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2) A subsidy paid to sugar producers would tend to
A) reduce the demand for sugar.
B) increase the market price of sugar.
C) increase the supply of sugar.
D) produce a surplus of sugar.
3) The minimum wage is an example of
A) a price ceiling
B) a producer subsidy
C) a support price
D) an excise tax
4) Which of the following is not a true statement about an excise tax?
A) It tends to shift the supply curve of the taxed product to the left.
B) It generally raises the price of the taxed product by the amount of the tax.
C) It is levied on the sale of specific products.
D) It reduces the quantity of the taxed product demanded by consumers.
5) The need for a secondary rationing device indicates that
A) government has imposed some form of price ceiling.
B) government has imposed some form of price support.
C) the market price is at the equilibrium level.
D) None of the above are true.
6) If a 10 percent increase in the price of Compaq computers leads to a 20 percent reduction in
the quantity demanded, then the coefficient of demand elasticity would be ________.
A) 2.0
B) 0.5
C) 1.0
D) None of the above
7) If the coefficient of demand elasticity is 0.4, demand would be described as
A) elastic.
B) inelastic.
C) unitary.
D) perfectly elastic.
8) A perfectly inelastic demand curve has a coefficient of demand elasticity of
A) zero, and is a horizontal straight line.
B) one, and is a horizontal straight line.
C) one, and is a vertical straight line.
D) zero, and is a vertical straight line.
9) Suppose that a decrease in the price of CHEAPO cigarettes leads to an increase in the quantity
of CHEAPO cigarettes demanded. Which of the following must be true?
A) The demand for CHEAPO cigarettes must be elastic.
B) The demand for CHEAPO cigarettes must be inelastic.
C) The demand for CHEAPO cigarettes must be of unitary elasticity.
D) None of the above
10) If the demand curve is a vertical straight line, the coefficient of elasticity would be
A) zero.
B) 1.
C) infinity.
D) different between any two points on the curve.
11) A linear, downward sloping demand curve is
A) elastic at the top, inelastic in the middle, and unitary near the bottom.
B) inelastic at the top, elastic in the middle, and unitary near the bottom.
C) elastic at the top, unitary in the middle, and inelastic near the bottom.
D) inelastic at the top, unitary in the middle, and elastic near the bottom.
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12) Total revenue is
A) the amount of money a business takes in from selling its product minus the cost of producing
the product.
B) another name for profit.
C) equal to the price of the product times the quantity sold.
D) equal to the average cost of producing the product times the number of units produced.
13) If the demand for subway tickets is inelastic, then
A) an increase in the price of subway tickets will lead to a reduction in the quantity of subway
tickets demanded, and the subway's total revenue will fall.
B) a decrease in the price of subway tickets will result in no change in the number of subway
tickets demanded, but the subway's total revenue will fall.
C) an increase in the price of subway tickets will lead to a reduction in the quantity of subway
tickets demanded, but the subway's total revenue will rise.
D) a decrease in the price of subway tickets will lead to an increase in the quantity of subway
tickets demanded, and the subway's total revenue will rise.
14) Which of the following best describes a product with elastic demand?
A) When the price of this product is reduced, consumers tend to buy more of it.
B) A relatively large price reduction is necessary to convince consumers to buy a little more of
this product.
C) Consumers buy almost the same quantity of this product at a low price as they do at a high
price.
D) A relatively small price reduction will cause consumers to buy a lot more of this product.
15) The demand for a product tends to be elastic if
A) the product has few good substitutes.
B) consumers generally spend a small fraction of their income on the product.
C) the product has a large number of good substitutes.
D) the product is regarded as a necessity.
16) Which of the following is a true statement?
A) A perfectly inelastic demand curve is a horizontal straight line.
B) If demand is of unitary elasticity, a price reduction will lead to an increase in the seller's total
revenue.
C) The more important a product in a consumer's budget, the more elastic the demand for that
product.
D) If demand is inelastic, a price reduction will not cause consumers to buy more of the product.
17) If the price elasticity of demand for water is 5, how much must the price of water increase to
convince consumers to use 20 percent less water?
A) 100 percent
B) 40 percent
C) 20 percent
D) 4 percent
18) MOZARK airlines has been losing money. The company's chief executive officer believes
that the answer to the company's problems is to reduce airfares in order to generate additional
revenue. An airline consultant disagrees; she believes that the company needs to increase fares
rather than decrease them. Apparently,
A) the chief executive believes the demand curve for Mozark tickets is downward sloping, but
the consultant believes it is upward sloping.
