Chapter 5 Elasticity and Its Application

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1 Chapter 5 Elasticity and Its Application MULTIPLE CHOICE 1. In general, elasticity is a measure of a. the extent to which advances in technology are adopted by producers. b. the extent to which a market is competitive. c. how firms profits respond to changes in market prices. d. how much buyers and sellers respond to changes in market conditions. ANS: D PTS: 1 DIF: 1 REF: 5-0 NAT: Analytic LOC: Elasticity TOP: Elasticity MSC: Definitional 2. Elasticity is a. a measure of how much buyers and sellers respond to changes in market conditions. b. the study of how the allocation of resources affects economic well-being. c. the maximum amount that a buyer will pay for a good. d. the value of everything a seller must give up to produce a good. ANS: A PTS: 1 DIF: 1 REF: 5-0 NAT: Analytic LOC: Elasticity TOP: Elasticity MSC: Definitional 3. When studying how some event or policy affects a market, elasticity provides information on the a. equity effects on the market by identifying the winners and losers. b. magnitude of the effect on the market. c. speed of adjustment of the market in response to the event or policy. d. number of market participants who are directly affected by the event or policy. ANS: B PTS: 1 DIF: 2 REF: 5-0 NAT: Analytic LOC: Elasticity TOP: Elasticity 4. When studying how some event or policy affects a market, elasticity provides information on the a. government expenditures associated with the policy. b. costs and benefits of the effect. c. allocative efficiency of the effect. d. direction and magnitude of the effect. ANS: D PTS: 1 DIF: 2 REF: 5-0 NAT: Analytic LOC: Elasticity TOP: Elasticity 5. How does the concept of elasticity allow us to improve upon our understanding of supply and demand? a. Elasticity allows us to analyze supply and demand with greater precision than would be the case in the absence of the elasticity concept. b. Elasticity provides us with a better rationale for statements such as an increase in x will lead to a decrease in y than we would have in the absence of the elasticity concept. c. Without elasticity, we would not be able to address the direction in which price is likely to move in response to a surplus or a shortage. d. Without elasticity, it is very difficult to assess the degree of competition within a market. ANS: A PTS: 1 DIF: 2 REF: 5-0 NAT: Analytic LOC: Elasticity TOP: Elasticity 6. When consumers face rising gasoline prices, they typically a. reduce their quantity demanded more in the long run than in the short run. b. reduce their quantity demanded more in the short run than in the long run. c. do not reduce their quantity demanded in the short run or the long run. d. increase their quantity demanded in the short run but reduce their quantity demanded in the long run. ANS: A PTS: 1 DIF: 2 REF: 5-0 NAT: Analytic LOC: Elasticity TOP: Elasticity 1

2 2 Chapter 5/Elasticity and Its Application 7. A 10 percent increase in gasoline prices reduces gasoline consumption by about a. 6 percent after one year and 2.5 percent after five years. b. 2.5 percent after one year and 6 percent after five years. c. 10 percent after one year and 20 percent after five years. d. 0 percent after one year and 1 percent after five years. ANS: B PTS: 1 DIF: 2 REF: 5-0 NAT: Analytic LOC: Elasticity TOP: Elasticity 8. Which of the following statements about the consumers responses to rising gasoline prices is correct? a. About 10 percent of the long-run reduction in quantity demanded arises because people drive less and about 90 percent arises because they switch to more fuel-efficient cars. b. About 90 percent of the long-run reduction in quantity demanded arises because people drive less and about 10 percent arises because they switch to more fuel-efficient cars. c. About half of the long-run reduction in quantity demanded arises because people drive less and about half arises because they switch to more fuel-efficient cars. d. Because gasoline is a necessity, consumers do not decrease their quantity demanded in either the short run or the long run. ANS: C PTS: 1 DIF: 2 REF: 5-0 NAT: Analytic LOC: Elasticity TOP: Elasticity THE ELASTICITY OF DEMAND 1. The price elasticity of demand measures how much a. quantity demanded responds to a change in price. b. quantity demanded responds to a change in income. c. price responds to a change in demand. d. demand responds to a change in supply. ANS: A PTS: 1 DIF: 1 REF: 5-1 MSC: Definitional 2. The price elasticity of demand measures a. buyers responsiveness to a change in the price of a good. b. the extent to which demand increases as additional buyers enter the market. c. how much more of a good consumers will demand when incomes rise. d. the movement along a supply curve when there is a change in demand. ANS: A PTS: 1 DIF: 1 REF: 5-1 MSC: Definitional 3. The price elasticity of demand for a good measures the willingness of a. consumers to buy less of the good as price rises. b. consumers to avoid monopolistic markets in favor of competitive markets. c. firms to produce more of a good as price rises. d. firms to respond to the tastes of consumers. ANS: A PTS: 1 DIF: 1 REF: 5-1

