Elasticity and Its Application
Multiple Choice – Section 00: Introduction
1. In general, elasticity is a measure of
a. the extent to which advances in technology are adopted by producers.
b. the extent to which a market is competitive.
c. how firms’ profits respond to changes in market prices.
d. how much buyers and sellers respond to changes in market conditions.
2. Elasticity is
a. a measure of how much buyers and sellers respond to changes in market conditions.
b. the study of how the allocation of resources affects economic well-being.
c. the maximum amount that a buyer will pay for a good.
d. the value of everything a seller must give up to produce a good.
3. When studying how some event or policy affects a market, elasticity provides information on the
a. equity effects on the market by identifying the winners and losers.
b. magnitude of the effect on the market.
c. speed of adjustment of the market in response to the event or policy.
d. number of market participants who are directly affected by the event or policy.
4. When studying how some event or policy affects a market, elasticity provides information on the
a. change in the costs of production.
b. tradeoff between equality and efficiency.
c. effect on the budget deficit or surplus.
d. direction and magnitude of the effect.
5. How does the concept of elasticity allow us to improve upon our understanding of supply and
demand?
a. Elasticity allows us to analyze supply and demand with greater precision than would be the case
in the absence of the elasticity concept.
b. Elasticity provides us with a better rationale for statements such as “an increase in x will lead to
a decrease in y” than we would have in the absence of the elasticity concept.
c. Without elasticity, we would not be able to address the direction in which price is likely to move
in response to a surplus or a shortage.
d. Without elasticity, it is very difficult to assess the degree of competition within a market.
6. When consumers face rising gasoline prices, they typically
a. reduce their quantity demanded more in the long run than in the short run.
b. reduce their quantity demanded more in the short run than in the long run.
c. do not reduce their quantity demanded in the short run or the long run.
d. increase their quantity demanded in the short run but reduce their quantity demanded in the long
run.
7. A 10 percent increase in gasoline prices reduces gasoline consumption by about
a. 6 percent after one year and 2.5 percent after five years.
b. 2.5 percent after one year and 6 percent after five years.
c. 10 percent after one year and 20 percent after five years.
d. 0 percent after one year and 1 percent after five years.
8. Which of the following statements about the consumers’ responses to rising gasoline prices is
correct?
a. About 10 percent of the long–run reduction in quantity demanded arises because people drive
less and about 90 percent arises because they switch to more fuel-efficient cars.
b. About 90 percent of the long-run reduction in quantity demanded arises because people drive
less and about 10 percent arises because they switch to more fuel-efficient cars.
c. About half of the long-run reduction in quantity demanded arises because people drive less and
about half arises because they switch to more fuel-efficient cars.
d. Because gasoline is a necessity, consumers do not decrease their quantity demanded in either
the short run or the long run.
Multiple Choice – Section 01: The Elasticity of Demand
1. The price elasticity of demand measures how much
a. quantity demanded responds to a change in price.
b. quantity demanded responds to a change in income.
c. price responds to a change in demand.
d. demand responds to a change in supply.
2. The price elasticity of demand measures
a. buyers’ responsiveness to a change in the price of a good.
b. the extent to which demand increases as additional buyers enter the market.
c. how much more of a good consumers will demand when incomes rise.
d. the movement along a supply curve when there is a change in demand.
3. The price elasticity of demand for a good measures the willingness of
a. consumers to buy less of the good as price rises.
b. consumers to avoid monopolistic markets in favor of competitive markets.
c. firms to produce more of a good as price rises.
d. firms to respond to the tastes of consumers.
4. Which of the following statements about the price elasticity of demand is correct?
a. The price elasticity of demand for a good measures the willingness of buyers of the good to buy
less of the good as its price increases.
b. Price elasticity of demand reflects the many economic, psychological, and social forces that
shape consumer tastes.
c. Other things equal, if good x has close substitutes and good y does not have close substitutes,
then the demand for good x will be more elastic than the demand for good y.
d. All of the above are correct.
5. Demand is said to be price elastic if
a. the price of the good responds substantially to changes in demand.
b. demand shifts substantially when income or the expected future price of the good changes.
c. buyers do not respond much to changes in the price of the good.
d. buyers respond substantially to changes in the price of the good.
6. Demand is said to be inelastic if
a. buyers respond substantially to changes in the price of the good.
b. demand shifts only slightly when the price of the good changes.
c. the quantity demanded changes only slightly when the price of the good changes.
d. the price of the good responds only slightly to changes in demand.
7. If demand is price inelastic, then
a. buyers do not respond much to a change in price.
b. buyers respond substantially to a change in price, but the response is very slow.
c. buyers do not alter their quantities demanded much in response to advertising, fads, or general
changes in tastes.
d. the demand curve is very flat.
8. If the quantity demanded of a certain good responds only slightly to a change in the price of the
good, then the
a. demand for the good is said to be elastic.
b. demand for the good is said to be inelastic.
c. law of demand does not apply to the good.
d. demand curve for the good shifts only slightly in response to a change in price.
9. When quantity demanded responds strongly to changes in price, demand is said to be
a. fluid.
b. elastic.
c. dynamic.
d. highly variable.
10. Demand is said to be inelastic if the
a. quantity demanded changes proportionately more than price.
b. price changes proportionately more than income.
c. quantity demanded changes proportionately less than price.
d. quantity demanded changes proportionately the same as price.
