9) Suppose you have surveyed a few industries and obtained information about the income
elasticity of demand for their products. If you expect that the economy is headed for a long
recession, you would advise people to look for jobs in an industry with
A) a high positive income elasticity coefficient such as 5.
B) a low positive income elasticity coefficient such as 0.8.
C) a “high” negative income elasticity coefficient such as -4.
D) a “low” negative income elasticity coefficient such as -0.2.
10) Last year, Joan bought 50 pounds of hamburger when her household income was $40,000.
This year, her household income was only $30,000 and Joan bought 60 pounds of hamburger.
Holding everything else constant, Joan’s income elasticity of demand for hamburger is
A) positive, so Joan considers hamburger to be an inferior good.
B) negative, so Joan considers hamburger to be an inferior good.
C) positive, so Joan considers hamburger to be a normal good and a necessity.
D) negative, so Joan considers hamburger to be a normal good.
11) Which of the following items is likely to have the highest income elasticity of demand?
A) a luxury cruise to several European countries
B) water
C) breakfast cereal
D) a hamburger
12) Suppose you are considering buying stock in the stock market, and your objective is to
maximize your net worth. Furthermore, your study of the market reveals that the economy will
be slowing down over the next several months. Under these conditions, it would be best to
purchase stock in companies that produce
A) normal goods.
B) luxury goods.
C) inferior goods.
D) price elastic goods.
13) The cross-price elasticity of demand measures the
A) absolute change in the quantity demanded of one good divided by the absolute change in the
price of another good.
B) percentage change in the quantity demanded of one good divided by the percentage change in
the price of another good.
C) percentage change in the price of one good divided by the percentage change in the quantity
demanded of another good.
D) percentage change in the quantity demanded of one good in one location divided by the price
of the same good in another location.
14) The cross-price elasticity of demand between Coca-Cola and Pepsi-Cola is calculated by
dividing
A) the percentage change in quantity demanded of Coca-Cola by the percentage change in the
quantity demanded of Pepsi-Cola.
B) the percentage change in the price of Pepsi-Cola by the percentage change in quantity
demanded of Coca-Cola.
C) the percentage change in the price of Coca-Cola by the percentage change in the price of
Pepsi-Cola.
D) the percentage change in the quantity demanded of Coca-Cola by the percentage change in
the price of Pepsi-Cola.
15) In order to prove that Motrin and Ibuprofen are substitutes, one should measure the
________ and get a ________.
A) cross-price elasticity; positive number
B) cross-price elasticity; negative number
C) price elasticity of demand; number greater than 1 (in absolute value)
D) price elasticity of demand; number less than 1 (in absolute value)
16) The cross-price elasticity between Gillette razors and a related good is -3.4. What happens to
the demand for the related good if the price of Gillette razors falls by 10 percent?
A) The quantity demanded of the related good rises by 3.4 percent.
B) The quantity demanded of the related good falls by 34 percent.
C) The quantity demanded of the related good rises by 34 percent.
D) The quantity demanded of the related good falls by 3.4 percent.
17) If the cross-price elasticity of demand between beer and wine is 0.31, then beer and wine are
A) complements.
B) price inelastic goods.
C) substitutes.
D) necessities.
18) Consider the following pairs of items:
a. shampoo and conditioner
b. iPhones and earbuds
c. a laptop computer and a desktop computer
d. beef and pork
e. air-travel and weed killer
Which of the pairs listed will have a positive cross-price elasticity?
A) a and b only
B) c and d only
C) e only
D) a, b, and c only
19) Which of the following pairs of goods is likely to have a negative cross-price elasticity of
demand?
A) pancakes and syrup
B) hot dogs and hamburgers
C) orange juice and grapefruit juice
D) peanuts and cat food
20) When the price of tortilla chips rose by 10 percent, the quantity of tortilla chips sold fell 4
percent, and the sale of dips (like salsa and bean dip) fell 8 percent. This set of facts indicates
that
A) the cross-price elasticity between tortilla chips and dips is 0.8, so the two are substitutes.
B) the cross-price elasticity between tortilla chips and dips is -0.4, so the two are complements.
C) the cross-price elasticity between tortilla chips and dips is -0.8, so the two are complements.
D) the cross-price elasticity between tortilla chips and dips is 0.4, so the two are substitutes.
21) Suppose the cross-price elasticity of demand between DVDs at Amazon.com and DVDs at
Buy.com is 3.5. Based on this information, predict what happens when Amazon.com lowers its
DVD prices by 10 percent.
A) The quantity of DVDs demanded on Amazon.com will increase by 35 percent.
B) The quantity of DVDs demanded on Buy.com will increase by 35 percent.
C) The quantity of DVDs demanded on Amazon.com will decrease by 35 percent.
D) The quantity of DVDs demanded on Buy.com will decrease by 35 percent.
22) For people who live near a bus route, a subway station, or a commuter rail line, public
transportation provides a substitute to driving their own cars. So, for these people, the ________
between gasoline and public transportation is positive.