3 Chapter 5/Elasticity and Its Application/ 3 4. Which of the following statements about the price elasticity of demand is correct? a. The price elasticity of demand for a good measures the willingness of buyers of the good to buy less of the good as its price increases. b. Price elasticity of demand reflects the many economic, psychological, and social forces that shape consumer tastes. c. Other things equal, if good x has close substitutes and good y does not have close substitutes, then the demand for good x will be more elastic than the demand for good y. d. All of the above are correct. ANS: D PTS: 1 DIF: 2 REF: If the price of natural gas rises, when is the price elasticity of demand likely to be the highest? a. immediately after the price increase b. one month after the price increase c. three months after the price increase d. one year after the price increase ANS: D PTS: 1 DIF: 2 REF: If the price of gasoline rises, when is the price elasticity of demand likely to be the highest? a. immediately after the price increases b. one month after the price increase c. three months after the price increase d. one year after the price increase ANS: D PTS: 1 DIF: 2 REF: If the price of milk rises, when is the price elasticity of demand likely to be the lowest? a. immediately after the price increase b. one month after the price increase c. three months after the price increase d. one year after the price increase 8. Holding all other forces constant, when the price of gasoline rises, the number of gallons of gasoline demanded would fall substantially over a ten-year period because a. buyers tend to be much less sensitive to a change in price when given more time to react. b. buyers tend to be much more sensitive to a change in price when given more time to react. c. buyers will have substantially more real income over a ten-year period. d. the quantity supplied of gasoline increases very little in response to an increase in the price of gasoline.

4 4 Chapter 5/Elasticity and Its Application 9. Which of the following is not a determinant of the price elasticity of demand for a good? a. the time horizon b. the steepness or flatness of the supply curve for the good c. the definition of the market for the good d. the availability of substitutes for the good 10. The greater the price elasticity of demand, the a. more likely the product is a necessity. b. smaller the responsiveness of quantity demanded to a change in price. c. greater the percentage change in price over the percentage change in quantity demanded. d. greater the responsiveness of quantity demanded to a change in price. ANS: D PTS: 1 DIF: 2 REF: Whether a good is a luxury or necessity depends on the a. price of the good. b. preferences of the buyer. c. intrinsic properties of the good. d. scarcity of the good. 12. The price elasticity of demand for bread a. is computed as the percentage change in quantity demanded of bread divided by the percentage change in price of bread. b. depends, in part, on the availability of close substitutes for bread. c. reflects the many economic, social, and psychological forces that influence consumers' tastes for bread. d. All of the above are correct. ANS: D PTS: 1 DIF: 1 REF: The price elasticity of demand for eggs a. is computed as the percentage change in quantity demanded of eggs divided by the percentage change in price of eggs. b. will be lower if there is a new invention that is a close substitute for eggs. c. will be higher if consumers consider eggs to be a necessity. d. All of the above are correct. ANS: A PTS: 1 DIF: 1 REF: The price elasticity of demand measures the a. magnitude of the response in quantity demanded to a change in price. b. direction of the shift in the demand curve in response to a market event. c. size of the shortage created by the increase in demand. d. responsiveness of quantity demanded to a change in income. MSC: Definitional

5 Chapter 5/Elasticity and Its Application/ 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 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. 16. Suppose that Jane enjoys Diet Coke so much that she consumes one can every day. Although she enjoys gourmet cheese, she consumes it sporadically. If the price of Diet Coke rises, Jane decreases her consumption by only a very small amount. But if the price of gourmet cheese rises, Jane decreases her consumption by a lot. These examples illustrate the importance of 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. 17. Suppose that Juan Carlos is filling out a survey that he received in the mail. The survey asks him what he would do if the price of his favorite toothpaste increased. Juan Carlos reports that he would switch to a different brand. The survey asks what he would do if the price of all toothpastes increased. Juan Carlos reports that he must use toothpaste, so he would have to adjust his spending elsewhere. These examples illustrate the importance of a. changes in total revenue 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. 18. Suppose that gasoline prices increase dramatically this month. Lola commutes 100 miles to work each weekday. Over the next few months, Lola drives less on the weekends to try to save money. Within the year, she sells her home and purchases one only 10 miles from her place of employment. These examples illustrate the importance of a. the availability of 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. ANS: D PTS: 1 DIF: 2 REF: Economists compute the price elasticity of demand as the a. percentage change in price divided by the percentage change in quantity demanded. b. change in quantity demanded divided by the change in the price. c. percentage change in quantity demanded divided by the percentage change in price. d. percentage change in quantity demanded divided by the percentage change in income. MSC: Definitional

6 6 Chapter 5/Elasticity and Its Application Table 5-1 Good Price Elasticity of Demand A 1.3 B Refer to Table 5-1. Which of the following is consistent with the elasticities given in Table 5-2? a. A is a luxury, and B is a necessity. b. A is a good several years after a price increase, and B is that same good several days after the price increase. c. A is a Kit Kat bar, and B is candy. d. A has fewer substitutes than B. ANS: D PTS: 1 DIF: 3 REF: Refer to Table 5-1. Which of the following is consistent with the elasticities given in Table 5-2? a. A is grapes, and B is fruit. b. A is T-shirts, and B is socks. c. A is train tickets before cars were invented, and B is train tickets after cars were invented. d. A is diamond necklaces, and B is beds. ANS: C PTS: 1 DIF: 3 REF: Refer to Table 5-1. Which of the following is consistent with the elasticities given in Table 5-2? a. A is root beer, and B is carbonated beverages. b. A is bicycles, and B is mopeds. c. A is airline tickets in the short run, and B is airline tickets in the long run. d. A is gourmet coffee, and B is dentist s visits. ANS: C PTS: 1 DIF: 3 REF: Suppose there is a 6 percent increase in the price of good X and a resulting 6 percent decrease in the quantity of X demanded. Price elasticity of demand for X is a. 0. b. 1. c. 6. d If the price elasticity of demand for a good is 4.0, then a 10 percent increase in price results in a a. 0.4 percent decrease in the quantity demanded. b. 2.5 percent decrease in the quantity demanded. c. 4 percent decrease in the quantity demanded. d. 40 percent decrease in the quantity demanded. ANS: D PTS: 1 DIF: 2 REF: 5-1

