Chapter 2 Demand Theory
MULTIPLE CHOICE
1. Information on the quantities that would be purchased at different prices, holding all other
factors constant, in a given time period from a group of firms is shown in a:
a.
firm demand curve
b.
market demand curve
c.
firm demand schedule
d.
market supply schedule
e.
firm supply curve
2. The market demand schedule shows the quantities that would be purchased, holding all
other factors constant, from a group of firms during a given time period:
a.
at varying prices
b.
at varying advertising levels
c.
at varying competitors’ prices and advertising levels
d.
at varying prices and advertising levels
e.
over different time intervals
3. The demand curve’s usual slope implies that consumers:
a.
buy more as the price of a good is increased
b.
buy more as a good is advertised more
c.
buy more at higher average incomes
d.
buy less as the price of a good is increased
e.
have tastes that sometimes change
4. A graphical representation of the demand function is called a:
a.
demand schedule
b.
demand curve
c.
demand function
d.
marginal revenue schedule
e.
marginal revenue curve
5. A market demand curve is likely to shift to the right when:
a.
average income falls
b.
prices fall
c.
prices rise
d.
population increases
e.
new firms enter the market
6. A firm’s demand curve is usually:
a.
to the right of the market demand curve
b.
more inelastic than the market demand curve
c.
the same as the market demand curve
d.
drawn holding supply constant
e.
more elastic than the market demand curve
7. If the elasticity of per capita demand with respect to population is zero, then a 10 percent
increase in the population will cause the quantity demanded to:
a.
increase by 25 percent
b.
decrease by 10 percent
c.
remain constant
d.
increase by 10 percent
e.
decrease by 25 percent
8. As we move down a linear demand curve, demand becomes:
a.
more elastic
b.
less elastic at first and then more elastic
c.
steeper
d.
more elastic at first and then less elastic
e.
less elastic
9. The demand for personal computers has been estimated to be Q = 500,000 – 700P + 200I –
500S. Assume that per capita income I is $13,000 and the average price of software S is
$400. When the price of personal computers is P = $3,000, the price elasticity of demand is:
a.
–2.625
b.
–7.0
c.
–1.0
d.
–21.0
e.
–4.25
10. The demand for fashion watches is Q = 9 – 0.7P + 2I. Assume that per capita income I is
$13. When the price of fashion watches is P = $30, the price elasticity of demand is:
a.
–0.66
b.
–1.0
c.
–2.0
d.
–0.5
e.
–1.5
11. The demand for space heaters is Q = 250 – P + 2COOL, where COOL is the absolute value
of the difference between the average overnight low temperature and 40°F. Assume that the
average overnight low is 0°F. When the price of space heaters is P = $30, the price elasticity
of demand is:
a.
–0.1
b.
–1.0
c.
–0.66
d.
–1.5
e.
–6.6
12. The demand for space heaters is Q = 250 – P + 2COOL, where COOL is the absolute value
of the difference between the average overnight low temperature and 40°F. Assume that the
average overnight low this month is 40°F. When the price of space heaters is P = $50, the
price elasticity of demand is:
a.
–1.38
b.
–13.8
c.
–0.138
d.
–1.50
e.
–0.25
13. The demand for answering machines is Q = 1,000 – 150P + 25I. Assume that per capita
disposable income I is $200. When the price of answering machines is P = $10, the price
elasticity of demand is:
a.
–3.0
b.
–3.33
c.
–1.33
d.
–0.33
e.
–1.0
14. The demand for textbooks is Q = 200 – P + 25U – 50Pbeer. Assume that the unemployment
rate U is 8 and the price of beer Pbeer is $2. When the average price of a textbook is P =
$100, the price elasticity of demand is:
a.
–1.0
b.
–2.0
c.
–0.5
d.
–50
e.
–5.0
15. Suppose that the demand curve for compact disks is given by P = 600 – Q and that the
supply curve is given by P = 0.5Q, where Q is the quantity of compact disks and P is their
price. What is the price elasticity of demand at the equilibrium price and quantity?
a.
–0.05
b.
–0.02
c.
–0.20
d.
–0.50
e.
–2.00
16. The demand for cough medicine is Q = 10 – 2P. At a price of $2.50, the price elasticity of
demand is:
a.
–2.0
b.
–1.0
c.
–2.5
d.
–0.4
e.
–1.5
17. The demand for office chairs in thousands is Q = 80 – P2. At a price of $4, the price
elasticity of demand is:
a.
–0.5
b.
–8.0
c.
