -5; an inferior

Skill: Level 3: Using models

Section: Checkpoint 5.3

Author: CD

AACSB: Analytical reasoning

55) Joe receives a 20 percent increase in his income from his part time job and as a consequence

decreases his consumption of Ramen noodles by 10 percent. Hence to Joe, Ramen noodles are

A) a normal good with a price elasticity of demand of 0.5.

B) a substitute good with a cross elasticity of 0.5.

C) a good with a price elasticity of supply of -0.5.

D) an inferior good with an income elasticity of -0.5.

E) an inferior good with an income elasticity of -2.0.

Skill: Level 4: Applying models

Section: Checkpoint 5.3

Author: TS

AACSB: Analytical reasoning

81

56) If a 5 percent decrease in income leads to a 15 percent decrease in the demand for a good, the

income elasticity of demand equals

A) -1/3 and the good is an inferior good.

B) 1/3 and demand for the good is income elastic.

C) 3 and the good is a normal good.

D) -3 and the demand for the good is income inelastic.

E) 3 and the good is an inferior good

Skill: Level 3: Using models

Section: Checkpoint 5.3

Author: CD

AACSB: Analytical reasoning

57) When income increases from $20,000 to $30,000 the quantity of inter-city bus trips taken per

year decreases from 10 to 8. Hence

A) inter-city bus trips are a normal good.

B) the income elasticity of demand for inter-city bus trips is -1.8.

C) the income elasticity of demand for inter-city bus trips is -0.56.

D) Both answers A and B are correct.

E) Both answers A and C are correct.

Skill: Level 3: Using models

Section: Checkpoint 5.3

Author: SA

AACSB: Analytical reasoning

58) The income elasticity of demand for foreign travel

A) is likely to be smaller than the income elasticity of demand for food.

B) is likely to be larger than the income elasticity of demand for food.

C) cannot be compared to the income elasticity of demand for food.

D) is likely to be inelastic.

E) is likely to be negative.

Skill: Level 4: Applying models

Section: Checkpoint 5.3

Author: SA

AACSB: Reflective thinking

82

59) The lower the level of income in a country, the

A) less income elastic is the demand for food.

B) more income elastic is the demand for food.

C) more negative the income elasticity of the demand for food.

D) Both answers A and C are correct.

E) Both answers A and B are correct.

Skill: Level 4: Applying models

Section: Checkpoint 5.3

Author: SA

AACSB: Reflective thinking

60) The measure used to determine whether two products are complements or substitutes is

called the

A) price elasticity of supply.

B) cross elasticity of demand.

C) price elasticity of demand.

D) income elasticity.

E) substitute elasticity of demand.

Skill: Level 2: Using definitions

Section: Checkpoint 5.3

Author: STUDY GUIDE

AACSB: Reflective thinking

61) If beef and pork are substitutes for consumers, the cross elasticity of demand between the

two products must be

A) negative.

B) positive.

C) indeterminate.

D) elastic.

E) greater than 1.

Skill: Level 2: Using definitions

Section: Checkpoint 5.3

Author: STUDY GUIDE

AACSB: Reflective thinking

83

62) When the price of a pizza is $10, the quantity of soda demanded is 300 drinks. When the

price of a pizza is $15, the quantity soda demanded is 100 drinks. The cross elasticity of demand

is equal to

A) -0.25.

B) -0.40.

C) -2.50.

D) -25.00.

E) 4.00.

Skill: Level 3: Using models

Section: Checkpoint 5.3

Author: STUDY GUIDE

AACSB: Analytical reasoning

63) When the price of going to a movie rises 5 percent, the quantity of DVDs demanded

increases 10 percent. The cross elasticity of demand equals

A) 10.0.

B) 0.50.

C) -0.50.

D) -2.0.

E) 2.0.

Skill: Level 3: Using models

Section: Checkpoint 5.3

Author: STUDY GUIDE

AACSB: Analytical reasoning

64) If two goods have a cross elasticity of demand of -2, then when the price of one good

increases, the demand curve of the other good

A) shifts rightward.

B) shifts leftward.

C) remains unchanged and the supply curve also remains unchanged.

D) might shift rightward, leftward, or remain unchanged.

