257) In the summer 2012 the lobster catch in Maine was especially large, but instead of
celebrating the fisherman were suffering from a lower total revenue. (Source: New York Times,
July 28, 2012) We learn from the article that despite the larger quantity of lobster caught, the
total revenue of the fisherman decreased. This fact means that the demand for lobster is
A) unit elastic.
B) elastic.
C) inelastic.
D) perfectly elastic.
2 More Elasticities of Demand
1) The cross elasticity of demand measures the responsiveness of the quantity demanded of a
particular good to changes in the prices of
A) its substitutes and its complements.
B) its substitutes but not its complements.
C) its complements but not its substitutes.
D) neither its substitutes nor its complements.
2) The cross elasticity of demand is calculated as the percentage change in the
A) quantity demanded of one good divided by the percentage change in the price of another good
B) price of one good divided by the percentage change in the quantity demanded of another
good.
C) quantity demanded of one good divided by the percentage change in the quantity demanded
of another good.
D) price of one good divided by the percentage change in the price of another good.
3) Toothpaste and toothbrushes are complements, so the ________ elasticity of demand is
________.
A) cross; positive
B) income; negative
C) cross; negative
D) income; positive
4) Blue pens and black pens are close substitutes. The cross elasticity of demand for black pens
with respect to the price of blue pens is ________.
A) positive
B) negative
C) equal to 1
D) zero
5) If the cross elasticity of demand between goods X and Y is positive and between goods X and
Z is negative, then X and Y are ________ and X and Z are ________.
A) price inelastic; complements
B) complements; substitutes
C) substitutes; complements
D) price inelastic; income elastic
6) If goods are complements, then their
A) cross elasticities are positive.
B) income elasticities are positive.
C) income elasticities are negative.
D) cross elasticities are negative.
7) If a rise in the price of good 1 decreases the quantity of good 2 demanded
A) the cross elasticity of demand is negative.
B) the cross elasticity of demand is positive.
C) good 1 is an inferior good.
D) good 2 is an inferior good.
8) The cross elasticity of demand between apples and oranges is defined as the
A) percentage change in the quantity of apples demanded divided by the percentage change in
the price of oranges.
B) price elasticity of demand for apples divided by the price elasticity of demand for oranges.
C) percentage change in the quantity of apples demanded divided by the percentage change in
the quantity of oranges demanded.
D) change in the quantity of apples demanded divided by the change in the quantity of oranges
demanded.
9) If peanut butter and jelly are complements, then their cross elasticity of demand must be
A) infinitely high.
B) a positive number that might be greater than 1.
C) a number between zero and one.
D) a negative number.
10) The cross elasticity of demand for pizza with respect to the price of a soda is
A) positive because the goods are complements.
B) negative because the goods are complements.
C) positive because the goods are substitutes.
D) negative because the goods are substitutes.
11) In the above figure, if the price of good A falls from P0 to P1 and the demand for good B
increases from D0 to D1, then goods A and B
A) are substitute goods.
B) are inferior goods.
C) will have a negative cross elasticity of demand.
D) are both price elastic but not perfectly price elastic.
12) In the above figure, if the two goods A and B, are complements, which of the following is
TRUE?
A) The shift from D0 to D1 for good B leads to a shift from S0 to S1 for good A.
B) The shift from S0 to S1 for good A leads to the shift from D0 to D1 for good B.
C) The law of demand is violated in both markets.
D) The cross elasticity of demand between them is positive.
13) A negative value for the cross elasticity of demand between two goods indicates that
A) the goods are complements.
B) the goods are substitutes.
C) one of the goods is normal and the other is inferior.
D) each good is price inelastic.
14) Donuts and coffee are complements. When the price of a donut increases, the demand for
coffee ________ and the cross elasticity of demand for coffee with respect to the price of a donut
is ________.
A) decreases; negative
B) increases; negative
C) increases; positive
D) decreases; positive
15) If tea and coffee are substitutes, the cross elasticity of coffee with respect to the price of tea
will be ________ and an increase in the price of tea will ________ the demand for coffee.
