1

BB 107 Tutorial 5

Part A: MCQ

1. Suppose that a 2% increase in income in the economy decreases the quantity of gadgets
demanded by 1% at every possible price. This implies that:

a. the supply of gadgets is elastic

b. income elasticity is positive and gadgets are a normal good

c. income elasticity is negative and gadgets are a normal good

d. income elasticity is negative and gadgets are an inferior good

Answer: d

2. Which of the following is not characteristic of the demand for a commodity that is elastic?

A. The relative change in quantity demanded is greater than the relative change in price.

B. Buyers are relatively sensitive to price changes.

C. Total revenue declines if price is increased.

D. The elasticity coefficient is less than one.

Answer: D

3. If a firm can sell 3,000 units of product A at $10 per unit and 5,000 at $8, then:

A. the price elasticity of demand is 0.44.

B. A is a complementary good.

C. the price elasticity of demand is 2.25.

D. A is an inferior good.

Answer: C

4. A perfectly inelastic demand schedule:

A. rises upward and to the right, but has a constant slope.

B. can be represented by a line parallel to the vertical axis.

C. cannot be shown on a two-dimensional graph.

D. can be represented by a line parallel to the horizontal axis.

Answer: B

This study source was downloaded by 100000868454364 from CourseHero.com on 06-18-2023 11:31:30 GMT -05:00

https://www.coursehero.com/file/65483581/MIcro-Tutorial-5-ANSdocx/
 2

5. A leftward shift in the supply curve of product X will increase equilibrium price to a
greater extent the:

A. more elastic the supply curve.

B. larger the elasticity of demand coefficient.

C. more elastic the demand for the product.

D. more inelastic the demand for the product.

Answer: D

6. Suppose the supply of product X is perfectly inelastic. If there is an increase in the

A. will decrease but equilibrium quantity will increase.

B. and quantity will both decrease.

C. will increase but equilibrium quantity will decline.

D. will increase but equilibrium quantity will be unchanged.

Answer: D

7. It takes a considerable amount of time to increase the production of pork. This implies
that:

A. a change in the demand for pork will not affect its price in the short run.

B. the short-run supply curve for pork is less elastic than the long-run supply curve for pork.

C. an increase in the demand for pork will elicit a larger supply response in the short run than
in the long run.

D. the long-run supply curve for pork is less elastic than the short-run supply curve for pork.

Answer: B

8. Suppose the income elasticity of demand for toys is +2.00. This means that:

A. a 10 percent increase in income will increase the purchase of toys by 20 percent.

B. a 10 percent increase in income will increase the purchase of toys by 2 percent.

C. a 10 percent increase in income will decrease the purchase of toys by 2 percent.

D. toys are an inferior good.

Answer: A

This study source was downloaded by 100000868454364 from CourseHero.com on 06-18-2023 11:31:30 GMT -05:00

https://www.coursehero.com/file/65483581/MIcro-Tutorial-5-ANSdocx/
 3

9. If price and total revenue vary in opposite directions, demand is:

A. perfectly inelastic.

B. perfectly elastic.

C. relatively inelastic.

D. relatively elastic.

Answer: D

10. Which of the following generalizations is not correct?

A. The larger an item is in one's budget, the greater the price elasticity of demand.

B. The price elasticity of demand is greater for necessities than it is for luxuries.

C. The larger the number of close substitutes available, the greater will be the price elasticity
of demand for a particular product.

D. The price elasticity of demand is greater the longer the time period under consideration.

Answer: B

Part B: Short Answer

1. A firm finds that its price elasticity of demand is 4.0.Currently, the firm
is selling 2000 units per month at $5 per unit. If it wishes to increases its
quantity sold by 10%, it must lower its price by:

Answer: 2.5%

2. Farmers often find that large bumper crops are associated with declines in their gross
incomes. Use a diagram to illustrate your answer.

Answer: new TR(0P1BQ1) < old TR(0P0AQ0)

P D S

P0 A

S’

P1 B Q

0 Q0 Q1

This study source was downloaded by 100000868454364 from CourseHero.com on 06-18-2023 11:31:30 GMT -05:00

https://www.coursehero.com/file/65483581/MIcro-Tutorial-5-ANSdocx/
 4

3. What are the major determinants of price elasticity of demand? Use those determinants
and your own reasoning in judging whether demand for each of the following products is
probably elastic or inelastic: (a) bottled water, (b) toothpaste, (c) Crest toothpaste, (d)
tomato sauce, (e) diamond bracelets, (f) Microsoft’s Windows operating system.

Answer: The key determinants of price elasticity are substitutability, proportion of

(a) bottled water. This good is likely elastic because there are a number of substitutes
(water fountains, cans of soda, etc...)

(b) toothpaste. This good is likely inelastic because there aren't many substitutes and
it is a necessity (in economic terms).

(c) Crest toothpaste. This specific brand of the good is likely elastic. There are a
number of substitutes for this specific brand of the good.

(d) tomato sauce. This good is likely inelastic. There aren't many substitutes for
tomato sauce (for people who like tomato sauce) and it makes up a small percentage
of income.

(e) Microsoft's Windows operating system. This good is likely inelastic because there
aren't many substitutes for this good and it has become a necessity in a number of
workplaces.

4. Danny “Dimes” Donahue is a neighborhood’s 9-year old entrepreneur. His most recent
venture is selling homemade brownies that he bakes himself. At a price of $2.00 each, he sells
100. At a price of $1.50 each, he sells 300. Is demand elastic or inelastic over this price
range? If demand had the same elasticity for a price decline from $1.50 to $1.00 as it does for
the decline from $2.00 to $1.50, would cutting the price from $1.50 to $1.00 increase or
decrease Danny’s total revenue? LO2

Answers: Elastic; cutting price would increase Danny’s total revenue.

Feedback: The total revenue rule implies that demand is elastic when revenue and
price move in opposite directions. In other words, a decrease in price results in an
increase in total revenue. We can use this rule to answer this question.

Consider the following values: At a price of $2.00 each, Danny sells 100. At a price
of $1.50 each, he sells 300. Is demand elastic or inelastic over this price range?

Total revenue at the price of $2.00 and the quantity of 100 equals $200 (=
$2.00x100). Danny then decreases his price to $1.50 and sells 300 brownies. Total
revenue at this new price equals $450 (= $1.50x300). Since total revenue increased
after Danny decreased his price we know from the rule above that demand is elastic
over this range.

We can also answer the following question now: If demand had the same elasticity for
a price decline from $1.50 to $1.00 as it does for the decline from $2.00 to $1.50,
would cutting the price from $1.50 to $1.00 increase or decrease Danny’s total

This study source was downloaded by 100000868454364 from CourseHero.com on 06-18-2023 11:31:30 GMT -05:00

https://www.coursehero.com/file/65483581/MIcro-Tutorial-5-ANSdocx/
 5

revenue?

The answer is obviously yes, it would increase his total revenue. A decrease in price
would increase total revenue because demand is elastic over this range as well.

This study source was downloaded by 100000868454364 from CourseHero.com on 06-18-2023 11:31:30 GMT -05:00

https://www.coursehero.com/file/65483581/MIcro-Tutorial-5-ANSdocx/
Powered by TCPDF (www.tcpdf.org)