E) remains unchanged but the supply curve shifts leftward.

Skill: Level 3: Using models

Section: Checkpoint 5.3

Author: STUDY GUIDE

AACSB: Analytical reasoning

84

65) The income elasticity of demand is the percentage change in the ________ divided by the

percentage change in ________.

A) quantity demanded; the price of a substitute or complement

B) quantity supplied; price

C) quantity demanded; price

D) quantity demanded; income

E) quantity demanded when income changes; the quantity supplied

Skill: Level 2: Using definitions

Section: Checkpoint 5.3

Author: STUDY GUIDE

AACSB: Reflective thinking

66) When income increases from $20,000 to $30,000 the number of home delivered pizzas per

year increases from 22 to 40. The income elasticity of demand for home delivered pizza equals

A) 1.45.

B) 0.69.

C) 0.58.

D) 0.40.

E) 2.86.

Skill: Level 3: Using models

Section: Checkpoint 5.3

Author: STUDY GUIDE

AACSB: Analytical reasoning

67) When income increases by 6 percent, the demand for potatoes decreases by 2 percent. The

income elasticity of demand for potatoes equals

A) -2.00.

B) 3.00.

C) -3.00.

D) 0.33.

E) -0.33.

Skill: Level 3: Using models

Section: Checkpoint 5.3

Author: STUDY GUIDE

AACSB: Analytical reasoning

85

68) When income increases from $30,000 a year to $40,000 a year, the quantity demanded of

weekend vacations by Sara increases from 2 a year to 5 a year. For Sara, the income elasticity of

demand of weekend vacations is ________ and weekend vacations are ________ good.

A) 3; a normal

B) 4.5 a normal

C) 1/3; an inferior

D) -4.5; an inferior

E) 1/3; a normal

Skill: Level 3: Using models

Section: Checkpoint 5.3

Author: MyEconLab Web Site

AACSB: Analytical reasoning

69) If a product is a normal good, then its income elasticity of demand is

A) zero.

B) positive.

C) negative.

D) indeterminate.

E) greater than 1.

Skill: Level 2: Using definitions

Section: Checkpoint 5.3

Author: STUDY GUIDE

AACSB: Reflective thinking

70) The income elasticity of demand for used cars is less than zero. So, used cars are

A) an inferior good.

B) a normal good.

C) an inelastic good.

D) a perfectly inelastic good.

E) a substitute good.

Skill: Level 2: Using definitions

Section: Checkpoint 5.3

Author: STUDY GUIDE

AACSB: Reflective thinking

86

71) An inferior good has a ________ elasticity of demand.

A) positive income

B) negative income

C) negative cross

D) positive cross

E) negative price

Skill: Level 2: Using definitions

Section: Checkpoint 5.3

Author: MyEconLab Web Site

AACSB: Reflective thinking

5.4 Chapter Figures

1) The demand curve shown in the figure above reflects demand that is

A) perfectly elastic.

B) perfectly inelastic.

C) unit elastic.

D) elastic but not perfectly elastic.

E) inelastic but not perfectly inelastic.

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: CO

AACSB: Analytical reasoning

87

2) The demand curve shown in the figure above reflects demand that is

A) perfectly elastic.

B) perfectly inelastic.

C) unit elastic.

D) elastic but not perfectly elastic.

E) inelastic but not perfectly inelastic.

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: CO

AACSB: Analytical reasoning

88

3) The demand curve shown in the figure above is ________ over the price range from $95 to

$105 per trip.

A) perfectly elastic

B) perfectly inelastic

C) unit elastic

D) elastic but not perfectly elastic

E) inelastic but not perfectly inelastic

Skill: Level 3: Using models

Section: Checkpoint 5.1

Author: CO

AACSB: Analytical reasoning

89

4) The demand curve shown in the figure above is ________ over the price range from $0.90 to

$1.10 per pack.

A) perfectly elastic

B) perfectly inelastic

C) unit elastic

D) elastic but not perfectly elastic

E) inelastic but not perfectly inelastic

Skill: Level 3: Using models

Section: Checkpoint 5.1

Author: CO

AACSB: Analytical reasoning

90

5) The demand curve shown in the figure above is ________ over the price range from $95 to

$105 per unit.

