6. Which of the following demand curves is more elastic?

Price

Price
Demand
Demand

Quantity Quantity

Self Test

1. The price of milk doubles, but the quantity demanded changes very little. Which of
the following would not be a likely explanation for this phenomenon?

a. There isn't a good substitute for milk.

b. People feel they need milk, rather than just wanting it.
c. Demand for milk is highly price elastic.
d. Milk is not a very big part of most people's budget.
e. All of the above are likely explanations for this phenomenon.

Questions 2 and 3 refer to the following scenario and graph. Bob’s Bakery has two
locations. The bakery decides to experiment with charging different prices at the two
bakeries, to find out which price will bring in higher total revenues. The results of the
experiment are shown in the graph below.

Downtown Bakery
Price of Cakes

A
Uptown Bakery

B C Demand

Quantity of Cakes

Chapter 4 – Elasticity 7
2. The revenue earned at Downtown Bakery is equal to

a. area A
b. area B
c. area C
d. area A + B
e. area B + C

3. Area A is bigger than area C. This means that

a. Demand for chocolate cake is highly price elastic.

b. Demand for chocolate cake is price inelastic.
c. The quantity demanded of chocolate cake exceeds the quantity supplied.
d. The quantity supplied of chocolate cake exceeds the quantity demanded.
e. None of the above.

4. Suppose a study finds that as people's incomes rise, they tend to buy fewer subway
tokens because they are more likely to have a car. This would mean that subway
tokens are

a. normal goods
b. inferior goods
c. price elastic goods
d. price taker goods
e. supply elastic goods

5. The more money people make, the more pairs of shoes they buy. We can conclude
that

a. Shoes are a normal good.

b. Shoes are an inferior good.
c. Demand for shoes is highly price elastic.
d. Demand for shoes has an elasticity between 0 and 1.
e. All of the above.

Questions #6 and #7 refer to the following scenario: A 4% increase in the price of

tomatoes leads to a 1% reduction in the quantity of tomatoes demanded.

6. The price elasticity of demand for tomatoes is:

a. 0.5
b. 0.6
c. 0.25
d. 1.25
e. 4.0

Chapter 4 – Elasticity 8
7. Which of the following statements about the market in tomatoes is false?

a. Demand for tomatoes is price inelastic.

b. A price increase will lead to a revenue increase.
c. Demand for tomatoes is unit elastic.
d. Price elasticity of demand equals percent change in quantity demanded, divided
by percent change in price.
e. All of the above are true.

8. Which of the following statements is true?

a. Elasticity is identical to the slope of the demand curve.

b. A single, straight-line demand curve can be elastic in one region and inelastic in
another.
c. Perfectly inelastic demand can be represented by a horizontal line.
d. When demand is unit elastic, revenue is strongly affected by price changes.
e. You can always determine the relative elasticity of demand for two products by
comparing the slope of their demand curves.

9. Suppose a 50% increase in the price of a drug results in no change in the quantity
demanded. What is the price elasticity of the drug?

a. 0
b. 0.05
c. 0.5
d. 1
e. Infinite

10. Suppose the price elasticity of demand for a good is 0.6. When the price of the good
decreases by 10%, what would we expect to happen to the quantity demanded?

a. It will increase by 60%

b. It will increase by 6%
c. It will increase by 0.6%
d. It will decrease by 0.6%
e. It will decrease by 6%

11. Which one of the following goods is most likely to have a perfectly elastic demand?

a. cigarettes
b. shoes
c. rice, in a developing country
d. a particular brand of butter
e. airline travel

Chapter 4 – Elasticity 9
12. Which is the following income elasticities could correspond to a normal good that is
income inelastic?

a. 0.5
b. 1.5
c. – 1.5
d. 2.0
e. -0.5

13. Every week you buy rice, wheat, and oatmeal. Suddenly the price of rice rises. You
decide to cut down on your rice purchases and get more wheat and oatmeal instead.
This is an illustration of …

a. an income effect
b. a substitution effect
c. a normal good effect
d. a Giffen good
e. a price inelastic good

14. A population subsists largely on potatoes, plus small amounts of dairy products and
vegetables. The price of potatoes rises, driving many poor families deeper into
poverty. As a result, these families are forced to eliminate dairy products and
vegetables from their daily diet and start eating even more potatoes than they did
before. In this example potatoes are …

a. normal goods
b. inferior goods
c. giffen goods
d. both a and c are correct.
e. both b and c are correct.

15. You get a notice in the middle of the semester stating that your monthly dorm fee is
being doubled, effective immediately. You don't want to pay the higher fee, but it's
not practical for you to move out of the dorm mid-semester. You decide to pay the
extra charge now, and look for new housing option after exams are over. Which of
the following statements best describes your situation?

a. The dorm room is a Giffen good.

b. The dorm room is an inferior good.
c. Your short run demand for dorm housing is relatively inelastic.
d. Your long run demand for dorm housing is less elastic than your short run
demand.
e. None of the above.

Chapter 4 – Elasticity 10
16. Which of the following goods is most likely to have high price elasticity of demand?

a. A staple food.
b. A good that forms a very small part of a person’s total budget.
c. A good for which there are many close substitutes.
d. A vital medicine.
e. None of the above.

17. Jake sells hot dogs at an outdoor stand. There are several other hot dog stands in the
vicinity. There is a going price in the market for hot dogs. Which of the following
statements is true about the demand for Jake’s hot dogs?

a. Demand for Jake’s hot dogs is perfectly inelastic.

b. Demand for Jake’s hot dogs is perfectly elastic.
c. Demand for Jake’s hot dogs can be represented as a vertical line.
d. Demand for Jake’s hot dogs can be represented as a downward sloping line.
e. None of the above.

18. Suppose that the price elasticity of supply for toothpaste is 0.2. If the price of
toothpaste increases by 30%, what would we expect to happen to the quantity of
toothpaste supplied?

a. increase by 3%
b. decrease by 5%
c. increase by 60%
d. decrease by 15%
e. increase by 6%

19. Suppose a grocery store normally sells 100 cartons of milk per day and the price
elasticity of demand for milk is 1.7. If the store lowers the price of milk by 10%,
about how many cartons of milk will it then sell per week?

a. 117
b. 83
c. 85
d. 100
e. 101.7

20. Which of the following is most likely to be an inferior good?

a. eyeglasses
b. airplane tickets
c. caviar
d. opera tickets
e. discount bus tickets

Chapter 4 – Elasticity 11