7 Chapter 5/Elasticity and Its Application/ If the price elasticity of demand for a good is 10.0, then a 4 percent increase in price results in a a. 0.4 percent decrease in the quantity demanded. b. 2.5 percent decrease in the quantity demanded. c. 4 percent decrease in the quantity demanded. d. 40 percent decrease in the quantity demanded. ANS: D PTS: 1 DIF: 2 REF: If the price elasticity of demand for a good is 0.4, then a 10 percent increase in price results in a a. 0.4 percent decrease in the quantity demanded. b. 2.5 percent decrease in the quantity demanded. c. 4 percent decrease in the quantity demanded. d. 40 percent decrease in the quantity demanded. 27. If the price elasticity of demand for a good is 0.25, then a 20 percent decrease in price results in a a percent increase in the quantity demanded. b. 4 percent increase in the quantity demanded. c. 5 percent increase in the quantity demanded. d. 80 percent increase in the quantity demanded. 28. If the price elasticity of demand for a good is 1.5, then a 3 percent decrease in price results in a a. 0.5 percent increase in the quantity demanded. b. 2 percent increase in the quantity demanded. c. 4.5 percent increase in the quantity demanded. d. 5 percent increase in the quantity demanded. 29. If the price elasticity of demand for a good is 0.2, then a 3 percent decrease in price results in a a. 0.6 percent increase in the quantity demanded. b. 1.5 percent increase in the quantity demanded. c. 2 percent increase in the quantity demanded. d. 6 percent increase in the quantity demanded. 30. If the price elasticity of demand for a good is 1, then a 3 percent decrease in price results in a a. 0.1 percent increase in the quantity demanded. b. 1 percent increase in the quantity demanded. c. 3 percent increase in the quantity demanded. d. 4 percent increase in the quantity demanded. ANS: C PTS: 1 DIF: 1 REF: 5-1

8 8 Chapter 5/Elasticity and Its Application 31. If the price elasticity of demand for a good is 4, then a 12 percent decrease in price results in a a percent increase in the quantity demanded. b. 3 percent increase in the quantity demanded. c. 30 percent increase in the quantity demanded. d. 48 percent increase in the quantity demanded. ANS: D PTS: 1 DIF: 1 REF: If the price elasticity of demand for a good is 0.8, then which of the following events is consistent with a 4 percent decrease in the quantity of the good demanded? a. a 0.2 percent increase in the price of the good b. a 3.2 percent increase in the price of the good c. a 4.8 percent increase in the price of the good d. a 5 percent increase in the price of the good ANS: D PTS: 1 DIF: 2 REF: For a particular good, a 2 percent increase in price causes a 12 percent decrease in quantity demanded. Which of the following statements is most likely applicable to this good? a. There are no close substitutes for this good. b. The good is a luxury. c. The market for the good is broadly defined. d. The relevant time horizon is short. ANS: B PTS: 1 DIF: 3 REF: For a particular good, a 5 percent increase in price causes a 15 percent decrease in quantity demanded. Which of the following statements is most likely applicable to this good? a. There are many substitutes for this good. b. The good is a necessity. c. The market for the good is broadly defined. d. The relevant time horizon is short. ANS: A PTS: 1 DIF: 3 REF: For a particular good, a 10 percent increase in price causes a 5 percent decrease in quantity demanded. Which of the following statements is most likely applicable to this good? a. There are many close substitutes for this good. b. The good is a necessity. c. The market for the good is narrowly defined. d. The relevant time horizon is long. ANS: B PTS: 1 DIF: 3 REF: 5-1

9 Chapter 5/Elasticity and Its Application/ For a particular good, a 10 percent increase in price causes a 15 percent decrease in quantity demanded. Which of the following statements is most likely applicable to this good? a. There are no close substitutes for this good. b. The good is a necessity. c. The market for the good is broadly defined. d. The relevant time horizon is long. ANS: D PTS: 1 DIF: 3 REF: For a particular good, a 5 percent increase in price causes a 2 percent decrease in quantity demanded. Which of the following statements is most likely applicable to this good? a. There are many close substitutes for this good. b. The good is a luxury. c. The market for the good is broadly defined. d. The relevant time horizon is long. ANS: C PTS: 1 DIF: 3 REF: For a particular good, a 12 percent increase in price causes a 3 percent decrease in quantity demanded. Which of the following statements is most likely applicable to this good? a. There are many substitutes for this good. b. The good is a necessity. c. The market for the good is narrowly defined. d. The relevant time horizon is long. ANS: B PTS: 1 DIF: 3 REF: For a particular good, a 3 percent increase in price causes a 10 percent decrease in quantity demanded. Which of the following statements is most likely applicable to this good? a. The relevant time horizon is short. b. The good is a necessity. c. The market for the good is broadly defined. d. There are many close substitutes for this good. ANS: D PTS: 1 DIF: 3 REF: For a particular good, a 10 percent increase in price causes a 3 percent decrease in quantity demanded. Which of the following statements is most likely applicable to this good? a. The relevant time horizon is short. b. The good is a luxury. c. The market for the good is narrowly defined. d. There are many close substitutes for this good. ANS: A PTS: 1 DIF: 3 REF: 5-1