A) perfectly elastic

B) perfectly inelastic

C) unit elastic

D) elastic but not perfectly elastic

E) inelastic but not perfectly inelastic

Skill: Level 3: Using models

Section: Checkpoint 5.1

Author: CO

AACSB: Analytical reasoning

91

The figure above shows the demand curve for Starbucks latte.

6) Using the figure above, suppose Starbucks charges $4.50 per cup for its latte. Which of the

following is true?

i. At this price, the demand for Starbucks latte is elastic.

ii. If Starbucks lowers the price of its latte, its revenue will decrease.

iii. If Starbucks raises the price of its latte, the demand for it will become less elastic.

A) Only iii

B) Only i

C) Only ii

D) i and ii

E) i and iii

Skill: Level 3: Using models

Section: Checkpoint 5.1

Author: CO

AACSB: Analytical reasoning

92

7) In the figure above, at the point where the price is $4 per cup the price elasticity of demand is

A) 2.

B) 0.5.

C) 1.

D) 1.5.

E) 0.

Skill: Level 3: Using models

Section: Checkpoint 5.1

Author: CO

AACSB: Analytical reasoning

8) In in the figure above, when the price falls from $5 to $4, the price elasticity of demand is

A) 2.

B) 3.

C) 0.75

D) 1.5.

E) 0.33

Skill: Level 3: Using models

Section: Checkpoint 5.1

Author: CO

AACSB: Analytical reasoning

9) In in the figure above, when the price rises from $3 to $4, the price elasticity of demand is

A) 1.4.

B) 2.

C) 0.71

D) 0.4.

E) 1

Skill: Level 3: Using models

Section: Checkpoint 5.1

Author: CO

AACSB: Analytical reasoning

93

10) Refer to the figure above. Suppose Starbucks charges $3.50 per cup for its latte. Which of the

following is true?

i. At this price, the demand for Starbucks latte is inelastic.

ii. If Starbucks raises the price of its latte, its revenue will increase.

iii. If Starbucks lowers the price of its latte, it will increase its revenue.

A) Only iii

B) Only i

C) Only ii

D) i and ii

E) i and iii

Skill: Level 3: Using models

Section: Checkpoint 5.1

Author: CO

AACSB: Analytical reasoning

94

The figure above shows the demand curve for Starbucks latte.

11) In the figure above, the demand is elastic in the range of prices between

A) $3.50 and $4.50 per cup.

B) $2.50 and $3.50 per cup.

C) $1.00 and $2.00 per cup.

D) $2.00 and $4.00 per cup.

E) $1.75 and $2.75 per cup.

Skill: Level 3: Using models

Section: Checkpoint 5.1

Author: CO

AACSB: Analytical reasoning

12) In the figure above, the demand is unit elastic

A) at the point where the price is $3.00 per cup.

B) at the point where the price is $2.00 per cup.

C) at the point where the price is $4.00 per cup.

D) at the point where the price is $2.50 per cup.

E) at all points along the demand curve.

Skill: Level 3: Using models

Section: Checkpoint 5.1

Author: CO

AACSB: Analytical reasoning

95

13) In the figure above, the demand is inelastic in the range of prices between

A) $3.50 and $4.50 per cup.

B) $2.50 and $3.50 per cup.

C) $1.00 and $2.00 per cup.

D) $2.25 and $4.50 per cup.

E) $2.75 and $3.75 per cup.

Skill: Level 3: Using models

Section: Checkpoint 5.1

Author: CO

AACSB: Analytical reasoning

14) Suppose Starbucks currently charges $3.25 per cup for its latte. If Starbucks lowers the price

to $3.00 per cup, based on the demand curve in the figure above, its total revenue will ________

because the demand for Starbucks latte is ________ over this price range.

A) increase; elastic

B) decrease; elastic

C) increase; inelastic

D) increase; elastic

E) not change; unit elastic

Skill: Level 3: Using models

Section: Checkpoint 5.1

Author: CO

AACSB: Analytical reasoning

15) Suppose Starbucks currently charges $2.50 per cup for its latte. If Starbucks raises the price

to $3.00 per cup, based on the demand curve in the figure above its total revenue will ________

because the demand for Starbucks latte is ________ over this price range.

