Chapter 5

1. What does the price elasticity of demand measure? a. how responsive buyers are to a change in income b. how responsive sellers are to a change in price c. how responsive buyers are to a change in price d. how responsive sellers are to a change in buyers incomes 2. When is demand said to be elastic? a. if the price of the good responds substantially to changes in demand b. if demand shifts substantially when the price of the good changes c. if buyers do not respond much to changes in the price of the good d. if the quantity demanded responds substantially to changes in the price of the good 3. When quantity demanded responds only slightly to changes in price, what is demand said to be? a. unit elastic b. elastic c. inelastic d. perfectly inelastic 4. If a good is a necessity, what would demand for the good tend to be? a. elastic b. horizontal c. unit elastic d. inelastic 5. What does the elasticity of demand for luxuries tend to be? a. greater than 1 b. less than 1 c. equal to 1 d. equal to 0 6. Why would chocolate chip cookie dough ice cream tend to have very elastic demand? a. because it has many complements b. because the market is broadly defined c. because there are few substitutes d. because other flavours of ice cream are almost perfect substitutes 7. There are very few, if any, good substitutes for motor oil. What does this imply? a. The supply of motor oil would tend to be price elastic. b. The demand for motor oil would tend to be price elastic. c. The demand for motor oil would tend to be price inelastic. d. The demand for motor oil would tend to be income elastic.

8. How do economists compute the price elasticity of demand?

9. Holding all other forces constant, when the price of gasoline rises, why would the number of gallons of gasoline demanded fall substantially over a ten-year period? a. because buyers tend to be much less sensitive to a change in price when given more time to react b. because buyers will have substantially more income over a ten-year period c. because buyers tend to be much more sensitive to a change in price when given more time to react d. because gasoline has no substitutes 10. Suppose the price of Twinkies is reduced from $1.45 to $1.25 and, as a result, the quantity of Twinkies demanded increases from 2,000 to 2,200. Using the midpoint method, what is the price elasticity of demand for Twinkies in the given price range? a. 0.64 b. 1.00 c. 0.75 d. 1.56

Figure 5-1

11. Refer to Figure 5-1. What is the elasticity of demand from point A to point B, using the midpoint method? a. 0.4 b. 1 c. 1.5 d. 2.5 12. Refer to Figure 5-1. If the price decreased from $18 to $6, what would happen to total revenue? What would this imply about demand elasticity? a. Total revenue would increase by $1200 and demand would be elastic. b. Total revenue would increase by $800 and demand would be elastic. c. Total revenue would decrease by $1200 and demand would be inelastic. d. Total revenue would decrease by $800 and demand would be inelastic.

Figure 5-2

13. Refer to Figure 5-2. As price falls from PA to PB, which demand curve is most elastic? a. D1 b. D2 c. D3 d. All of the above are equally elastic. 14. What does a flatter demand curve represent? a. greater price elasticity of demand b. smaller price elasticity of demand c. price elasticity of demand that is close to the slope of the curve d. price elasticity of demand that is equal o the slope of the curve 15. What is true about a downward sloping linear demand curve? a. The slope and elasticity are both constant. b. The slope changes but elasticity is constant. c. The slope and elasticity both change. d. The slope is constant but elasticity changes. 16. Moving down a linear demand curve, what happens to elasticity? a. It gets smaller, then larger. b. It gets larger. c. It gets smaller. d. It gets larger, then smaller. 17. Get Smart University is contemplating increasing tuition to increase revenue. What must the school believe? a. The law of demand does not apply. b. The demand for university education is elastic. c. The demand for university education is inelastic. d. The supply of university education is elastic.

18. If marijuana were legalized, it is likely that there would be an increase in the supply of marijuana. Advocates
of marijuana legalization argue that this would significantly reduce the amount of revenue going to the criminal organizations that currently supply marijuana. What do these advocates believe about marijuana? a. The supply for marijuana is price elastic. b. The demand for marijuana is price elastic. c. The supply for marijuana is price inelastic. d. The demand for marijuana is price inelastic. 19. What describes a perfectly elastic demand curve? a. vertical b. horizontal c. downward sloping to the right d. upward sloping to the right 20. What happens in the case of perfectly inelastic demand? a. Quantity demanded stays the same regardless of price changes. b. Huge changes in quantity demanded result from very small changes in the price. c. The change in quantity demanded exactly equals the change in price. d. The change in quantity demanded will be twice the change in price. 21. As elasticity of demand increases, what happens to the demand curve? a. It gets flatter and the price elasticity of demand will eventually be less than 1. b. It gets steeper and the price elasticity of demand will eventually be greater than 1. c. It gets flatter and the price elasticity of demand will eventually be greater than 1. d. It gets steeper and the price elasticity of demand will eventually be less than 1. Figure 5-3

22. Refer to Figure 5-3. What areas represent the total revenue at P1? a. A + B b. B + C c. B + D d. C + D

23. If the demand for doughnuts is elastic, what will a decrease in the price of doughnuts do? a. It will increase the total revenue of doughnut sellers. b. It will decrease the total revenue of doughnut sellers. c. It will not change the total revenue of doughnut sellers. d. There is not enough information to answer this question. 24. Where will total revenue be highest on a linear demand curve? a. the top of the curve where prices are higher b. the centre of the curve c. the lower end of the curve where quantity is higher d. any point on the curve; total revenue will be the same since increases in price are offset by decreases in quantity Figure 5-4