10 10 Chapter 5/Elasticity and Its Application 41. If the price elasticity of demand for a good is 6, then a 3 percent decrease in price results in a. a 20 percent increase in the quantity demanded. b. an 18 percent increase in the quantity demanded. c. a 2 percent increase in the quantity demanded. d. a 1.8 percent increase in the quantity demanded. 42. Elasticity of demand is closely related to the slope of the demand curve. The more responsive buyers are to a change in price, the a. steeper the demand curve will be. b. flatter the demand curve will be. c. further to the right the demand curve will sit. d. closer to the vertical axis the demand curve will sit. 43. Elasticity of demand is closely related to the slope of the demand curve. The less responsive buyers are to a change in price, the a. steeper the demand curve will be. b. flatter the demand curve will be. c. further to the right the demand curve will sit. d. closer to the vertical axis the demand curve will sit. 44. The flatter the demand curve through a given point, the a. greater the price elasticity of demand at that point. b. smaller the price elasticity of demand at that point. c. closer the price elasticity of demand will be to the slope of the curve. d. greater the absolute value of the change in total revenue when there is a movement from that point upward and to the left along the demand curve. ANS: A PTS: 1 DIF: 3 REF: The smaller the price elasticity of demand, the a. steeper the demand curve will be through a given point. b. flatter the demand curve will be through a given point. c. more strongly buyers respond to a change in price between any two prices P 1 and P 2. d. smaller the decrease in equilibrium price when the supply curve shifts rightward from S 1 to S 2. ANS: A PTS: 1 DIF: 3 REF: As we move downward and to the right along a linear, downward-sloping demand curve, a. both slope and elasticity remain constant. b. slope changes but elasticity remains constant. c. both slope and elasticity change. d. slope remains constant but elasticity changes. ANS: D PTS: 1 DIF: 2 REF: 5-1

11 Chapter 5/Elasticity and Its Application/ The difference between slope and elasticity is that slope a. is a ratio of two changes, and elasticity is a ratio of two percentage changes. b. is a ratio of two percentage changes, and elasticity is a ratio of two changes. c. measures changes in quantity demanded more accurately than elasticity. d. none of the above; there is no difference between slope and elasticity. 48. Goods with many close substitutes tend to have a. more elastic demands. b. less elastic demands. c. price elasticities of demand that are unit elastic. d. income elasticities of demand that are negative. NAT: Analytic LOC: Elasticity TOP: Elastic demand 49. For a good that is a luxury, demand a. tends to be inelastic. b. tends to be elastic. c. has unit elasticity. d. cannot be represented by a demand curve in the usual way. NAT: Analytic LOC: Elasticity TOP: Elastic demand 50. The demand for Godiva pumpkin truffles is likely quite elastic because a. truffles melt easily. b. this particular type of chocolate is viewed as a necessity by many chocolate lovers. c. the market is broadly defined. d. other types of chocolate are good substitutes for this particular flavor. ANS: D PTS: 1 DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Elastic demand 51. The demand for Hubba Bubba bubble gum is likely a. elastic because gum is expensive relative to other snacks. b. elastic because there are many close substitutes for Hubba Bubba. c. elastic because bubble gum is regarded as a necessity by many people. d. inelastic because it is consumed quickly, making the relevant time horizon short. NAT: Analytic LOC: Elasticity TOP: Elastic demand 52. A good will have a more elastic demand, the a. greater the availability of close substitutes. b. more broad the definition of the market. c. shorter the period of time. d. more it is regarded as a necessity. NAT: Analytic LOC: Elasticity TOP: Elastic demand

12 12 Chapter 5/Elasticity and Its Application 53. Which of the following statements is correct? a. The demand for flat-screen computer monitors is more elastic than the demand for monitors in general. b. The demand for grandfather clocks is more elastic than the demand for clocks in general. c. The demand for cardboard is more elastic over a long period of time than over a short period of time. d. All of the above are correct. ANS: D PTS: 1 DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Elastic demand 54. Which of the following statements is correct? a. The demand for natural gas is more elastic over a short period of time than over a long period of time. b. The demand for smoke alarms is more elastic than the demand for Persian rugs. c. The demand for bourbon whiskey is more elastic than the demand for alcoholic beverages in general. d. All of the above are correct. NAT: Analytic LOC: Elasticity TOP: Elastic demand 55. The value of the price elasticity of demand for a good will be relatively large when a. there are no good substitutes available for the good. b. the time period in question is relatively short. c. the good is a luxury rather than a necessity. d. All of the above are correct. NAT: Analytic LOC: Elasticity TOP: Elastic demand 56. If the price elasticity of demand is 1.5, regardless of which two points on the demand curve are used to compute the elasticity, then demand is a. perfectly inelastic, and the demand curve is vertical. b. elastic, and the demand curve is a straight, downward-sloping line. c. perfectly elastic, and the demand curve is horizontal. d. elastic, and the demand curve is something other than a straight, downward-sloping line. ANS: D PTS: 1 DIF: 3 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Elastic demand 57. Suppose that quantity demand falls by 30% as a result of a 5% increase in price. The price elasticity of demand for this good is a. inelastic and equal to 6. b. elastic and equal to 6. c. inelastic and equal to d. elastic and equal to NAT: Analytic LOC: Elasticity TOP: Elastic demand

