Elasticity and Its Application 1357
36. If a firm is facing elastic demand, then the firm should decrease price to increase revenue.
a. True
b. False
37. If a firm is facing inelastic demand, then the firm should decrease price to increase revenue.
a. True
b. False
38. When demand is inelastic, a decrease in price increases total revenue.
a. True
b. False
1358 Elasticity and Its Application
39. The income elasticity of demand is defined as the percentage change in quantity demanded
divided by the percentage change in income.
a. True
b. False
40. The income elasticity of demand is defined as the percentage change in quantity demanded
divided by the percentage change in price.
a. True
b. False
41. Normal goods have negative income elasticities of demand, while inferior goods have positive
income elasticities of demand.
a. True
b. False
Elasticity and Its Application 1359
42. If the income elasticity of demand for a good is negative, then the good must be an inferior good.
a. True
b. False
43. If we observe that when consumers’ incomes rise by 10%, the quantity demanded of ice cream
increases by 5%,
then ice cream is an inferior good.
a. True
b. False
44. If the cross-price elasticity of demand for two goods is negative, then the two goods are
substitutes.
a. True
b. False
1360 Elasticity and Its Application
45. If the cross-price elasticity of demand for two goods is negative, then the two goods are
complements.
a. True
b. False
46. Cross-price elasticity of demand measures how the quantity demanded of one good changes as
the price of another good changes.
a. True
b. False
47. Cross-price elasticity is used to determine whether goods are inferior or normal goods.
a. True
b. False
Elasticity and Its Application 1361
48. Cross-price elasticity is used to determine whether goods are substitutes or complements.
a. True
b. False
49. The cross-price elasticity of garlic salt and onion salt is -2, which indicates that garlic salt and
onion salt are substitutes.
a. True
b. False
50. The cross-price elasticity of demand for bacon and eggs likely would be negative because bacon
and eggs are complements for many people.
a. True
b. False
1362 Elasticity and Its Application
51. Supply and demand both tend to be more elastic in the long run and more inelastic in the short run.
a. True
b. False
52. Price elasticity of supply measures how much the quantity supplied responds to changes in the
price.
a. True
b. False
53. If the price elasticity of supply is 2 and the quantity supplied decreases by 6%, then the price
must have decreased by 3%.
a. True
b. False
Elasticity and Its Application 1363
54. Supply is said to be inelastic if the quantity supplied responds substantially to changes in the price
and elastic if the quantity supplied responds only slightly to price.
a. True
b. False
55. Supply tends to be more elastic in the short run and more inelastic in the long run.
a. True
b. False
56. When the price of knee braces increased by 25 percent, the Brace Yourself Company increased
its quantity supplied of knee braces per week by 75 percent. BYC’s price elasticity of supply of
knee braces is 0.33.
a. True
b. False
1364 Elasticity and Its Application
57. If a supply curve is horizontal, then supply is said to be perfectly elastic, and the price elasticity of
supply approaches infinity.
a. True
b. False
58. If we observe that when the price of ice cream rises by 10%, ice cream manufacturers increase
the quantity supplied of ice cream by 20%, then the price elasticity of supply is 2.
a. True
b. False
59. If a t-shirt manufacturer supplies 1,000 t-shirts per week when the price of t-shirts is $10 and
supplies 1,200 t-shirts per week when the price of t-shirts is $12, the price elasticity of supply is 2.
a. True
b. False
Elasticity and Its Application 1365
60. A government program that reduces land under cultivation hurts farmers but helps consumers.
a. True
b. False
61. A government program that pays farmers not to plant corn on part of their land can help farmers
not only through the subsidy payments to farmers who participate in the program but also by
raising the market price of corn.
a. True
b. False
62. A discovery that increases wheat yields per acre hurts farmers by increasing supply and lowering
their total revenues.
a. True
b. False
1366 Elasticity and Its Application
63. A discovery that increases wheat yields per acre helps farmers by increasing both supply and
total revenues.
a. True
b. False
64. OPEC failed to maintain a high price of oil in the long run, partly because both the supply of oil
and the demand for oil are more elastic in the long run than in the short run.
a. True
b. False
65. The OPEC oil cartel has difficulty maintaining high prices in the long run because the supply of oil
is more inelastic in the long run than in the short run.