A) increase; elastic

B) decrease; elastic

C) increase; inelastic

D) increase; elastic

E) not change; unit elastic

Skill: Level 3: Using models

Section: Checkpoint 5.1

Author: CO

AACSB: Analytical reasoning

96

The figure above shows the supply curve for roses.

16) In the figure above, at the point where the price is $60 per bunch, the price elasticity of

supply is

A) 1.8.

B) 0.56.

C) 1.

D) 1.5.

E) 0.

Skill: Level 3: Using models

Section: Checkpoint 5.2

Author: CO

AACSB: Analytical reasoning

97

17) In the figure above, at the point where the price is $50 per bunch, the price elasticity of

supply is

A) 2.14.

B) 0.47.

C) 1.

D) 3.

E) 0.33.

Skill: Level 3: Using models

Section: Checkpoint 5.2

Author: CO

AACSB: Analytical reasoning

5.5 Integrative Questions

1) Suppose an increase in supply lowers the price from $10 to $8 and increases the quantity

demanded from 100 units to 130 units. Using the midpoint method, the elasticity of demand

equals

A) 1.17.

B) 0.85.

C) 0.26.

D) 1.56.

E) None of the above answers is correct.

Skill: Level 3: Using models

Section: Integrative

Author: CD

AACSB: Analytical reasoning

2) Suppose a decrease in supply raises the price from $4.00 to $5.50 and decreases the quantity

demanded from 2,000 to 1,500. Using the midpoint method, the elasticity of demand equals

A) 2.10.

B) 1.11.

C) 0.90.

D) 0.72.

E) None of the above answers is correct.

Skill: Level 3: Using models

Section: Integrative

Author: CD

AACSB: Analytical reasoning

98

3) The total revenue test says that if a price decrease leads to

A) an increase in total revenue, demand is income elastic.

B) a decrease in total revenue, demand is income inelastic.

C) a decrease in total revenue, demand is price inelastic.

D) a decrease in total revenue, supply is price inelastic.

E) a decrease in total revenue, supply is price elastic.

Skill: Level 3: Using models

Section: Integrative

Author: CD

AACSB: Reflective thinking

4) The total revenue test says that if a price decrease leads to

A) an increase in total revenue, supply is elastic.

B) a decrease in total revenue, supply is unit elastic.

C) a decrease in total revenue, supply is inelastic.

D) an increase in total revenue, supply is inelastic

E) None of the above answers is correct.

Skill: Level 3: Using models

Section: Integrative

Author: MR

AACSB: Reflective thinking

5) If demand is ________, a price cut ________ the total revenue.

A) elastic; increases

B) unit elastic; decreases

C) inelastic; increases

D) inelastic; does not change

E) normal; decreases

Skill: Level 3: Using models

Section: Integrative

Author: CD

AACSB: Reflective thinking

99

6) If you spend a large portion of your income on a good,

A) supply of that good would be price elastic.

B) demand for that good is more elastic than if you spent a smaller portion of your income on the

good.

C) supply of that good is price inelastic.

D) demand for that good is less elastic than if you spent a smaller portion of your income on the

good.

E) the good must be able to be produced at a constant (or gently rising) opportunity cost.

Skill: Level 3: Using models

Section: Integrative

Author: CD

AACSB: Reflective thinking

7) A ________ curve means that ________.

A) horizontal demand; a change in price does not change total revenue

B) horizontal demand; the elasticity of demand is less than 1

C) horizontal supply; elasticity of supply is infinite

D) horizontal supply; elasticity of demand is infinite

E) vertical demand; a change in price does not change total revenue

Skill: Level 3: Using models

Section: Integrative

Author: CD

AACSB: Reflective thinking

8) The cross elasticity of demand

A) means that an increase in the demand for one good leads to a decrease in demand for another

good.

B) measures how a change in the price of one good impacts the demand for another good.

C) measures how a change in supply impacts the demand for the good.

D) means that an increase in the price of one good leads to an increase in the price of another

good.

E) measures how a change in income impacts the demand for the good.