13 Chapter 5/Elasticity and Its Application/ Which of the following is likely to have the most price elastic demand? a. clothing b. blue jeans c. Tommy Hilfiger jeans d. All three would have the same elasticity of demand because they are all related. NAT: Analytic LOC: Elasticity TOP: Elastic demand 59. Which of the following is likely to have the most price elastic demand? a. ice cream b. frozen yogurt c. vanilla ice cream d. Häagen-Dazs vanilla bean ice cream ANS: D PTS: 1 DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Elastic demand 60. Which of the following is likely to have the most price elastic demand? a. lattés b. doctor s visits c. eggs d. natural gas NAT: Analytic LOC: Elasticity TOP: Elastic demand 61. Which of the following is likely to have the most price elastic demand? a. dental floss b. milk c. salt d. diamond earrings ANS: D PTS: 1 DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Elastic demand 62. Which of the following is likely to have the most price elastic demand? a. gasoline in the short run b. dentist s visits c. ice cream d. deodorant NAT: Analytic LOC: Elasticity TOP: Elastic demand 63. Demand is said to be price elastic if a. the price of the good responds substantially to changes in demand. b. demand shifts substantially when income or the expected future price of the good changes. c. buyers do not respond much to changes in the price of the good. d. buyers respond substantially to changes in the price of the good. ANS: D PTS: 1 DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Elastic demand MSC: Definitional

14 14 Chapter 5/Elasticity and Its Application 64. When quantity demanded responds strongly to changes in price, demand is said to be a. fluid. b. elastic. c. dynamic. d. highly variable. ANS: B PTS: 1 DIF: 1 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Elastic demand MSC: Definitional 65. Demand is elastic if the price elasticity of demand is a. less than 1. b. equal to 1. c. equal to 0. d. greater than 1. ANS: D PTS: 1 DIF: 1 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Elastic demand MSC: Definitional 66. For a good that is a necessity, a. quantity demanded tends to respond substantially to a change in price. b. demand tends to be inelastic. c. the law of demand does not apply. d. All of the above are correct. NAT: Analytic LOC: Elasticity TOP: Inelastic demand 67. Which of the following is likely to have the most price inelastic demand? a. mint-flavored toothpaste b. toothpaste c. Colgate mint-flavored toothpaste d. a generic mint-flavored toothpaste NAT: Analytic LOC: Elasticity TOP: Inelastic demand 68. Which of the following is likely to have the most price inelastic demand? a. white chocolate chip with macadamia nut cookies b. Mrs. Field s chocolate chip cookies c. milk chocolate chip cookies d. cookies ANS: D PTS: 1 DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Inelastic demand 69. Which of the following is likely to have the most price inelastic demand? a. white chocolate chip with macadamia nut cookies b. hardback novels c. salt d. box seats at a major league baseball game NAT: Analytic LOC: Elasticity TOP: Inelastic demand

15 Chapter 5/Elasticity and Its Application/ Which of the following is likely to have the most price inelastic demand? a. laptop computers b. ipod shuffles c. designer jeans d. college tuition for a junior or senior ANS: D PTS: 1 DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Inelastic demand 71. Which of the following is likely to have the most price inelastic demand? a. strawberry-banana milk shakes b. gasoline in the short run c. diamond earrings d. box seats at a major league baseball game NAT: Analytic LOC: Elasticity TOP: Inelastic demand 72. Which of the following is likely to have the most price inelastic demand? a. chocolate b. Godiva chocolate c. Hershey s chocolate d. All three would have the same elasticity of demand because they are all related. NAT: Analytic LOC: Elasticity TOP: Inelastic demand 73. Which of the following is likely to have the most price inelastic demand? a. camcorders b. insulin c. apples d. devices that remove cores from apples NAT: Analytic LOC: Elasticity TOP: Inelastic demand 74. Which of the following is likely to have the most price inelastic demand? a. athletic shoes b. running shoes c. Nike running shoes d. Nike Shox running shoes NAT: Analytic LOC: Elasticity TOP: Inelastic demand 75. Which of the following is likely to have the most price inelastic demand? a. lattés b. filet mignon c. Grey Goose vodka d. milk ANS: D PTS: 1 DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Inelastic demand

16 16 Chapter 5/Elasticity and Its Application 76. For a good that is a necessity, demand a. tends to be inelastic. b. tends to be elastic. c. has unit elasticity. d. cannot be represented by a demand curve in the usual way. NAT: Analytic LOC: Elasticity TOP: Inelastic demand 77. A person who takes a prescription drug to control high cholesterol most likely has a demand for that drug that is a. inelastic. b. unit elastic. c. elastic. d. highly responsive to changes in income. NAT: Analytic LOC: Elasticity TOP: Inelastic demand 78. There are very few, if any, good substitutes for motor oil. Therefore, the 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. NAT: Analytic LOC: Elasticity TOP: Inelastic demand 79. A good will have a more inelastic demand, the a. greater the availability of close substitutes. b. broader the definition of the market. c. longer the period of time. d. more it is regarded as a luxury. NAT: Analytic LOC: Elasticity TOP: Inelastic demand 80. Other things equal, the demand for a good tends to be more inelastic, the a. fewer the available substitutes. b. longer the time period considered. c. more the good is considered a luxury good. d. more narrowly defined is the market for the good. NAT: Analytic LOC: Elasticity TOP: Inelastic demand 81. Suppose that quantity demand rises by 10% as a result of a 15% decrease in price. The price elasticity of demand for this good is a. inelastic and equal to b. elastic and equal to c. inelastic and equal to d. elastic and equal to NAT: Analytic LOC: Elasticity TOP: Inelastic demand

