A241 BEEBK1013 PRINCIPLE OF ECONOMICS

EXERCISE CHAPTER 4
Chapter 4: Elasticity

Multiple Choice

1) Elasticity measures the

A) percentage change in a variable.
B) slope of a curve.
C) change in a variable.
D) responsiveness of a variable to a change in another variable.

2) The price elasticity of demand measures

A) how often the price of a good changes.
B) the slope of a budget curve.
C) how sensitive the quantity demanded is to changes in demand.
D) the responsiveness of the quantity demanded to changes in price.

3) The price elasticity of demand is defined as the magnitude of the

A) change in quantity demanded divided by the change in price.
B) change in price divided by the change in quantity demanded.
C) percentage change in quantity demanded divided by the percentage change in price.
D) percentage change in price divided by the percentage change in quantity demanded.

4) Suppose the quantity of gasoline is measured in gallons and the price of gasoline is measured in dollars.
The price elasticity of demand is 0.67. If the price of gasoline was now measured in cents rather than dollars,
the price elasticity of demand would now be
A) 0.0067.
B) 0.67.
C) 6.7.
D) 67.0.

5) Dan sells newspapers. Dan says that a 4 percent increase in the price of a newspaper will decrease the
quantity of newspapers demanded by 8 percent. According to Dan, the demand for newspapers is ________.
A) inelastic
B) unit elastic
C) perfectly elastic
D) elastic

6) The price elasticity of demand for furniture is estimated at 1.3. This value means a one percent increase in
the
A) price of furniture will increase the quantity of furniture demanded by 1.3 percent.
B) price of furniture will decrease the quantity of furniture demanded by 1.3 percent.
C) quantity of furniture demanded will decrease the price of furniture by 1.3 percent.
D) quantity of furniture demanded will increase the price of furniture by 1.3 percent.

7) The price elasticity of demand for oil is estimated at 0.05. This value means a 10 percent increase in the
A) quantity of oil demanded will result from a 0.5 percent increase in the price of oil.
B) quantity of oil demanded will result from a 0.5 percent decrease in the price of oil.
C) price of oil will increase the quantity of oil demanded by 0.5 percent.
D) price of oil will decrease the quantity of oil demanded by 0.5 percent.

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8) Last year the price of corn was $3 per pack and the quantity of corn demanded was 8 million packs. This
year the price of corn is $4 per pack and the quantity of corn demanded is 7 million packs. Assuming that the
demand curve has not shifted, what is the price elasticity of demand for corn? (Use the midpoint formula.)
A) 1
B) 0.47
C) 2.14
D) 0.29

9) The price elasticity of demand for cigarettes is 0.4. If government wants to reduce smoking by 10 percent,
by how much should it raise the price of cigarettes by imposing a tax?
A) by 10 percent
B) by 20 percent
C) by 25 percent
D) by 50 percent

10) The figure shows the demand curve for popsicles. The price elasticity of demand when the price of a
popsicle increases from $0.30 to $0.50 is ________.
A) 0
B) 1
C) 1/2
D) 2

11) The price elasticity of demand can range between

A) zero and one.
B) negative infinity and infinity.
C) zero and infinity.
D) negative one and one.

12) Demand is price inelastic if a relatively ________ price increase leads to a relatively ________ in the
quantity demanded.
A) large; small increase
B) small; large decrease
C) large; small decrease
D) small; large increase

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13) If a consumer is relatively insensitive to changes in the price of a good, then the consumer's demand for
the good is
A) elastic.
B) unit elastic.
C) inelastic.
D) perfectly elastic.

14) If the price of salt increases and the quantity demanded does not change, then
A) the price elasticity of demand is equal to zero.
B) demand is perfectly inelastic.
C) the demand curve for salt is horizontal.
D) Both answers A and B are correct.

15) If demand is price elastic,

A) a 1 percent decrease in the price leads to an increase in the quantity demanded that exceeds 1 percent.
B) a 1 percent increase in the price leads to an increase in the quantity demanded that exceeds 1 percent.
C) a 1 percent decrease in the price leads to a decrease in the quantity demanded that is less than 1 percent.
D) the price is very sensitive to any shift of the supply curve.