25. Refer to Figure 5-4. Between point A and point B, what do we know? a. the slope is equal to 1/4 and elasticity is equal to 2/3 b. the slope is equal to 1/4 and elasticity is equal to 3/2 c. the slope is equal to 3/2 and elasticity is equal to 1/4 d. the slope is equal to 2/3 and elasticity is equal to 1/4 26. If a 6 percent increase in income results in a 10 percent increase in the quantity demanded of pizza, what is the income elasticity of demand for pizza, and what type of good is pizza? a. negative, and therefore pizza is an normal good b. negative, and therefore pizza is a inferior good c. positive, and therefore pizza is an inferior good d. positive, and therefore pizza is a normal good 27. To determine whether a good is considered normal or inferior, what would one consider? a. the good's income elasticity of demand b. the good's price elasticity of demand c. the good's price elasticity of supply d. the good's cross-price elasticity of demand 28. What can the cross-price elasticity of demand tell us? a. whether goods are normal or inferior b. whether goods are elastic or inelastic c. whether goods are luxuries or necessities d. whether goods are complements or substitutes

29. If the cross-price elasticity of demand of two goods is negative, what are those two goods called? a. substitutes b. complements c. normal goods d. inferior goods 30. Suppose that the cross-price elasticity of demand between hot dogs and mustard is 2.00. If there is a 20 percent increase in the price of hot dogs, what will happen to the quantity of mustard purchased? a. It will fall by 200 percent. b. It will fall by 40 percent. c. It will rise by 200 percent. d. It will rise by 40 percent. 31. What does the price elasticity of supply measure? a. how responsive sellers are to a change in price b. how responsive buyers are to a change in income c. how responsive buyers are to a change in price d. how responsive sellers are to a change in buyers' income 32. In the short run, how responsive is the quantity supplied to price changes? a. very responsive b. not very responsive c. indifferent d. totally responsive 33. When a supply curve is relatively flat, what do we know? a. The supply is relatively elastic. b. The supply is relatively inelastic. c. Sellers are not at all responsive to a change in price. d. Quantity supplied changes slightly when the price changes. Figure 5-5

34. Refer to Figure 5-5. Which supply curve is perfectly inelastic? a. S1 b. S2 c. S3 d. It is impossible to tell without more information.

35. If two supply curves pass through the same point and one is steep and the other is flat, which of the following statements is correct? a. The flatter supply curve is more inelastic. b. The steeper supply curve is more inelastic. c. The elasticity of supply will be the same for both curves. d. It is impossible to tell the elasticity of supply for either curve unless you are given actual numbers to compute the elasticity of both curves. 36. If the elasticity of supply of a product is 2.5, what do we know about supply? a. It is inelastic. b. It is elastic. c. It is unit elastic. d. It is perfectly inelastic. 37. Which of the following statements apply as the elasticity of supply approaches infinity? a. Very small changes in price will lead to very large changes in quantity supplied. b. Very large changes in price will lead to very small changes in quantity supplied. c. Very small changes in price will lead to no change in quantity supplied. d. Very large changes in price will lead to no change in quantity supplied. 38. Because the demand for wheat tends to be inelastic, what would the development of a new, more productive hybrid wheat tend to do? a. increase the total revenue of wheat farmers b. decrease the total revenue of wheat farmers c. weaken the demand for wheat d. weaken the supply of wheat 39. When will a decrease in supply cause the smallest increase in price? a. when both supply and demand are inelastic b. when demand is elastic and supply is inelastic c. when both supply and demand are elastic d. when demand is inelastic and supply is elastic 40. What impact does an increase in farm technology that increases market supply have for farmers and for consumers? a. It is good for farmers because it raises prices for their products, but bad for consumers because it raises the prices consumers pay for food. b. It is bad for farmers because total revenue will fall, but good for consumers because food prices will fall. c. It is good for farmers because it raises prices for their products, and it is also good for consumers because more output is available for consumption. d. It is bad for farmers because total revenue will fall, and it is bad for consumers because farmers will raise the price of food to increase their total revenue. 41. In the market for oil in the short run, what are demand and supply? a. both elastic b. both inelastic c. demand is elastic and supply is inelastic d. demand is inelastic and supply is elastic

42. Which of the following consequences would follow from government attempts to reduce the flow of illegal drugs into the country? a. Drug interdiction would lower prices and total revenue in the drug market. b. Drug interdiction would decrease drug-related crime. c. Drug interdiction would shift the supply curve of drugs to the left. d. Drug interdiction would shift the demand curve for drugs to the left. 43. Why was OPEC successful in raising the world price of oil in the 1970s and early 1980s? a. There was an inelastic demand for oil and a reduction in the amount of oil supplied. b. There was a reduction in the amount of oil supplied and a world-wide oil embargo. c. There was a world-wide oil embargo and an elastic demand for oil. d. There was a reduction in the amount of oil supplied and an elastic demand for oil.