a. True
b. False
Elasticity and Its Application 1367
66. Drug interdiction, which reduces the supply of drugs, may decrease drug-related crime because
the demand for drugs is inelastic.
a. True
b. False
67. Drug interdiction, which reduces the supply of drugs, will likely be a less effective policy than
educating consumers to reduce their demand for drugs because the drug interdiction policy will
lower drug prices and reduce the quantity of drugs demanded.
a. True
b. False
68. A “Just Say No” drug education policy that successfully educates consumers to reduce their
demand for drugs will lower drug prices and reduce the quantity of drugs demanded.
a. True
b. False
1368 Elasticity and Its Application
69. Consider the following pairs of goods. For which of the two goods would you expect the demand
to be more price elastic? Why?
a. water or diamonds
b. insulin or nasal decongestant spray
c. food in general or breakfast cereal
d. gasoline over the course of a week or gasoline over the course of a year
e. personal computers or IBM personal computers
Elasticity and Its Application 1369
70. You own a small town movie theatre. You currently charge $5 per ticket for everyone who
comes to your movies.
Your friend who took an economics course in college tells you that there may be a way to
increase your total revenue. Given the demand curves shown, answer the following questions.
a. What is your current total revenue for both groups?
b. The elasticity of demand is more elastic in which market?
c. Which market has the more inelastic demand?
d. What is the elasticity of demand between the prices of $5 and $2 in the adult market? Is this
elastic or inelastic?
e. What is the elasticity of demand between $5 and $2 in the children’s market? Is this elastic or
inelastic?
f. Given the graphs and what your friend knows about economics, he recommends you increase the
price of adult tickets to $8 each and lower the price of a child‘s ticket to $3.
How much could you increase total revenue if you take his advice?
1370 Elasticity and Its Application
Elasticity and Its Application 1371
71. Use the graph shown to answer the following questions. Put the correct letter(s) in the blank.
a. The elastic section of the graph is represented by section _______.
b. The inelastic section of the graph is represented by section _______.
c. The unit elastic section of the graph is represented by section .
d. The portion of the graph in which a decrease in price would cause total revenue to fall would
be _________.
e. The portion of the graph in which a decrease in price would cause total revenue to rise
would be _________.
f. The portion of the graph in which a decrease in price would not cause a change in total
revenue would be _________.
g. The section of the graph in which total revenue would be at a maximum would be
_______.
h. The section of the graph in which elasticity is greater than 1 is .
i. The section of the graph in which elasticity is equal to 1 is .
j. The section of the graph in which elasticity is less than 1 is .
1372 Elasticity and Its Application
72.
Using the midpoint method, compute the elasticity of demand between points A and B. Is demand
along this portion of the curve elastic or inelastic? Interpret your answer with regard to price and
quantity demanded. Now compute the elasticity of demand between points B and C. Is demand
along this portion of the curve elastic or inelastic?
Elasticity and Its Application 1373
73. When the Shaffers had a monthly income of $4,000, they usually ate out 8 times a month. Now
that the couple makes $4,500 a month, they eat out 10 times a month. Compute the couple’s
income elasticity of demand using the midpoint method. Explain your answer. Is a restaurant meal
a normal or inferior good to the couple?
74. Recently, in Smalltown, the price of Twinkies fell from $0.80 to $0.70. As a result, the quantity
demanded of Ho– Ho’s decreased from 120 to 100. What would be the appropriate elasticity to
compute? Using the midpoint method, compute this elasticity. What does your answer tell you?
1374 Elasticity and Its Application
Problems
1. The measure of how willing consumers are to buy less of a good as its price rises is called
2. Suppose that good X has few close substitutes and that good Y has many close substitutes. Which
good would you expect to have more price inelastic demand?
3. Suppose that good X has few close substitutes and that good Y has many close substitutes. Which
good would you expect to have more price elastic demand?
Elasticity and Its Application 1375
4. Suppose that good X is a luxury and that good Y is a necessity. Which good would you expect to
have more price inelastic demand?
5. Suppose that good X is a luxury and that good Y is a necessity. Which good would you expect to
have more price elastic demand?
6. For which of the following goods would demand be most price elastic: a car, a sedan, a Honda
sedan, a Honda Accord, a black Honda Accord?