17 Chapter 5/Elasticity and Its Application/ There are very few, if any, good substitutes for automotive tires. Therefore, the demand for automotive tires would tend to be a. elastic. b. unit elastic. c. inelastic. d. highly responsive to changes in income as well as changes in prices. ANS: C PTS: 1 DIF: 1 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Inelastic demand 83. Demand is said to be inelastic if a. buyers respond substantially to changes in the price of the good. b. demand shifts only slightly when the price of the good changes. c. the quantity demanded changes only slightly when the price of the good changes. d. the price of the good responds only slightly to changes in demand. NAT: Analytic LOC: Elasticity TOP: Inelastic demand MSC: Definitional 84. If demand is price inelastic, then a. buyers do not respond much to a change in price. b. buyers respond substantially to a change in price, but the response is very slow. c. buyers do not alter their quantities demanded much in response to advertising, fads, or general changes in tastes. d. the demand curve is very flat. NAT: Analytic LOC: Elasticity TOP: Inelastic demand MSC: Definitional 85. If the quantity demanded of a certain good responds only slightly to a change in the price of the good, then the a. demand for the good is said to be elastic. b. demand for the good is said to be inelastic. c. law of demand does not apply to the good. d. demand curve for the good shifts only slightly in response to a change in price. ANS: B PTS: 1 DIF: 1 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Inelastic demand MSC: Definitional 86. Demand is inelastic if the price elasticity of demand is a. less than 1. b. equal to 1. c. greater than 1. d. equal to 0. ANS: A PTS: 1 DIF: 1 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Inelastic demand MSC: Definitional 87. Demand is said to be inelastic if the a. quantity demanded changes proportionately more than price. b. price changes proportionately more than income. c. quantity demanded changes proportionately less than price. d. quantity demanded changes proportionately the same as price. NAT: Analytic LOC: Elasticity TOP: Inelastic demand MSC: Definitional

18 18 Chapter 5/Elasticity and Its Application 88. When the price of bubble gum is $0.50, the quantity demanded is 400 packs per day. When the price falls to $0.40, the quantity demanded increases to 600. Given this information and using the midpoint method, we know that the demand for bubble gum is a. inelastic. b. elastic. c. unit elastic. d. perfectly inelastic. NAT: Analytic LOC: Elasticity TOP: Midpoint method Price elasticity of demand 89. The midpoint method is used to compute elasticity because it a. automatically computes a positive number instead of a negative number. b. results in an elasticity that is the same as the slope of the demand curve. c. gives the same answer regardless of the direction of change. d. automatically rounds quantities to the nearest whole unit. NAT: Analytic LOC: Elasticity TOP: Midpoint method Price elasticity of demand 90. Suppose the price of potato chips decreases from $1.45 to $1.25 and, as a result, the quantity of potato chips demanded increases from 2,000 to 2,200. Using the midpoint method, the price elasticity of demand for potato chips in the given price range is a b c d ANS: D PTS: 1 DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Midpoint method Price elasticity of demand 91. Using the midpoint method, the price elasticity of demand for a good is computed to be approximately Which of the following events is consistent with a 10 percent decrease in the quantity of the good demanded? a. a 7.5 increase in the price of the good b. a percent increase in the price of the good c. an increase in the price of the good from $7.50 to $10 d. an increase in the price of the good from $10 to $17.50 ANS: B PTS: 1 DIF: 3 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Midpoint method Price elasticity of demand 92. Using the midpoint method, the price elasticity of demand for a good is computed to be approximately 2. Which of the following events is consistent with a 0.1 percent increase in the price of the good? a. The quantity of the good demanded decreases from 250 to 150. b. The quantity of the good demanded decreases from 200 to 100. c. The quantity of the good demanded decreases by 0.05 percent. d. The quantity of the good demanded decreases by 0.2 percent. ANS: D PTS: 1 DIF: 3 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Midpoint method Price elasticity of demand

19 Chapter 5/Elasticity and Its Application/ Studies indicate that the price elasticity of demand for cigarettes is about 0.4. A government policy aimed at reducing smoking changed the price of a pack of cigarettes from $2 to $6. According to the midpoint method, the government policy should have reduced smoking by a. 30%. b. 40%. c. 80%. d. 250%. ANS: B PTS: 1 DIF: 3 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Midpoint method Price elasticity of demand 94. When the price of a good is $5, the quantity demanded is 100 units per month; when the price is $7, the quantity demanded is 80 units per month. Using the midpoint method, the price elasticity of demand is about a b c d ANS: B PTS: 1 DIF: 1 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Midpoint method Price elasticity of demand 95. When the price of a good is $5, the quantity demanded is 120 units per month; when the price is $7, the quantity demanded is 100 units per month. Using the midpoint method, the price elasticity of demand is about a b c. 2. d. 10. ANS: A PTS: 1 DIF: 1 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Midpoint method Price elasticity of demand 96. When the price of a bracelet was $25 each, the jewelry shop sold 20 per month. When it raised the price to $35 each, it sold 14 per month. Using the midpoint method, the price elasticity of demand for bracelets is about a b c d NAT: Analytic LOC: Elasticity TOP: Midpoint method Price elasticity of demand 97. Which of the following expressions is valid for the price elasticity of demand? a. Price elasticity of demand =. b. c. d. Price elasticity of demand =. Price elasticity of demand =. Price elasticity of demand =. NAT: Analytic LOC: Elasticity TOP: Midpoint method Price elasticity of demand