Skill: Level 2: Using definitions

Section: Integrative

Author: CD

AACSB: Reflective thinking

100

9) Which of the following is true?

I. The demand for a good is elastic if when its price changes, the percentage change in the

quantity demanded exceeds the percentage change in price.

II. Price elasticity of demand equals the percentage change in price divided by the percentage

change in the quantity demanded.

III. If demand is price inelastic, a rise in price leads to a decrease in total revenue.

A) Only I

B) Only II

C) Only III

D) I and II

E) II and III

Skill: Level 2: Using definitions

Section: Integrative

Author: CO

AACSB: Reflective thinking

10) Which of the following is true?

I. The supply of a good is inelastic if when its price changes, the percentage change in the

quantity supplied exceeds the percentage change in price.

II. Price elasticity of supply equals the percentage change in the quantity supplied divided by the

percentage change in price.

III. If demand is price elastic, a rise in price leads to a decrease in total revenue.

A) Only I

B) Only II

C) Only III

D) I and II

E) II and III

Skill: Level 2: Using definitions

Section: Integrative

Author: CO

AACSB: Reflective thinking

101

11) Which of the following is true?

I. The easier it is to find substitutes for a good, the more price elastic the demand for the good is.

II. The demand for a good is more price elastic the smaller the proportion of income spent on it.

III. If demand is price elastic, lowering the price leads to a decrease in total revenue.

A) Only I

B) Only II

C) Only III

D) I and II

E) I and III

Skill: Level 2: Using definitions

Section: Integrative

Author: CO

AACSB: Reflective thinking

5.6 Essay: The Price Elasticity of Demand

1) "The price elasticity of demand is a measure of how sensitive demanders are to changes in the

price of a product." Is this statement true or false?

Skill: Level 1: Definition

Section: Checkpoint 5.1

Author: PH

AACSB: Reflective thinking

2) What is the price elasticity of demand? In terms of percentage changes, what is its formula?

Skill: Level 1: Definition

Section: Checkpoint 5.1

Author: CD

AACSB: Reflective thinking

102

3) When does a decrease in supply raise the price more: When demand is elastic or when

demand is inelastic? When OPEC decreases the supply of oil, the price of gasoline skyrockets.

Hence is the demand for gasoline elastic or inelastic?

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: JC

AACSB: Analytical reasoning

4) What does a horizontal demand curve indicate about the price elasticity of demand?

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: SA

AACSB: Reflective thinking

5) What are the three cases for the price elasticity of demand? Briefly define each.

Skill: Level 1: Definition

Section: Checkpoint 5.1

Author: CD

AACSB: Communication

6) In a study session, your friend says, "Demand is elastic if the percentage change in the price

exceeds the percentage change in quantity demanded." Is your friend correct?

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: SB

AACSB: Reflective thinking

103

7) If the percentage change in quantity demanded is greater than the percentage change in price,

can you determine if the demand is elastic, unit elastic, or inelastic? Explain your answer.

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: PH

AACSB: Communication

8) Does the fact that the price elasticity of demand for a good is inelastic violate the law of

demand?

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: PH

AACSB: Communication

9) What factors determine the size of the price elasticity of demand?

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: AA

AACSB: Communication

104

10) Explain why the number of substitutes influences the price elasticity of demand.

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: SB

AACSB: Communication

11) "The fewer the number of substitutes for a product, the more elastic the demand for that

product." Is the previous statement true or false?

Skill: Level 1: Definition

Section: Checkpoint 5.1

Author: TS

AACSB: Reflective thinking

12) If a good has only a few, poor substitutes, is its demand elastic or inelastic?

Skill: Level 1: Definition

Section: Checkpoint 5.1

Author: AA

AACSB: Reflective thinking

13) Which is larger: The price elasticity of demand for food or the price elasticity of demand for

oranges? Why?

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: AA

AACSB: Analytical reasoning

105

14) Water is considered a necessity. So, is the demand for water elastic or inelastic?

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: AA

AACSB: Reflective thinking

15) Studies have shown that the price elasticity of demand for necessities, such as food, are

higher in developing countries and lower in developed countries. What is the reason for this

difference in elasticity?