16) If the demand for a good is perfectly elastic, the price elasticity of demand is ________ and the demand
curve is ________.
A) infinite; vertical
B) zero; vertical
C) zero; horizontal
D) infinite; horizontal

17) If the price elasticity of demand for airline travel is 0.52 in the short run and 1.46 in the long run, then the
demand for airline travel is ________ in the short run and ________ in the long run.
A) elastic; elastic
B) elastic; inelastic
C) inelastic; elastic
D) inelastic; inelastic

18) The demand for movies is unit elastic if

A) a 5 percent decrease in the price leads to an infinite increase in the quantity demanded.
B) a 5 percent increase in the price leads to a 5 percent decrease in the quantity demanded.
C) any increase in the price leads to a 1 percent decrease in the quantity demanded.
D) a 5 percent increase in the price leads to a 5 percent increase in total revenue.

19) If the elasticity of demand for peaches is 1.76 and the elasticity of demand for apples is 1.59, then
consumers are
A) more sensitive to a change in the price of peaches than they are to a change in the price of apples.
B) less sensitive to a change in the price of peaches than they are to a change in the price of apples.
C) more sensitive to a change in the quantity of peaches than they are to a change in the quantity of apples.
D) less sensitive to a change in the quantity of peaches than they are to a change in the quantity of apples.

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20) The demand curve in the figure above illustrates the demand for a product with
A) zero price elasticity of demand at all prices.
B) infinite price elasticity of demand.
C) unit price elasticity of demand at all prices.
D) a price elasticity of demand that is different at all prices.

21) The demand curve in the figure above illustrates the demand for a product with
A) zero price elasticity of demand at all prices.
B) infinite price elasticity of demand.
C) unit price elasticity of demand at all prices.
D) a price elasticity of demand that is different at all prices.

22) According to the total revenue test, a price cut increases total revenue if demand is
A) inelastic.
B) perfectly inelastic.
C) elastic.
D) unit elastic.

23) When demand is ________, a decrease in price ________ total revenue.

A) elastic; decreases
B) inelastic; decreases
C) unit elastic; increases
D) elastic; does not change

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24) To maximize its revenue,
A) a firm facing inelastic demand should always raise its price.
B) a firm facing elastic demand should always raise its price.
C) a firm should always charge the highest price possible regardless of the elasticity of demand.
D) None of the above answers is correct.

25) If an increase in price results in no change in total revenue, then demand must be
A) inelastic.
B) elastic.
C) unit elastic.
D) infinitely elastic.

26) If OPEC, a group of oil producing nations, cuts oil production to increase the total revenue, OPEC
presumes that the demand for oil is
A) perfectly elastic.
B) unit elastic.
C) elastic.
D) inelastic.

27) Which goods have more elastic demands?

A) goods with many substitutes
B) goods which are necessities
C) goods with few substitutes
D) goods whose purchase represents a small percentage of income

28) The closer the substitutes for a good, the

A) more elastic is the demand for the good.
B) less elastic is the demand for the good.
C) smaller the degree of substitutability between the goods.
D) larger the proportion of income that is spent on the good.

29) The amount of time elapsed since a price change impacts the elasticity of demand because as more time
passes,
A) people can find more substitutes, and so the elasticity of demand decreases.
B) people can find more substitutes, and so the elasticity of demand increases.
C) people's incomes will increase, and so the elasticity of demand decreases.
D) the good's price will have a chance to return to its previous level.

30) The demand for Honda Accords is probably

A) inelastic but more elastic than the demand for automobiles.
B) elastic and more elastic than the demand for automobiles.
C) inelastic and less elastic than the demand for automobiles.
D) elastic but less elastic than the demand for automobiles.

31) Which of the following statements is FALSE?

A) Goods or services that have few close substitutes generally have a less elastic demand.
B) Goods or services for which a greater proportion of income is spent on the item generally have a more
elastic demand.
C) A narrowly defined good or service generally has a less elastic demand.
D) The longer the time that has elapsed since a price change, the more elastic the demand.

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31) A determinant of the price elasticity of demand is
A) whether the good is a durable or a nondurable.
B) the availability of resources used in the production of the product.
C) how well consumers like the good.
D) the proportion of the consumer's total budget spent on the good.