20 20 Chapter 5/Elasticity and Its Application 98. Which of the following expressions can be used to compute the price elasticity of demand? a. Price elasticity of demand =. b. c. d. Price elasticity of demand =. Price elasticity of demand =. Price elasticity of demand =. ANS: C PTS: 1 DIF: 3 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Midpoint method Price elasticity of demand 99. Suppose that 50 ice cream cones are demanded at a particular price. If the price of ice cream cones rises from that price by 4 percent, the number of ice cream cones demanded falls to 46. Using the midpoint approach to calculate the price elasticity of demand, it follows that the a. demand for ice cream cones in this price range is elastic. b. demand for ice cream cones in this price range is inelastic. c. demand for ice cream cones in this price range is unit elastic. d. price elasticity of demand for ice cream cones in this price range is 0. NAT: Analytic LOC: Elasticity TOP: Midpoint method Price elasticity of demand 100. When the price of used cds is $4, Daphne buys five per month. When the price is $3, she buys nine per month. Daphne's demand for used cds is 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. NAT: Analytic LOC: Elasticity TOP: Midpoint method Price elasticity of demand 101. The midpoint method for calculating elasticities is convenient in that it allows us to 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. NAT: Analytic LOC: Elasticity TOP: Midpoint method Price elasticity of demand

21 Chapter 5/Elasticity and Its Application/ 21 Table 5-2 Price Quantity $100 0 $80 10 $60 20 $40 30 $20 40 $ Refer to Table 5-2. Using the midpoint method, if the price falls from $80 to $60, the absolute value of the price elasticity of demand is a. 20. b. 10. c d NAT: Analytic LOC: Elasticity TOP: Midpoint method Price elasticity of demand 103. Refer to Table 5-2. Using the midpoint method, if the price falls from $60 to $40, the absolute value of the price elasticity of demand is a b. 1. c. 4. d. 20. NAT: Analytic LOC: Elasticity TOP: Midpoint method Price elasticity of demand 104. Refer to Table 5-2. Using the midpoint method, if the price falls from $40 to $20, the absolute value of the price elasticity of demand is a. 20. b. 10. c d ANS: D PTS: 1 DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Midpoint method Price elasticity of demand 105. Refer to Table 5-2. Using the midpoint method, if the price falls from $80 to $60, the price elasticity of demand is a. zero. b. unit elastic. c. inelastic. d. elastic. ANS: D PTS: 1 DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Midpoint method Price elasticity of demand

22 22 Chapter 5/Elasticity and Its Application 106. Refer to Table 5-2. Using the midpoint method, if the price falls from $60 to $40, the price elasticity of demand is a. zero. b. inelastic. c. unit elastic. d. elastic. NAT: Analytic LOC: Elasticity TOP: Midpoint method Price elasticity of demand 107. Refer to Table 5-2. Using the midpoint method, if the price falls from $40 to $20, the price elasticity of demand is a. zero. b. inelastic. c. unit elastic. d. elastic. NAT: Analytic LOC: Elasticity TOP: Midpoint method Price elasticity of demand Table 5-3 The following table shows the demand schedule for a particular good. Price Quantity $15 0 $12 5 $9 10 $6 15 $3 20 $ Refer to Table 5-3. Using the midpoint method, what is the price elasticity of demand when price rises from $9 to $12? a b c d ANS: D PTS: 1 DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Midpoint method Price elasticity of demand 109. Refer to Table 5-3. Using the midpoint method, when price rises from $6 to $9, the price elasticity of demand is a b c d. 1.5 NAT: Analytic LOC: Elasticity TOP: Midpoint method Price elasticity of demand

23 Chapter 5/Elasticity and Its Application/ Refer to Table 5-3. Using the midpoint method, when price falls from $6 to $3, the price elasticity of demand is a b c d NAT: Analytic LOC: Elasticity TOP: Midpoint method Price elasticity of demand Table 5-4 Price Total Revenue $10 $100 $12 $108 $14 $112 $16 $ Refer to Table 5-4. As price rises from $10 to $12, the price elasticity of demand using the midpoint method is approximately a b c d ANS: D PTS: 1 DIF: 3 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Midpoint method Price elasticity of demand 112. Refer to Table 5-4. Demand is unit elastic when quantity demanded changes from a. 10 to 9. b. 9 to 8. c. 8 to 7. d. There is not enough information given to determine the correct answer. ANS: C PTS: 1 DIF: 3 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Midpoint method Price elasticity of demand 113. Refer to Table 5-4. When price is between $10 and $14, demand is a. elastic. b. unit elastic. c. inelastic. d. There is not enough information given to determine whether demand is elastic, unit elastic, or inelastic. ANS: C PTS: 1 DIF: 3 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Midpoint method Price elasticity of demand