Skill: Level 4: Applying models

Section: Checkpoint 5.1

Author: SA

AACSB: Communication

16) What happens to the price elasticity of demand moving down along a downward-sloping,

linear demand curve?

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: TS

AACSB: Communication

106

17) What effect does a price hike have on the total revenue of the producers?

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: TS

AACSB: Communication

18) The demand for oil is inelastic. So, does an increase in the price of oil mean an increase in

total revenue or a decrease in total revenue for oil producers?

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: SA

AACSB: Analytical reasoning

19) Anna owns the Sweet Alps Chocolate store. She charges $10 per pound for her hand made

chocolate. You, the economist, have calculated the elasticity of demand for chocolate in her town

to be 2.5. If she wants to increase her total revenue, what advice will you give her?

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: SA

AACSB: Analytical reasoning

20) You are the brand manager of Crest toothpaste and you observe that when you increase the

price of Crest, your total revenue increases. How is that possible?

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: SA

AACSB: Analytical reasoning

107

21) Explain the total revenue test.

Skill: Level 1: Definition

Section: Checkpoint 5.1

Author: CD

AACSB: Analytical reasoning

22) If a decrease in price increases total revenue, what can you determine about the elasticity of

demand for the good?

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: SA

AACSB: Analytical reasoning

23) "If the price falls and, as a result, the total revenue decreases, demand is elastic." Is the

previous assertion correct?

Skill: Level 2: Using definitions

Section: Checkpoint 5.1

Author: SB

AACSB: Analytical reasoning

108

24) Recently the governor of Vermont proposed that cigarette taxes in Vermont should be

increased substantially, from 44 cents a pack to 66 cents a pack. He estimates that Vermont can

raise $20 million in revenue from this tax hike. He also pointed out that the neighboring state of

New Hampshire was considering an increase in cigarette taxes.

a. How can it be that an increase in cigarette taxes will increase tax revenue, because, after all, a

higher tax will increase cigarette prices and thereby decrease the quantity demanded?

b. If New Hampshire chooses not to increase cigarette taxes, is it likely that Vermont can still

raise $20 million in tax revenue? Why or why not? Explain

Skill: Level 4: Applying models

Section: Checkpoint 5.1

Author: SA

AACSB: Analytical reasoning

25) Suppose the price of flour increases from $0.80 to $1.00 a pound and the quantity demanded

decreases from 100 pounds to 95 pounds. Using the midpoint method, what is the price elasticity

of demand for flour? Is the demand for flour elastic or inelastic?

Skill: Level 3: Using models

Section: Checkpoint 5.1

Author: SA

AACSB: Analytical reasoning

109

26) If the price of suntan lotion increases from $6 to $8 per bottle and quantity demanded

decreases from 900,000 bottles to 845,000 bottles, using the midpoint method, what is the price

elasticity of demand for suntan lotion?

Skill: Level 3: Using models

Section: Checkpoint 5.1

Author: JC

AACSB: Analytical reasoning

27) If the price of a magazine increases from $5 to $7 and the quantity demanded of the

magazines decreases from 10 million per month to 8 million per month, using the midpoint

method, what is the price elasticity of demand? Show your work. Is the demand elastic, inelastic,

or unit elastic?

Skill: Level 3: Using models

Section: Checkpoint 5.1

Author: CD

AACSB: Analytical reasoning

28) Suppose the price elasticity of demand for bouquets of flowers is 4.0. You are charging $8

per bouquet. If you want to increase the quantity of bouquets you sell by 20 percent, what price

should you charge?

Skill: Level 4: Applying models

Section: Checkpoint 5.1

Author: SA

AACSB: Analytical reasoning

110

29) The table above gives the demand schedule for a good. Using the midpoint method, find the

price elasticity of demand between points A and B, between B and C, between C and D, and

between D and E.

Skill: Level 3: Using models

Section: Checkpoint 5.1

Author: TS

AACSB: Analytical reasoning

111

30) The figure above shows the demand curve for pizza. Using the midpoint method and moving

from point A to point B, calculate the

a. percentage change in price.

b. percentage change in quantity demanded.

c. price elasticity of demand.