A) positive; increase
B) negative; decrease
C) negative; increase
D) positive; decrease
16) If a 5 percent increase in the price of good A leads to a 4 percent decrease in the demand for
good B, then ________.
A) the goods are substitutes
B) only one good is a normal good
C) the goods are complements
D) both goods are normal goods
17) Joe likes peanut butter and jelly sandwiches for lunch. We can conclude that for Joe the cross
elasticity of demand for peanut butter with respect to jelly is
A) positive because jelly and peanut butter are substitutes.
B) positive because jelly and peanut butter are complements.
C) negative because jelly and peanut butter are substitutes.
D) negative because jelly and peanut butter are complements.
18) Many younger people eat peanut butter AND jelly, whereas many older people eat peanut
butter OR jelly. This suggests that the cross elasticity of demand between peanut butter and jelly
is
A) negative for youngsters and positive for oldsters.
B) positive for youngsters and negative for oldsters.
C) negative for youngsters and zero for oldsters.
D) positive for youngsters and zero for oldsters.
19) Suppose Target decided to lower the price on all shirts as part of its Back to School
promotion. The cross elasticity of demand between pants and shirts is negative. Lowering the
price on shirts will ________ the demand for pants because shirts and pants are ________.
A) increase; substitutes
B) decrease; substitutes
C) increase; complements
D) decrease; complements
20) If the cross elasticity of demand for good x with respect to the price of good y is positive,
then goods x and y are
A) normal goods.
B) inferior goods.
C) complements.
D) substitutes.
21) You are the new vice president in charge of advertising at Taco Bell. In your upcoming
advertising campaign, you plan to degrade the fast food competitor whose product is the closest
substitute for Taco Bell’s tacos. That would be the fast food chain whose cross elasticity of
demand with your tacos is equal to
A) negative 2.11.
B) negative 1.75.
C) positive 1.55.
D) positive 1.00.
22) When the price of milk rose 50 percent, the quantity of milk sold fell 25 percent and the sale
of breakfast cereals also fell 25 percent. This set of facts indicates that the
A) demand for milk is price elastic.
B) demand for breakfast cereals is price elastic.
C) cross elasticity between milk and cereal is negative so the two are complements.
D) cross elasticity between milk and cereal is positive so the two are complements.
23) If Pepsi decided to raise its price, you would expect the price of Coca Cola
A) to fall.
B) to raise.
C) Their prices should have no relationship because Pepsi and Coca Cola are not related.
D) None of the above answers are correct.
24) If the cross elasticity of demand between goods A and B is positive
A) the demands for A and B are both price elastic.
B) the demands for A and B are both price inelastic.
C) A and B are complements.
D) A and B are substitutes.
25) If the cross elasticity of demand between coffee and tea is positive, an increase in the price of
tea will shift the demand curve for
A) tea rightward.
B) tea leftward.
C) coffee rightward.
D) coffee leftward.
26) The cross-elasticity of demand between Homer’s Holesome Doughnuts and Krusty’s Krispy
Crullers is 5.0, which indicates that Homer’s doughnuts and Krusty’s crullers are
A) complements and the relationship between the two goods is strong (that is, the quantity
demanded of doughnuts is very responsive to changes in the price of crullers).
B) complements and the relationship between the two goods is weak (that is, the quantity
demanded of doughnuts is not very responsive to changes in the price of crullers).
C) substitutes and the relationship between the two goods is strong (that is, the quantity
demanded of doughnuts is very responsive to changes in the price of crullers).
D) substitutes and the relationship between the two goods is weak (that is, the quantity demanded
of doughnuts is not very responsive to changes in the price of crullers).
27) If the cross elasticity of demand is -5 between french fries and orange drink, then french fries
A) and orange drink are complements.
B) and orange drink are substitutes.
C) are a normal good and orange drink is an inferior good.
D) are an inferior good and orange drink is a normal good.
28) Suppose inter-city bus travel is a substitute for transportation by train. Which of the
following could then be TRUE?