B) the chief executive understands the law of demand, but the consultant does not.
C) the chief executive believes that demand for MOZARK tickets is elastic, while the consultant
believes it is inelastic.
D) the chief executive believes that demand for MOZARK tickets is inelastic, while the
consultant believes it is elastic.
19) Consider the impact of an excise tax imposed on French fries. The more inelastic the demand
for French fries,
A) the greater the portion of the excise tax which will be paid by consumers in the form of a
higher price.
B) the greater the portion of the excise tax which will be borne by suppliers in the form of
reduced profit.
C) the smaller the portion of the excise tax that will be paid by consumers in the form of a higher
price.
D) the greater the reduction in the quantity demanded of French fries caused by the tax.
20) If the demand for cigarettes were perfectly inelastic, an increase in the excise tax on
cigarettes would
A) have no impact on the price of cigarettes.
B) have no impact on the supply of cigarettes.
C) raise the price of cigarettes by the full amount of the tax.
D) increase the demand for cigarettes.
21) Which of the following is false?
A) Price supports tend to produce surpluses, while price ceilings tend to produce shortages.
B) Price ceilings necessitate the use of secondary rationing devices.
C) Producer subsidies tend to reduce the market price of the product being subsidized.
D) Excise taxes are represented by shifting the supply curve to the right.
22) Which of the following would be most likely to raise the aggregate income of grain farmers
(the total income of grain farmers as a group)?
A) a good growing season coupled with inelastic demand for grain
B) a poor growing season coupled with elastic demand for grain
C) a good growing season coupled with elastic demand for grain
D) None of the above would be likely to raise aggregate income.
23) If an increase in price causes total revenue to fall, what can be concluded?
A) Demand is elastic.
B) Demand is inelastic.
C) Unitary elasticity prevails.
D) The demand curve is perfectly inelastic.
1) Price supports tend to produce shortages.
2) Price supports tend to produce shortages while price ceilings tend to produce surpluses.
3) Price ceilings result in the use of secondary rationing devices.
4) Minimum wages are a form of price support.
5) Producer subsidies tend to shift the market supply curve to the right.
6) Producer subsidies tend to reduce the market price of the product being subsidized.
7) Excise taxes increase market supply.
8) The more elastic the demand for a product, the more of an excise tax that will be passed on to
consumers as a higher price.
9) The more elastic the supply of a product, the more of an excise tax that will be passed on to
consumers as a higher price.
10) If demand is elastic, consumers will buy the same quantity regardless of price.
11) To compute the coefficient of demand elasticity, we divide the percentage change in price
demanded by the percentage change in quantity demanded.
12) If Big Bobs drops the price of hamburgers and consumers respond by buying more, we can
say that demand must be elastic.
13) If a 10 percent price reduction causes the quantity demanded to expand by 25 percent,
demand must be elastic.
14) If a 20 percent price hike leads to a 30 percent reduction in the quantity demanded, the
coefficient of demand elasticity would be 1.5.
15) The sign on the coefficient of demand elasticity is always negative because price and
quantity demanded are inversely related.
Page 20
16) If demand is perfectly inelastic, the coefficient will be equal to zero.
17) A perfectly inelastic demand curve is a horizontal straight line.
18) A linear, downward sloping demand curve is perfectly elastic at its midpoint.
19) A linear, downward sloping demand curve is inelastic at the upper end, unitary at the
midpoint, and elastic at the lower end.
20) The elasticity of a demand curve is equal to its slope.
21) If demand is elastic, a price reduction will lead to an increase in total revenue.
22) If total revenue increases when a firm raises the price of its product, demand for the product
must be elastic.
23) If demand is of unitary elasticity, a price reduction will leave total revenue unchanged.
24) When demand is perfectly inelastic, an increase in price will increase total revenue and leave
the quantity demanded unchanged.
25) If a product has a large number of good substitutes, the demand for that product is probably
inelastic.
26) The expenditures for a particular product account for a large fraction of the typical family's
income; demand for that product will tend to be elastic.
27) The demand for breakfast cereal is probably more elastic than the demand for Oat Crunchies,
a particular breakfast cereal.
28) If a product has an elasticity coefficient of 0.5, a 10 percent reduction in price will lead to a
50 percent increase in the quantity demanded.
29) If the coefficient for demand elasticity for Gizmos is 2, a 20 percent price hike would lead to
a 40 percent increase in the quantity demanded.
30) If product A has a coefficient of price elasticity of 0.75, a reduction in price would increase
the total revenue received from the sale of A.