Skill: Level 3: Using models

Section: Checkpoint 5.1

Author: SB

AACSB: Analytical reasoning

112

31) In the figure above, at which point (a, b, or c) along the linear demand curve illustrated

would demand be

a. most elastic?

b. most inelastic?

Skill: Level 3: Using models

Section: Checkpoint 5.1

Author: SB

AACSB: Analytical reasoning

113

32) The table above gives the demand schedule for a good. What is the total revenue at point A?

At point B? At point C? At point D? At point E?

Skill: Level 3: Using models

Section: Checkpoint 5.1

Author: TS

AACSB: Analytical reasoning

33) The table above gives the demand schedule for museum visits.

a. You, as the resident economist, have been given the task of maximizing the museum's total

revenue. What admission price should you charge?

b. What is the elasticity of demand between $6 and $4?

c. Moving along the demand schedule from $10 to $8 to $6 and ultimately to $4, how does the

price elasticity of demand change in size?

Skill: Level 4: Applying models

Section: Checkpoint 5.1

Author: SA

AACSB: Analytical reasoning

114

34) Steve sells hotdogs from a vending cart downtown. The table above shows his daily total

revenues at four different prices. Between which two prices is the demand for hotdogs

a. elastic?

b. unit elastic?

c. inelastic?

Skill: Level 4: Applying models

Section: Checkpoint 5.1

Author: SB

AACSB: Analytical reasoning

35) Suppose bad weather decreases the quantity of wheat by 12 percent. If the price elasticity of

demand for wheat is 0.6, how would the crop failure affect the price of wheat? Would the crop

decrease benefit or harm wheat farmers?

Skill: Level 5: Critical thinking

Section: Checkpoint 5.1

Author: SB

AACSB: Analytical reasoning

115

5.7 Essay: The Price Elasticity of Supply

1) What is the price elasticity of supply? List and briefly define three cases of the price elasticity

of supply.

Skill: Level 1: Definition

Section: Checkpoint 5.2

Author: CD

AACSB: Communication

2) If the price elasticity of supply for corn is 3.12, then is the supply of corn elastic or inelastic?

Skill: Level 2: Using definitions

Section: Checkpoint 5.2

Author: JC

AACSB: Reflective thinking

3) List factors that increase the price elasticity of supply.

Skill: Level 2: Using definitions

Section: Checkpoint 5.2

Author: SB

AACSB: Communication

116

4) How does elasticity of supply differ for a product that can be stored, compared to a product

that cannot be stored?

Skill: Level 2: Using definitions

Section: Checkpoint 5.2

Author: PH

AACSB: Communication

5) Natural gas is difficult to store. What implication does this fact have for the elasticity of

supply of natural gas?

Skill: Level 2: Using definitions

Section: Checkpoint 5.2

Author: JC

AACSB: Analytical reasoning

6) Is supply more elastic or less elastic as more time passes after a price change? Explain your

answer.

Skill: Level 2: Using definitions

Section: Checkpoint 5.2

Author: PH

AACSB: Reflective thinking

7) If the price increases by 20 percent and the quantity supplied increases by 40 percent, what

does the elasticity of supply equal?

Skill: Level 2: Using definitions

Section: Checkpoint 5.2

Author: SA

AACSB: Analytical reasoning

117

8) Suppose the quantity supplied of computers increases from 2 million to 4 million units as the

price of a computer increases from $600 to $700. What does the price elasticity of supply equal?

Skill: Level 3: Using models

Section: Checkpoint 5.2

Author: SA

AACSB: Analytical reasoning

9) The table above gives the supply schedule for a product. Using the midpoint method, find the

price elasticity of supply between points A and B, between B and C, between C and D, and

between D and E.

Skill: Level 3: Using models

Section: Checkpoint 5.2

Author: TS

AACSB: Analytical reasoning

118

10) June makes holiday wreaths and sells them during the holiday season. The figure above

shows her supply curve of wreaths per week. Use the midpoint method in this problem.

a. Calculate the percentage change in quantity between points A and B.

b. Calculate the percentage change in price between points A and B.

c. Calculate the price elasticity of supply between points A and B.