A) The cross elasticity between bus and train travel could equal 0.65.
B) The cross elasticity between bus and train travel could equal 1.0.
C) The cross elasticity between bus and train travel could equal 1.25.
D) All of the above could be true.
29) Suppose that the cross elasticity of demand for Dell computers with respect to Hewlett
Packard computers is 2.1. If Hewlett-Packard lowers its price by 5 percent, other things being
equal, what will be the percentage change in the quantity of Dell computers demanded?
A) 2.4 percent
B) -10.5 percent
C) 10.5 percent
D) -42 percent
30) Suppose Clyde always eats ice cream and chocolate syrup together. If the price of syrup
increases by 10 percent, and the cross elasticity of demand is -2, the demand for ice cream
A) increases by 5 percent.
B) increases by 20 percent.
C) decreases by 5 percent.
D) decreases by 20 percent.
31) Dell lowers the price of their PCs by 10 percent. As a result, the quantity of Gateway
computers demanded at the current price decreases by 12 percent. What is the cross elasticity of
demand for Gateway computers with respect to the price of Dell computers?
A) -1.20
B) -0.83
C) 1.20
D) 0.83
32) Microsoft raises the price of its Office software by 10 percent. As a result, the quantity of
personal computers demanded at the current price decreases by 5 percent. What is the cross
elasticity of demand for personal computers with respect to the price of Microsoft Office
software?
A) -2.0
B) -0.5
C) 0.5
D) 2.0
33) If a price hike of 5 percent increases the quantity demanded of another good by 2 percent, the
goods must be ________ and the cross elasticity of demand equals ________.
A) substitutes; 0.40
B) substitutes; 2.5
C) complements; 0.40
D) complements; 2.5
34) Based on the following pieces of information, which fast food product do consumers see as
the closest substitute for Wendy’s Hamburgers?
A) Kentucky Fried Chicken, which has a cross elasticity of 1.70 with Wendy’s
B) McDonald’s hamburgers, which have a cross elasticity of 1.01 with Wendy’s
C) Pizza Hut pizza, which has a cross elasticity of zero with Wendy’s
D) Taco Bell tacos, which have a cross elasticity of -1.25 with Wendy’s
35) If there is an increase in the price of broccoli because of disastrous weather that destroys
about half of this year’s spinach crop, which of the following could be TRUE?
A) The cross elasticity of demand between spinach and broccoli is negative 1.25.
B) The demand curve for broccoli has shifted rightward and the cross elasticity of demand
between spinach and broccoli is positive.
C) The demand curve for spinach has shifted to the leftward and the cross elasticity of demand
between spinach and broccoli is positive.
D) The demand curves for spinach and broccoli have become more cross inelastic.
36) If the cross elasticity of demand between two goods is -0.56, then a fall in the price of one
good leads to a ________ shift in the ________ of the other good.
A) rightward; demand
B) rightward; supply
C) leftward; demand
D) leftward; supply
37) If the cross elasticity of demand between goods A and B is negative
A) the demands for A and B are both price elastic.
B) the demands for A and B are both price inelastic.
C) A and B are complements.
D) A and B are substitutes.
38) The greater the substitutability between Northwest timber and Southeast timber, the
________ is the cross elasticity of demand between timber from the two regions and the
________ is the elasticity of demand for Northwest timber.
A) smaller; smaller
B) smaller; larger
C) larger; smaller
D) larger; larger
39) If goods A and B are complements, then
A) the cross elasticity of demand between A and B is negative.
B) the cross elasticity of demand between A and B is positive.
C) their income elasticities of demand are both greater than 1.
D) their income elasticities of demand are both less than 1.
40) If a rise in the price of good B increases the quantity demanded of good A
A) A and B are substitutes.
B) A and B are complements.
C) A is a substitute for B, but B is a complement to A.
D) B is a substitute for A, but A is a complement to B.
41) If a fall in the price of good A increases the quantity demanded of good B
A) A and B are substitutes.
B) A and B are complements.
C) A is a substitute for B, but B is a complement to A.
D) B is a substitute for A, but A is a complement to B.