–2.0
d.
–4.0
e.
–0.25
18. The price elasticity of demand for Portland cement at a local retail outlet is –3 at the current
price of $3. If the marginal cost is $2, then the store manager should:
a.
increase the price to $4
b.
lower the price to $2.75
c.
quit selling cement
d.
leave the price unchanged
e.
lower the price to $2.50
19. The formula for the arc price elasticity can be written (where Q denotes the change in Q)
as:
a.
b.
c.
d.
e.
none of the above
20. The constant price elasticity of demand for cigarettes has been estimated to be –0.5. To
reduce smoking by 50 percent, approximately how much tax needs to be added to a $1
pack?
a.
$1.00
b.
$2.00
c.
$3.00
d.
$.50
e.
$4.00
21. The formula for the arc elasticity of demand can be written as:
a.
b.
c.
d.
e.
none of the above
22. Total revenue can be defined as:
a.
average revenue multiplied by marginal revenue
b.
average revenue divided by marginal revenue
c.
average revenue multiplied by output
d.
average revenue divided by output
e.
marginal revenue divided by output
23. Along a linear demand curve, total revenue is maximized:
a.
where the slope of a line from the origin to the demand curve is equal to the
elasticity
b.
where the elasticity is –1
c.
near the quantity axis intercept
d.
near the price axis intercept
e.
where the elasticity is 0
24. The demand for a product is more inelastic the:
a.
more narrowly defined the product
b.
longer the time period covered
c.
lower the average income of consumers
d.
better the available substitutes
e.
poorer the available substitutes
25. The demand for a product is more elastic the:
a.
more broadly the product is defined
b.
longer the time period covered
c.
higher the average income of consumers
d.
smaller the share of a consumer’s income the item represents
e.
larger the number of firms in the market
26. The demand for costume jewelry has been estimated to be Q = 100P–2E2, where E is the
price of real gem jewelry. Costume jewelry and real gem jewelry are:
a.
substitute goods
b.
complement goods
c.
inferior goods
d.
normal goods
e.
unrelated goods
27. The price elasticity of market demand primarily depends on the:
a.
number of firms in an industry
b.
cost of producing an industry’s output
c.
availability of substitutes
d.
substitutability of inputs in producing a product
e.
supply curves of inputs
28. Marginal revenue can be defined in terms of price (P) and elasticity (
) as:
a.
MR = P(
+ 1/
)
b.
P = MR(1/
)
c.
MR = P
d.
MR = P(1 + 1/
)
e.
P = MR(1 – 1/
)
29. If price is $25 when the price elasticity of demand is –0.5, then marginal revenue must be:
a.
$50
b.
–$25
c.
$12.50
d.
$37.50
e.
$25
30. If price is $12 when the price elasticity of demand is –1, then marginal revenue must be:
a.
$24
b.
$18
c.
$12
d.
$6
e.
$0
31. A profit-maximizing firm’s price can be written in terms of marginal cost and price
elasticity of demand as:
a.
P = MC(1 – 1/)
b.
P = MC(1/
)
c.
P = MC/(1 + 1/
)
d.
P = MC
e.
P = MC(1 + 1/
)
32. If the marginal cost of seating a theatergoer is $5 and the elasticity of demand is –4, the
profit-maximizing price is:
a.
$3.33
b.
$5.00
c.
$10.00
d.
$13.33
e.
$6.67
33. If the marginal cost of making a photocopy is 3 cents and the elasticity of demand is –2, the
profit-maximizing price is:
a.
3 cents
b.
5 cents
c.
6 cents
d.
7 cents
e.
8 cents
34. A manufacturer of infant clothes has found that the demand for its product is given by
Q = 100P–1.25A0.5, where P is price and A is advertising expenditures. If marginal cost
is $5, the profit-maximizing price is:
a.
$10.00
b.
$15.00
c.
$20.00
d.
$25.00
e.
$6.25
35. If the marginal cost of brewing beer is 40¢ and the profit-maximizing price is 60¢, then the
price elasticity of demand is:
a.
–0.333
b.
–3
c.
–0.667
d.
–1.5
e.
–2
36. “Colombia, Brazil Advance Proposal to Withhold 10 Percent of Export Output” (Wall Street
Journal, September 23, 1991, p. B6). A Colombian delegate to the International Coffee
Organization said that if all its members withheld 10 percent of export output, the
international price would rise 20 percent. This statement implies the price elasticity of
demand for coffee is approximately:
a.
–0.00
b.
–5.00