Question 1

Which of the following is likely to have the most price elastic demand?

Accepted Answer

A) dental floss 
B) milk 
C) salt 
D) diamond earrings

Question 2

Suppose an airline determines that its customers traveling for business have inelastic demand and its customers traveling for vacations have an elastic demand. If the airline's objective is to increase total revenue, it should

Accepted Answer

A) increase the price charged to vacationers and decrease the price charged to business travelers. 
B) decrease the price charged to vacationers and increase the price charged to business travelers. 
C) decrease the price to both groups of customers. 
D) increase the price for both groups of customers.

Question 3

Assume that a 4 percent decrease in income results in a 6 percent increase in the quantity demanded of a good. The income elasticity of demand for the good is

Accepted Answer

A) negative, and the good is an inferior good. 
B) negative, and the good is a normal good. 
C) positive, and the good is an inferior good. 
D) positive, and the good is a normal good.

Question 4

Table 5-3
Consider the following demand schedule. 
-Refer to Table 5-3. Using the midpoint method, what is the price elasticity of demand between $12 and $15?

Accepted Answer

The answer of Table 5-3
Consider the following demand schedule. 
-Refer...

Question 5

Suppose that demand is inelastic within a certain price range. For that price range,

Accepted Answer

A) an increase in price would increase total revenue because the decrease in quantity demanded is proportionately less than the increase in price. 
B) an increase in price would decrease total revenue because the decrease in quantity demanded is proportionately greater than the increase in price. 
C) a decrease in price would increase total revenue because the increase in quantity demanded is proportionately smaller than the decrease in price. 
D) a decrease in price would not affect total revenue.

Question 6

You and your college roommate eat three packages of Ramen noodles each week. After graduation last month, both of you were hired at several times your college income. You still enjoy Ramen noodles very much and buy even more, but your roommate plans to buy fewer Ramen noodles in favor of foods she prefers more. When looking at income elasticity of demand for Ramen noodles, yours would

Accepted Answer

A) be negative, and your roommate's would be positive. 
B) be positive, and your roommate's would be negative. 
C) be zero, and your roommate's would approach infinity. 
D) approach infinity, and your roommate's would be zero.

Question 7

Figure 5-14 
-Refer to Figure 5-14. Using the midpoint method, what is the price elasticity of supply between $100 and $220?

Accepted Answer

A) 0.58 
B) 0.67 
C) 1.00 
D) 1.73

Question 8

Table 5-2 
-Refer to Table 5-2. Using the midpoint method, if the price falls from $200 to $150, the price elasticity of demand is

Accepted Answer

A) zero. 
B) unit elastic. 
C) inelastic. 
D) elastic.

Question 9

Figure 5-4 
-Refer to Figure 5-4. Assume, for the good in question, two specific points on the demand curve are (Q = 1,000, P = $40) and (Q = 1,500, P = $30). Then which of the following scenarios is possible?

Accepted Answer

A) Both of these points lie on the section of the demand curve from B to C. 
B) The vertical intercept of the demand curve is the point (Q = 0, P = $60). 
C) The horizontal intercept of the demand curve is the point (Q = 1,800, P = $0). 
D) Any of these scenarios is possible.

Question 10

Scenario 5-6
Consider the markets for mobile and landline telephone service. Suppose that when the average income of residents of Plainville is $55,000 per year, the quantity demanded of landline telephone service is 12,500 and the quantity demanded of mobile service is 28,000. Suppose that when the price of mobile service rises from $100 to $120 per month, the quantity demanded of landline service decreases to 11,000. Suppose also that when the average income increases to $60,000, the quantity demanded of mobile service increases to 33,000.
-Refer to Scenario 5-6. Considering the income elasticity, what type of good is mobile telephone service?

Accepted Answer

The answer of Scenario 5-6
Consider the markets for mobile and...

Question 11

Danita rescues dogs from her local animal shelter. When Danita's income rises by 7 percent, her quantity demanded of dog biscuits increases by 12 percent. For Danita, the income elasticity of demand for dog biscuits is

Accepted Answer

A) negative, and dog biscuits are a normal good. 
B) negative, and dog biscuits are an inferior good. 
C) positive, and dog biscuits are an inferior good. 
D) positive, and dog biscuits are a normal good.

Question 12

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

Accepted Answer

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.

Question 13

If a 15% change in price results in a 20% change in quantity supplied, then the price elasticity of supply is about

Accepted Answer

A) 1.33, and supply is elastic. 
B) 1.33, and supply is inelastic. 
C) 0.75, and supply is elastic. 
D) 0.75, and supply is inelastic.

Question 14

If marijuana were legalized, it is likely that there would be an increase in the demand for marijuana. If demand for marijuana is inelastic and the supply of marijuana is perfectly elastic, this will result in

Accepted Answer

A) higher prices and higher total revenue from marijuana sales. 
B) higher prices but lower total revenue from marijuana sales. 
C) the same price and higher total revenue from marijuana sales. 
D) the same price but lower total revenue from marijuana sales.

Question 15

The midpoint method for calculating elasticities is convenient in that it allows us to

Accepted Answer

A) ignore the percentage change in quantity demanded and instead focus entirely on the percentage change in price. 
B) calculate the same value for the elasticity, regardless of whether the price increases or decreases. 
C) assume that sellers' total revenue stays constant when the price changes. 
D) restrict all elasticity values to between 0 and 1.

Question 16

When the price of chai tea lattés is $5, Maxine buys 20 per month. When the price is $4, she buys 30 per month. Maxine's demand for chai tea lattés is

Accepted Answer

A) elastic, and her demand curve would be relatively flat. 
B) elastic, and her demand curve would be relatively steep. 
C) inelastic, and her demand curve would be relatively flat. 
D) inelastic, and her demand curve would be relatively steep.

Question 17

If a 15% increase in price for a good results in a 20% decrease in quantity demanded, the price elasticity of demand is

Accepted Answer

A) 0.75. 
B) 1.25. 
C) 1.33. 
D) 1.60.

Question 18

If sellers do not adjust their quantity supplied at all in response to a change in price, the price elasticity of supply is

Accepted Answer

A) zero, and the supply curve is horizontal. 
B) zero, and the supply curve is vertical. 
C) infinity, and the supply curve is horizontal. 
D) infinity, and the supply curve is vertical.

Question 19

There are very few, if any, good substitutes for motor oil. Therefore, the

Accepted Answer

A) demand for motor oil would tend to be inelastic. 
B) demand for motor oil would tend to be elastic. 
C) demand for motor oil would tend to respond strongly to changes in prices of other goods. 
D) supply of motor oil would tend to respond strongly to changes in people's tastes for large cars relative to their tastes for small cars.

Question 20

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.

Accepted Answer

A) True 
 B)False

Exam 5: Elasticity and Its Application