42) The cross elasticity of demand between Coca-Cola and Pepsi-Cola is ________ so that Coke
and Pepsi are ________.
A) positive; complements
B) positive; substitutes
C) negative; normal goods
D) negative; substitutes
43) If the price of one good increases by 3 percent and the quantity demanded of another good
increases by 2 percent, the cross elasticity is ________ and the two goods are ________.
A) 2/3, substitutes
B) 2/3, complements
C) 3/2, complements
D) 3/2, substitutes
44) A rise in the price of good A shifts the ________ good B rightward if the cross elasticity of
demand between A and B is ________.
A) demand curve for; negative
B) demand curve for; positive
C) supply curve of; negative
D) supply curve of; positive
45) The income elasticity of demand is a measure of the responsiveness of the
A) quantity of a good demanded to changes in income.
B) consumer’s income to a change in the price of the goods he or she consumes.
C) quantity of a good demanded to changes in its price.
D) quantity of a good demanded to changes in another good’s price.
46) The income elasticity of demand is the percentage change in ________ divided by the
percentage change in ________.
A) the price; income
B) the quantity demanded; income
C) income; the quantity demanded
D) income; the price
47) The income elasticity of demand is defined as the percentage change in
A) the quantity demanded resulting from a given percentage change in price.
B) income divided by the percentage change in quantity demanded.
C) the movement along the demand curve resulting from a change in income.
D) the quantity demanded divided by the percentage change in income.
48) A normal good is defined as a good for which the demand curve
A) shifts leftward as income increases.
B) shifts rightward as income increases.
C) slopes downward to the right.
D) is perfectly price elastic.
49) When Sam’s annual income was only $15,000, he purchased 50 pounds of bananas a year.
When his income rose to $18,000, he purchased 55 pounds a year. Therefore
A) for Sam, bananas are an inferior good.
B) his income elasticity of demand for bananas is negative.
C) his income elasticity and price elasticity of demand for bananas are both greater than one.
D) for Sam, bananas are a normal good.
50) The income elasticity of demand is
A) always positive.
B) always negative.
C) negative for a normal good and positive for an inferior good.
D) positive for a normal good and negative for an inferior good.
51) Bus rides and canned soup are inferior goods, so the ________ elasticity of demand is
________.
A) cross; positive
B) income; positive
C) income; negative
D) cross; negative
52) The income elasticity of demand is ________ for a normal good and ________ for an
inferior good.
A) positive; positive
B) positive; negative
C) negative; positive
D) negative; negative
53) To say that turnips are inferior goods means that the income elasticity
A) is definitely greater than 1.
B) is definitely between 0 and 1.
C) is positive but could be greater than or less than (or equal to) 1.
D) is negative.
54) If the income elasticity of demand for spaghetti is -1.3, then spaghetti
A) is a normal good.
B) is an inferior good.
C) has an elastic demand.
D) is income elastic.
55) If a good is inferior, its income elasticity will be
A) 0.
B) 1.0.
C) negative.
D) positive.
56) Goods whose income elasticities are negative are called
A) normal goods.
B) superior goods.
C) inferior goods.
D) complements.
57) For Product X, the income elasticity of demand is -2.56. Which of the following is therefore
TRUE?
A) Product X is a necessity.
B) Product X is a luxury.
C) Product X is an inferior good.
D) Product X is a normal good.
58) Demand is income elastic if
A) a large percentage increase in income results in a small percentage increase in quantity
demanded.
B) a small percentage increase in income results in a large percentage increase in quantity
demanded.
C) an increase in income does not affect the quantity demanded.
D) the good in question has close substitutes.
59) The income elasticity of demand is largest for
A) food.
B) clothing.
C) shelter.
D) luxuries.
60) For Product X, the income elasticity of demand is 1.16. Which of the following is therefore
definitely TRUE?
A) Product X is a necessity.
B) Product X is income elastic.
C) Product X is a substitute for some other good.
D) Product X is something that mostly poor people will buy.