32) The ________ the portion of your income spent on a good, the ________ is your demand for the good.
A) larger; more income elastic
B) larger; more price elastic
C) smaller; less price elastic
D) smaller; more income elastic

33) For electricity, natural gas, or other forms of energy, it is very likely that the price elasticity of demand
A) is zero.
B) is infinite.
C) will decrease in magnitude as more time passes after a price change.
D) will increase in magnitude as more time passes after a price change.

34) 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.

35) 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.

36) Toothpaste and toothbrushes are complements, so the ________ elasticity of demand is ________.
A) cross; positive
B) income; negative
C) cross; negative
D) income; positive

37) 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

38) 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

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39) 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.

40) 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.

41) 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.

42) 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.

43) 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

44) 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.

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45) 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.

46) The income elasticity of demand is largest for

A) food.
B) clothing.
C) shelter.
D) luxuries.

47) 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.

48) The price elasticity of supply is calculated as the

A) quantity supplied divided by the per unit cost of production.
B) quantity supplied divided by the percentage change in quantity demanded.
C) percentage change in quantity supplied divided by the percentage change in price.
D) percentage change in price divided by the percentage change in quantity demanded.

49) Supply is elastic if

A) a 1 percent change in price leads to a larger percentage change in quantity supplied.
B) a 1 percent change in price leads to a smaller percentage change in quantity supplied.
C) the slope of the supply curve is positive.
D) the good in question is a normal good.

50) If a 1 percent decrease in the price of a pound of oranges results in a smaller percentage decrease in the
quantity supplied,
A) demand is elastic.
B) demand is inelastic.
C) supply is elastic.
D) supply is inelastic.

51) If at a given moment, no matter what the price, producers cannot change the quantity supplied, the
momentary supply
A) has zero elasticity.
B) has unit elasticity.
C) has infinite elasticity.
D) does not exist.

52) If a 5 percent increase in the price results in a 9 percent increase in quantity supplied, the elasticity of
supply is
A) 0.30.
B) 0.55.
C) 1.20.
D) 1.80.

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53) If the elasticity of supply of TV sets is equal to 3, then a 10 percent increase in the price of a TV will
A) increase the quantity supplied by 3.33 percent.
B) increase the quantity supplied by 30.0 percent.
C) increase the quantity supplied by 0.33 percent.
D) decrease the quantity supplied by 30.0 percent.

54) The elasticity of supply equals ________ if the supply curve is vertical.
A) 0
B) 1
C) infinity
D) -1

55) If the supply curve is vertical, then supply is

A) relatively elastic.
B) perfectly elastic.
C) perfectly inelastic.
D) relatively inelastic.

56) The elasticity of supply equals ________ if the supply curve is horizontal.
A) 0
B) 1
C) infinity
D) -1

57) If the supply for a good is elastic, that means that when price increases, the
A) supply will increase.
B) quantity supplied will decrease.
C) quantity supplied will increase by a smaller percentage than the price increased.
D) quantity supplied will increase by a greater percentage than the price increased.

58) Which of the following leads a good to have a high elasticity of supply?
I. The good must be produced using unique resources.
II. The good is produced using commonly available resources.
A) I only
B) II only
C) I and II
D) neither I nor II

59) If a good is produced using inputs for which there are no substitutes, the good's
A) elasticity of supply is likely to be small.
B) elasticity of supply is likely to be large.
C) elasticity of demand will be small.
D) elasticity of demand will be large.

60) Refining gasoline for our cars requires a very specialized resource, crude oil. As a result, the
A) demand for gasoline is price elastic.
B) demand for gasoline is price inelastic.
C) supply of gasoline is price elastic.
D) supply of gasoline is price inelastic.

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61) Goods and services that can be produced by using commonly available resources that could be allocated
to a wide variety of alternative tasks have a supply that is
A) elastic.
B) inelastic.
C) unit elastic.
D) perfectly inelastic.

62) As time passes after a change in the price, the supply of a good or service
A) becomes more elastic.
B) becomes less elastic.
C) initially becomes more elastic and then becomes less elastic.
D) initially becomes less elastic and then becomes more elastic.

63) The elasticity of the momentary supply curve for any good always equals
A) zero.
B) one.
C) positive infinity.
D) None of the above answers is correct.

64) The elasticity of supply does NOT depend on

A) resource substitution possibilities.
B) the fraction of income spent on the product.
C) the time elapsed since the price change.
D) none of the above because all of the factors listed affect the elasticity of supply.

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