24 24 Chapter 5/Elasticity and Its Application Figure 5-1 Price A 6 5 B 4 3 Demand Quantity 114. Refer to Figure 5-1. Between point A and point B, price elasticity of demand is equal to a b c. 1.5 d NAT: Analytic LOC: Elasticity TOP: Midpoint method Price elasticity of demand 115. Refer to Figure 5-1. Between point A and point B, the slope is equal to a. -1/4, and the price elasticity of demand is equal to 2/3. b. -1/4, and the price elasticity of demand is equal to 3/2. c. -3/2, and the price elasticity of demand is equal to 1/4. d. -2/3, and the price elasticity of demand is equal to 3/2. NAT: Analytic LOC: Elasticity TOP: Midpoint method Price elasticity of demand 116. Refer to Figure 5-1. Between point A and point B on the graph, demand is a. perfectly elastic. b. inelastic. c. unit elastic. d. elastic, but not perfectly elastic. ANS: D PTS: 1 DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Midpoint method Price elasticity of demand 117. Suppose demand is perfectly elastic, and the supply of the good in question decreases. As a result, a. the equilibrium quantity decreases, and the equilibrium price is unchanged. b. the equilibrium price increases, and the equilibrium quantity is unchanged. c. the equilibrium quantity and the equilibrium price both are unchanged. d. buyers total expenditure on the good is unchanged. NAT: Analytic LOC: Elasticity TOP: Perfectly elastic demand

25 Chapter 5/Elasticity and Its Application/ A perfectly elastic demand implies that a. buyers will not respond to any change in price. b. any rise in price above that represented by the demand curve will result in a quantity demanded of zero. c. quantity demanded and price change by the same percent as we move along the demand curve. d. price will rise by an infinite amount when there is a change in quantity demanded. NAT: Analytic LOC: Elasticity TOP: Perfectly elastic demand 119. The case of perfectly elastic demand is illustrated by a demand curve that is a. vertical. b. horizontal. c. downward-sloping but relatively steep. d. downward-sloping but relatively flat. ANS: B PTS: 1 DIF: 1 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Perfectly elastic demand 120. When small changes in price lead to infinite changes in quantity demanded, demand is perfectly a. elastic, and the demand curve will be horizontal. b. inelastic, and the demand curve will be horizontal. c. elastic, and the demand curve will be vertical. d. inelastic, and the demand curve will be vertical. NAT: Analytic LOC: Elasticity TOP: Perfectly elastic demand 121. For a horizontal demand curve, a. the slope is undefined, and the price elasticity of demand is equal to 0. b. the slope is equal to 0, and the price elasticity of demand is undefined. c. both the slope and price elasticity of demand are undefined. d. both the slope and price elasticity of demand are equal to 0. NAT: Analytic LOC: Elasticity TOP: Perfectly elastic demand 122. Suppose demand is perfectly inelastic, and the supply of the good in question decreases. As a result, a. the equilibrium quantity decreases, and the equilibrium price is unchanged. b. the equilibrium price increases, and the equilibrium quantity is unchanged. c. the equilibrium quantity and the equilibrium price both are unchanged. d. buyers total expenditure on the good is unchanged. NAT: Analytic LOC: Elasticity TOP: Perfectly inelastic demand 123. In the case of perfectly inelastic demand, a. the change in quantity demanded equals the change in price. b. the percentage change in quantity demanded equals the percentage change in price. c. infinitely-large changes in quantity demanded result from very small changes in the price. d. quantity demanded stays the same whenever price changes. ANS: D PTS: 1 DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Perfectly inelastic demand

26 26 Chapter 5/Elasticity and Its Application 124. When demand is perfectly inelastic, the demand curve will be a. negatively sloped, because buyers decrease their purchases when the price rises. b. vertical, because buyers purchase the same amount as before whenever the price rises or falls. c. positively sloped, because buyers increase their purchases when price rises. d. positively sloped, because buyers increase their total expenditures when price rises. NAT: Analytic LOC: Elasticity TOP: Perfectly inelastic demand 125. When demand is perfectly inelastic, the price elasticity of demand a. is zero, and the demand curve is vertical. b. is zero, and the demand curve is horizontal. c. approaches infinity, and the demand curve is vertical. d. approaches infinity, and the demand curve is horizontal. NAT: Analytic LOC: Elasticity TOP: Perfectly inelastic demand 126. A perfectly inelastic demand implies that buyers a. decrease their purchases when the price rises. b. purchase the same amount as before when the price rises or falls. c. increase their purchases only slightly when the price falls. d. respond substantially to an increase in price. NAT: Analytic LOC: Elasticity TOP: Perfectly inelastic demand 127. Ryan says that he would buy one cup of coffee every day regardless of the price. If he is telling the truth, Ryan s a. demand for coffee is perfectly inelastic. b. price elasticity of demand for coffee is 1. c. income elasticity of demand for coffee is 0. d. None of the above answers is correct. NAT: Analytic LOC: Elasticity TOP: Perfectly inelastic demand 128. For a vertical demand curve, a. the slope is undefined, and the price elasticity of demand is equal to 0. b. the slope is equal to 0, and the price elasticity of demand is undefined. c. both the slope and price elasticity of demand are undefined. d. both the slope and price elasticity of demand are equal to 0. NAT: Analytic LOC: Elasticity TOP: Perfectly inelastic demand 129. In which of these instances is demand said to be perfectly inelastic? a. An increase in price of 2% causes a decrease in quantity demanded of 2%. b. A decrease in price of 2% causes an increase in quantity demanded of 0%. c. A decrease in price of 2% causes a decrease in total revenue of 0%. d. An increase in price of 2% causes a decrease in quantity demanded of 1/2%. NAT: Analytic LOC: Elasticity TOP: Perfectly inelastic demand