61) If the income elasticity for chocolate chip cookies is 1.84, then chocolate chip cookies are
A) a normal good and income inelastic.
B) a normal good and income elastic.
C) an inferior good and income inelastic.
D) an inferior good and income elastic.
62) When consumers’ incomes increased 10 percent, the quantity of milk bought increased 5
percent. This result means
A) the demand for milk is income elastic.
B) milk is a necessity.
C) milk is a luxury.
D) milk is an inferior good.
63) When consumers’ incomes increased 6 percent, the quantity of wine bought increased 12
percent. This result means
A) wine is a luxury.
B) the demand for wine is income inelastic.
C) wine is a necessity.
D) wine is an inferior good.
64) The income elasticity of demand for bicycles is +10, which implies that bicycles are
A) an inferior good.
B) a normal good.
C) a substitute good for motorbikes.
D) a complement good for motorbikes.
65) A Business Wire report shows that sales at Target stores increased in 2012 compared to the
previous year. (Source: Business Wire, August 30, 2012) Incomes grew slightly between 2011
and 2012. Using that fact and the sales data given above means that Target definitely is selling
goods and services that
A) are normal.
B) are inferior.
C) have an income elasticity of zero.
D) have an income elasticity of 1.
66) About six months ago, Pat lost the job as vice president of a local bank. Since losing the job,
Pat still has the Sunday newspaper delivered every week. For Pat, the Sunday newspaper is
A) income inelastic.
B) price inelastic.
C) an inferior good.
D) a normal good because Pat still buys the paper even with a big loss of income.
67) Because Product X has a large positive income elasticity, it is likely that the product
A) has many good substitutes.
B) has few good complements.
C) is a necessity.
D) is a luxury.
68) Because Product X has a very small, positive income elasticity of demand, it is likely that
product X is a
A) luxury.
B) necessity.
C) product with many good substitutes.
D) product with many good complements.
69) The income elasticity of demand for food
A) does not change when an individual’s income changes.
B) increases as an individual’s income increases.
C) decreases as an individual’s income increases.
D) is negative.
70) An increase in Abigail’s income decreases her demand for used cars. For her, used cars are
A) a normal good.
B) an inferior good.
C) a complement to any good.
D) a substitute good.
71) If the income elasticity of demand for corn is 0.5, then as income increases
A) the demand for corn will increase.
B) the demand for corn will decrease.
C) corn will prove to be an inferior good.
D) the supply curve of corn will shift leftward.
72) The greater the magnitude of the absolute value of the income elasticity of demand for a
good, the more the
A) demand for that good changes when income changes.
B) total revenue for firms producing that good changes when income changes.
C) price of the good changes when income changes.
D) All of the above answers are correct.
73) A 10 percent increase in income has caused a 5 percent decrease in the quantity demanded.
The income elasticity is
A) 0.5.
B) -0.5.
C) 2.0.
D) -2.0.
74) Deb’s income has just risen from $950 per week to $1,050 per week. As a result, she decides
to increase the number of movies she attends each month by 5 percent. Her demand for movies is
A) represented by a vertical line.
B) represented by a horizontal line.
C) income elastic.
D) income inelastic.
75) Peter’s monthly income increases from $1,500 to $1,600. As a result, he increases the
number of DVDs he buys per month from 2 to 3. Peter’s demand for DVDs is
A) price elastic.
B) price inelastic.
C) income elastic.
D) income inelastic.
76) Paul’s monthly income decreased from $2,500 to $2,300. As a result, he decreased the
number of DVDs he rents per month from 5 to 4. Paul’s demand for DVD rentals is
A) price elastic.
B) price inelastic.
C) income elastic.
D) income inelastic.
77) Last year, Jack’s income was $15,000 and he bought 50 bags of potato chips. This year his
income is $18,000 and he buys 55 bags of potato chips. Therefore, Jack’s
A) income elasticity of demand for potato chips is 0.52.
B) price elasticity of demand for potato chips is 0.52.
C) income elasticity of demand for potato chips is 1.66.
D) price elasticity of demand for potato chips is 1.66.