Skill: Level 4: Applying models

Section: Checkpoint 5.2

Author: SB

AACSB: Analytical reasoning

5.8 Essay: Cross Elasticity and Income Elasticity

1) The price elasticity of demand is always positive, as is the price elasticity of supply. Is the

cross elasticity of demand always positive? Explain your answer.

Skill: Level 2: Using definitions

Section: Checkpoint 5.3

Author: TS

AACSB: Communication

119

2) Explain why the cross elasticity of demand for substitute goods is positive and the cross

elasticity of demand for complements is negative.

Skill: Level 2: Using definitions

Section: Checkpoint 5.3

Author: SA

AACSB: Communication

3) If the cross elasticity of demand between two goods is negative, are the goods substitutes or

complements?

Skill: Level 2: Using definitions

Section: Checkpoint 5.3

Author: SA

AACSB: Reflective thinking

4) If the cross elasticity of demand between peanut butter and milk is -1.11, then are peanut

butter and milk substitutes or complements?

Skill: Level 1: Definition

Section: Checkpoint 5.3

Author: SA

AACSB: Reflective thinking

120

5) How are the cross price elasticity of demand and income elasticity of demand similar and how

are they different from the price elasticity of demand?

Skill: Level 2: Using definitions

Section: Checkpoint 5.3

Author: TS

AACSB: Communication

6) If the income elasticity of demand for a Miami Dolphin season ticket is 2.34, then are Dolphin

season tickets a normal or an inferior good?

Skill: Level 1: Definition

Section: Checkpoint 5.3

Author: JC

AACSB: Communication

7) The income elasticity of demand for store brands of soda (that is, non-name brands) is

negative. What does this fact indicate about consumers' perceptions about the store brands?

Skill: Level 2: Using definitions

Section: Checkpoint 5.3

Author: JC

AACSB: Communication

121

8) When the price of Ford pickup trucks rises from $18,000 to $19,000, the quantity of Chevy

trucks demanded increases from 112,000 to 144,000. What does the cross elasticity of demand

between Ford and Chevy trucks equal?

Skill: Level 3: Using models

Section: Checkpoint 5.3

Author: JC

AACSB: Analytical reasoning

9) When the price of bananas rises 2 percent, the quantity demanded of peanut butter falls 4

percent.

a. What is the cross elasticity of demand between these two goods?

b. How are these goods related?

c. If the price of bananas rises, how will that affect the demand curve for peanut butter?

Skill: Level 3: Using models

Section: Checkpoint 5.3

Author: SB

AACSB: Analytical reasoning

10) Consider two goods: peanut butter and jelly. If the price of jelly increases from $2 a jar to $3

per jar and the quantity demanded of peanut butter decreases from 50 jars to 45 jars, what is the

cross elasticity of demand? Are the goods substitutes or complements?

Skill: Level 3: Using models

Section: Checkpoint 5.3

Author: CD

AACSB: Analytical reasoning

122

11) A 10 percent increase in income brings about a 15 percent decrease in the demand for a

good. What is the income elasticity of demand and is the good a normal good or an inferior

good?

Skill: Level 3: Using models

Section: Checkpoint 5.3

Author: SA

AACSB: Analytical reasoning

12) If income increases from $50,000 to $60,000 while the demand for a good increases from

100 units to 125 units, what is the income elasticity of demand? Is the good a normal good or an

inferior good?

Skill: Level 3: Using models

Section: Checkpoint 5.3

Author: CD

AACSB: Analytical reasoning

13) The income elasticity of demand for movies in the United States is 3.41. If people's incomes

decrease by 1 percent, what is the decrease in the quantity of movies demanded?

Skill: Level 3: Using models

Section: Checkpoint 5.3

Author: SA

AACSB: Analytical reasoning

123

14) The table above gives Sharon's demand for ground beef at two different income levels. Use

the midpoint method in this problem.

a. What is the percentage change in Sharon's income?

b. What is the percentage change in the quantity demanded?

c. What is Sharon's income elasticity of demand for ground beef?

d. Is ground beef a normal or an inferior good for Sharon?

Skill: Level 3: Using models

Section: Checkpoint 5.3

Author: SB

AACSB: Analytical reasoning

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