31) The Fleet Foot Shoe Company knows that the price elasticity of demand for its tennis shoes
is 1.5. To increase total revenue the firm should increase the price of its tennis shoes.
32) The sign on the elasticity of supply coefficient is positive.
33) If supply were perfectly inelastic, the supply curve would be a vertical straight line.
34) Supply tends to be more elastic in the short run than in the long run.
35) If a 5 percent price increase leads to a 20 percent increase in the quantity supplied, the
coefficient of supply elasticity would be 0.25.
36) In the short run, output cannot be changed.
37) The short run is defined as a period of time during which all of a business's inputs are fixed-
incapable of being changed.
38) The long run is a sufficient period of time to change all of a business's inputs.
39) New production facilities can be built or expanded in the long run, but not in the short run.
40) If demand was inelastic (but not perfectly inelastic), a price increase would reduce the
quantity sold, but raise the firm's total revenue.
41) College administrators that raise tuition in order to increase total revenue must believe that
the demand for their college's education is elastic.
42) A perfectly elastic demand curve graphs as a horizontal straight line.
43) If the supply elasticity for new residential housing is 2, then a 10 percent increase in the price
of new housing would lead to a 20 percent increase in the quantity of new homes.
44) If the price elasticity of demand for residential electricity is 0.4, the price of electricity would
have to be increased by 25 percent in order to reduce usage by 10 percent.
45) If the price elasticity of demand for cigarettes is 0.5, a tax which increases price by 50
percent will reduce consumption by 25 percent.
46) The hiring of additional production workers is a long-run adjustment.
47) The demand for Wilson tennis balls is probably more elastic than the demand for tennis balls
in general.
48) Because there are fewer substitutes for milk than there are for Farmer's Milk (a particular
brand), we would expect the demand for milk to be more elastic than the demand for Farmer's
Milk.
49) Supply tends to be more elastic in the long run than the short run because firms have more
options for expanding production in the long run.
50) The more elastic the supply of a product, the more of an excise tax that will be passed on to
consumers as a higher price.
51) The more elastic the supply and less elastic the demand, the more of an excise tax that will
be passed on to consumers as a higher price.
1) Rent ceilings lead to shortages of apartments because they interfere with the rationing and
motivating functions of prices. Explain.
2) Price ceilings are commonly instituted in order to protect consumers against high prices. But
these ceilings may have some undesirable and unintended consequences. Discuss.
3) Suppose policymakers want to encourage workers to acquire additional training. How could
producer subsidies (subsidies to educational institutions) accomplish this objective? How can
subsidizing producers encourage workers (the consumers of education) to purchase more of the
product?
4) What are secondary rationing devices and when must they be used?
5) Explain why price supports lead to surpluses. Supplement your answer with the appropriate
graph and fully explain your graph.
6) In recent years, policymakers have been raising the excise tax on cigarettes, at least in part to
deter smoking by young people. Some critics argue that these taxes unfairly burden older
smokers, who tend to have more inelastic demand than younger smokers. How would you
explain the fact that older smokers have more inelastic demand than younger smokers? How can
this fact be used to argue that higher taxes are unfair to this group?
7) In some cities, the demand for bus service is inelastic, in others it is elastic. Provide a
plausible explanation for this difference.
8) Carefully explain why an increase in price will tend to increase total revenue if demand is
inelastic.
9) Once upon a time in the far off land of Kansas there lived three bears: a Papa bear, a Mama
bear, and a Baby bear. And they were all wheat farmers. (Actually, they all helped to run the
Bear Family Wheat Farm, Inc.) One year there was a terrible drought, which destroyed about 20
percent of the country's wheat crop. Fortunately, the impact of the drought was evenly
distributed; each farm lost about 20 percent of its crop, but no farmer was wiped out. Papa bear
was devastated; "Our farming income (the total amount received by selling wheat) will drop
substantially," he cried. But Mama bear was elated; "The drought will cause our income to rise;
it may even be greater than last year," she cried. Baby bear wasn't certain why her parents were
in disagreement so she decided to consult an economist.
Help Baby bear to make sense of this disagreement.
(a) What can you say with certainty about the impact of the drought?
(b) On what assumption is Papa bear basing his conclusion?
(c) What about Mama bear; what assumption is she making?
(d) Who do you think is correct and why?
10) Some individuals are convinced that an increase in the minimum wage will significantly
reduce employment. Others foresee such a hike a leading to a very modest reduction in
employment. Explain this disagreement in terms of the price elasticity of demand for labor, and
supplement your explanation with the appropriate graph.