11. Demand is elastic if the price elasticity of demand is
a. less than 1.
b. equal to 1.
c. equal to 0.
d. greater than 1.
12. Demand is inelastic if the price elasticity of demand is
a. less than 1.
b. equal to 1.
c. greater than 1.
d. equal to 0.
13. Which of the following is not a determinant of the price elasticity of demand for a good?
a. the time horizon
b. the steepness or flatness of the supply curve for the good
c. the definition of the market for the good
d. the availability of substitutes for the good
14. The smaller the price elasticity of demand, the
a. more likely the product is a luxury.
b. smaller the responsiveness of quantity demanded to a change in price.
c. more substitutes the product has.
d. greater the responsiveness of quantity demanded to a change in price.
15. Whether a good is a luxury or necessity depends on the
a. price of the good.
b. preferences of the buyer.
c. intrinsic properties of the good.
d. scarcity of the good.
16. Goods with many close substitutes tend to have
a. more elastic demands.
b. less elastic demands.
c. price elasticities of demand that are unit elastic.
d. income elasticities of demand that are negative.
17. For a good that is a luxury, demand
a. tends to be inelastic.
b. tends to be elastic.
c. has unit elasticity.
d. cannot be represented by a demand curve in the usual way.
18. For a good that is a necessity, demand
a. tends to be inelastic.
b. tends to be elastic.
c. has unit elasticity.
d. cannot be represented by a demand curve in the usual way.
19. A good will have a more elastic demand, the
a. greater the availability of close substitutes.
b. more broad the definition of the market.
c. shorter the period of time.
d. more it is regarded as a necessity.
20. The value of the price elasticity of demand for a good will be relatively large when
a. there are no good substitutes available for the good.
b. the time period in question is relatively short.
c. the good is a luxury rather than a necessity.
d. All of the above are correct.
21. For a good that is a necessity,
a. quantity demanded tends to respond substantially to a change in price.
b. demand tends to be inelastic.
c. the law of demand does not apply.
d. All of the above are correct.
22. A good will have a more inelastic demand, the
a. greater the availability of close substitutes.
b. broader the definition of the market.
c. longer the period of time.
d. more it is regarded as a luxury.
23. Other things equal, the demand for a good tends to be more inelastic, the
a. fewer the available substitutes.
b. longer the time period considered.
c. more the good is considered a luxury good.
d. more narrowly defined is the market for the good.
24. If the price of natural gas rises, when is the price elasticity of demand likely to be the highest?
a. immediately after the price increase
b. one month after the price increase
c. three months after the price increase
d. one year after the price increase
25. If the price of gasoline rises, when is the price elasticity of demand likely to be the highest?
a. immediately after the price increases
b. one month after the price increase
c. three months after the price increase
d. one year after the price increase
26. If the price of milk rises, when is the price elasticity of demand likely to be the lowest?
a. immediately after the price increase
b. one month after the price increase
c. three months after the price increase
d. one year after the price increase
27. Holding all other forces constant, when the price of gasoline rises, the number of gallons of
gasoline demanded would fall substantially over a ten-year period because
a. buyers tend to be much less sensitive to a change in price when given more time to react.
b. buyers tend to be much more sensitive to a change in price when given more time to react.
c. buyers will have substantially more real income over a ten-year period.
d. the quantity supplied of gasoline increases very little in response to an increase in the price of
gasoline.
28.
The price elasticity of demand for bread
a. is computed as the percentage change in quantity demanded of bread divided by the percentage
change in price of bread.
b. depends, in part, on the availability of close substitutes for bread.
c. reflects the many economic, social, and psychological forces that influence consumers’ tastes
for bread.
d. All of the above are correct.
29. The price elasticity of demand for mobile phones
a. will be higher if there is an improvement in the production technology.
b. will be lower if consumers perceive mobile phones to be a necessity.
c. is computed as the percentage change in the price of mobile phones divided by the percentage
change in quantity of mobile phones.
d. All of the above are correct.
30. The price elasticity of demand measures the
a. magnitude of the response in quantity demanded to a change in price.
b. direction of the shift in the demand curve in response to a market event.
c. size of the shortage created by the increase in demand.
d. responsiveness of quantity demanded to a change in income.
31. If the price of walnuts rises, many people would switch from consuming walnuts to consuming
pecans. But if the price of salt rises, people would have difficulty purchasing something to use in
its place. These examples illustrate the importance of
a. the availability of close substitutes in determining the price elasticity of demand.
b. a necessity versus a luxury in determining the price elasticity of demand.
c. the definition of a market in determining the price elasticity of demand.
d. the time horizon in determining the price elasticity of demand.
32. Suppose that Jane enjoys Diet Coke so much that she consumes one can every day. Although she
enjoys gourmet cheese, she consumes it sporadically. If the price of Diet Coke rises, Jane
decreases her consumption by only a very small amount. But if the price of gourmet cheese rises,
Jane decreases her consumption by a lot. These examples illustrate the importance of
a. the availability of close substitutes in determining the price elasticity of demand.
b. a necessity versus a luxury in determining the price elasticity of demand.
c. the definition of a market in determining the price elasticity of demand.
d. the time horizon in determining the price elasticity of demand.