A) income elasticity of demand
B) price elasticity of demand
C) cross-price elasticity of demand
D) price elasticity of supply
23) During an economic expansion as consumer incomes rise, holding everything else constant,
A) the demand for most goods, except luxuries, will rise.
B) the demand for luxuries will rise while the demand for inferior goods will fall.
C) the demand for luxuries and inferior goods will rise.
D) the prices of luxuries will fall while the prices of inferior goods will rise.
24) Studies show that the income elasticity of demand for wine is 5.03 and the income elasticity
of demand for spirits is 1.21. This indicates that
A) wine and spirits are luxury goods.
B) wine is a luxury good and spirits are inferior goods.
C) wine and spirits are highly price elastic.
D) wine is a luxury good and spirits are necessities.
25) Barbara, the consummate hostess, proudly announced as she served dessert, “A port is often
the perfect end to a meal, sipped with a piece of my scrumptious chocolate cake.” Evidently,
Barbara views
A) port and chocolate cake as luxury items.
B) port and chocolate cake as necessities.
C) port and chocolate cake as complementary goods.
D) port and chocolate cake as substitutes to other desserts.
26) Economists estimated that the cross-price elasticity of demand for beer and wine is 0.31 and
the income elasticity of wine is 5.03. This means that
A) beer and wine are substitutes and wine is an inferior good.
B) beer and wine are complements and wine is a luxury good.
C) beer and wine are substitutes and wine is a luxury good.
D) beer and wine are complements and wine is an inferior good.
27) Economists have estimated that the cross-price elasticity of demand between beer and spirits
is 0.15, the income elasticity for spirits is 1.21 and the income elasticity for wine is 5.03. These
elasticities mean that
A) beer and spirits are complements, spirits and wine are luxuries.
B) beer and spirits are normal goods, spirits and wine are luxuries.
C) beer and spirits are complements, spirits are substitutes.
D) beer and spirits are substitutes, spirits and wine are luxuries.
28) The absolute value of the price elasticity of demand for telescopes is 1.5. Therefore,
telescopes can be classified as a luxury.
29) If the income elasticity for canned food is 0.8, then canned food is an inferior good.
30) If the cross-price elasticity of demand for goods A and B is zero, this means the two goods
are unrelated.
31) A recent study indicated that “Stricter college alcohol policies such as raising the price of
alcohol, or banning alcohol on campus, decreases the number of students who use marijuana.”
This indicates that the cross-price elasticity between alcohol and marijuana is positive.
32) Explain the concepts of cross-price elasticity of demand and income elasticity of demand.
What do positive and negative values indicate for each of these demand elasticities
Table 6-4
Quantities
Purchased
Quantities
Purchased
Income
Prices
Good X
Good Y
$30,000
Px = $6, Py = $3
2
20
50,000
Px = $6, Py = $4
5
10
33) Refer to Table 6-4.
a. Using the information in the table, calculate the income elasticity of demand for good X and
characterize the good. Use the midpoint formula.
b. Can you calculate the income elasticity of demand for good Y? If you can, show your
calculation and characterize the good. If you cannot, explain why.
34) When the price of Starbucks coffee increased by 8 percent, the quantity demanded of Peets
coffee increased by 10 percent. Calculate the cross price elasticity of demand between Starbucks
coffee and Peets coffee. What is the relationship between the two products?
6.5 Using Elasticity to Analyze the Disappearing Family Farm
1) From 1950 to 2011 the number of people who lived on farms fell from 23 million to fewer
than 3 million? Which of the following factors have contributed to this trend?
A) increases in the cost of farming and a desire for young adults to move to urban areas
B) rapid growth in farm production and low income and price elasticities for food products
C) slow growth in agricultural productivity and low income elasticities for food products
D) government policies that have increased the cost of living and working on farms
2) Between 1950 and 2011 the productivity of wheat farmers in the United States more than
doubled. This means that
A) the amount of land and other resources devoted to wheat production more than doubled.
B) the incomes of wheat farmers more than doubled.
C) the total amount of wheat produced more than doubled.
D) the amount of wheat produced by the average farmer more than doubled.
3) The paradox of American farming is
A) the demand for imported luxury food products has risen as the demand for domestic food
products has fallen.
B) the demand for food has risen as the number of people who pursue farming as a career has
fallen.
C) food has become cheaper and more abundant as the number of farms has decreased.
D) the amount of food produced has increased as the average farm size has fallen.
4) Since 1950 there has been a substantial increase in wheat production. The increase in
production has led to a decrease in the price of wheat because of which of the following factors?
A) The absolute value of the price elasticity of demand for wheat is less than 1 and the income
elasticity of demand for wheat is greater than 1.
B) The absolute value of the price elasticity of demand for wheat is greater than 1 and wheat is a
close substitute for other food products.
C) The absolute value of the price elasticity of demand for wheat is less than 1 and the income
elasticity of demand for wheat is low.
D) The income elasticity of demand for wheat is high and wheat is an inferior good.