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Microeconomics, 3e (Hubbard/O'Brien) - TB2

Chapter 6 Elasticity: The Responsiveness of Demand and Supply
6.1 The Price Elasticity of Demand and Its Measurement
1) Economists use the concept of ________ to measure how one economic variable, such as
quantity, responds to a change in another economic variable, such as price.
A) slope
B) efficiency
C) relativity
D) elasticity
Answer: D
Comment: Recurring
Diff: 1 Page Ref: 168/168
Topic: Elasticity
Objective: LO1: Define price elasticity of demand and understand how to measure it.
AACSB: Reflective Thinking
Special Feature: None
2) The price elasticity of demand is equal to

A) the value of the slope of the demand curve.
B) the change in quantity demanded divided by the change in price.
C) the percentage change in price divided by the percentage change in quantity demanded.
D) the percentage change in quantity demanded divided by the percentage change in price.
Answer: D
Comment: Recurring
Diff: 1 Page Ref: 168-169/168-169
Topic: Price Elasticity of Demand
1
Copyright © 2010 Pearson Education, Inc.
3) In July 2008, the average price of gasoline in the United States was $4.09 per gallon, and
consumers purchased nearly 6 percent less gasoline than they had during July 2007, when the
average price of gasoline was $2.96 per gallon. Based on these figures, from July 2007 to July
2008, the demand for gasoline was
A) elastic.
B) inelastic.
C) unit elastic.
D) perfectly elastic.
Answer: B
Topic: Elastic and Inelastic Demand
AACSB: Analytic Skills
Special Feature: Chapter Opener: Do People Respond to Changes in the Price of Gasoline
4) To calculate the price elasticity of demand we divide

A) the percentage change in quantity demanded by the percentage change in price.
B) the percentage change in price by the percentage change in quantity demanded.
C) rise by the run.
D) the average price by the average quantity demanded.
Answer: A
Comment: Recurring
Diff: 1 Page Ref: 168-169/168-169
5) The slope of a demand curve is not used to measure the price elasticity of demand because
A) the slope of a linear demand curve is not constant.
B) the slope of a line cannot have a negative value.
C) the measurement of slope is sensitive to the units chosen for price and quantity.
D) the slope of the demand curve does not tell us how much quantity changes as price changes.
Answer: C
Comment: Recurring
Topic: Price Elasticity and the Slope of a Demand Curve
6) If the slope of a demand curve is equal to -0.1 then

A) demand is inelastic.
2
B) we don't know whether the demand is elastic or inelastic.
C) the demand is elastic at low prices and inelastic at high prices.
D) as price increases by 10 percent quantity demanded decreases by 1 percent.
Answer: B
Comment: Recurring
3
7) The price elasticity of demand for beef is estimated to be 0.60 (in absolute value). This means
that a 20 percent increase in the price of beef, holding every thing else constant, will cause the
quantity of beef demanded to
A) decrease by 12 percent.
B) decrease by 26 percent.
C) decrease by 32 percent.
D) decrease by 60 percent.
Answer: A
Comment: Recurring
Diff: 2 Page Ref: 168-169/168-169
8) If the absolute value of the price elasticity of demand for aspirin equals 0.8 then
A) aspirin is a normal good.
B) the demand for aspirin is inelastic.
C) aspirin has few substitutes.
D) the demand for aspirin is elastic.
Answer: B
Comment: Recurring
9) If demand is perfectly elastic, the absolute value of the price elasticity coefficient is
A) infinity.
B) zero.
C) more than one.
D) equal to the absolute value of the slope of the demand curve.
Answer: A
Comment: Recurring
Topic: Perfectly Elastic Demand
4
10) When the price of tortilla chips rose by 10 percent, the quantity of tortilla chips sold fell 4
percent. This indicates that the demand for tortilla chips is
A) inelastic.
B) elastic.
C) unit-elastic.
D) perfectly inelastic.
Answer: A
Comment: Recurring
11) A linear downward sloping demand curve has price elasticities (in absolute values) that
A) increase as price decreases.
B) remain constant along the demand curve.
C) decrease as price decreases.
D) are greater than or equal to 1.
Answer: C
Comment: Recurring
Diff: 1 Page Ref: 168-169/168-169
12) Carrie Bradshaw claims that when it comes to buying shoes, "price is no object." If this is
true, then her demand for shoes is
A) perfectly elastic.
B) perfectly inelastic.
C) unit-elastic.
D) horizontal.
Answer: B
Comment: Recurring
Topic: Perfectly Inelastic Demand
5
13) If the price elasticity of demand for insulin is equal to zero then the demand curve for insulin
is
A) horizontal.
B) downward sloping.
C) curvilinear.
D) vertical.
Answer: D
Comment: Recurring
Figure 6-1
14) Refer to Figure 6-1. The section of the demand curve labeled "A" represents
A) the inelastic section of the demand curve.
B) the unit-elastic section of the demand curve.
C) the elastic section of the demand curve.
D) the perfectly elastic section of the demand curve.
Answer: C
Comment: Recurring
Skill: Graphing
6
15) If the demand for iPods is price elastic, then
A) the percentage change in quantity demanded is greater than the percentage change in price (in
absolute value).
B) the percentage change in quantity demanded is less than the percentage change in price (in
absolute value).
C) the percentage change in quantity demanded is equal to the percentage change in price.
D) quantity demanded is not responsive to changes in price.
Answer: A
Comment: Recurring
16) If the demand for a steak is unit-elastic, then

A) the percentage change in quantity demanded is 1 percent greater than the percentage change
in price.
B) the percentage change in quantity demanded is equal to the percentage change in price.
C) the percentage change in quantity demanded is 100 percent greater than the percentage
change in price (in absolute value).
D) quantity demanded does not respond to changes in price.
Answer: B
Comment: Recurring
Topic: Unit-Elastic Demand
17) If the demand for cell phone service is inelastic, then

A) the percentage change in quantity demanded is greater than the percentage change in price (in
absolute value).
B) the percentage change in quantity demanded is equal to the percentage change in price.
C) the quantity demanded does not change in response to changes in price.
D) the percentage change in quantity demanded is less than the percentage change in price (in
absolute value).
Answer: D
Comment: Recurring
7
Figure 6-2
18) Refer to Figure 6-2. As price falls from PA to PB, the quantity demanded increases most
along D1; therefore,
A) D1 is unit elastic.
B) D1 is more inelastic than D2 or D3.
C) D1 is more elastic than D2 or D3
D) D1 is elastic at PA but inelastic at PB.
Answer: C
Comment: Recurring
Skill: Graphing
19) The midpoint formula is used to measure the elasticity of demand between two points on a
demand curve
A) when demand is elastic.
B) in special cases when the percentage change in the quantity demanded is equal to the
percentage change in price.
C) to ensure that the elasticity has a negative value.
D) to ensure that we have only one value of the price elasticity of demand between two points on
a demand curve.
Answer: D
Comment: Recurring
Topic: The Midpoint Formula
8
20) When the price of pistachio nuts is $7.50 per lb. the quantity demanded is 48 lbs. When the
price of peaches is $9.00 per lb. the quantity demanded is 40 lbs. When the midpoint formula is
used to measure the price elasticity of demand we can say that the demand for pistachio nuts is
A) relatively, but not perfectly, elastic.
B) unit-elastic.
C) completely inelastic.
D) relatively, but not perfectly, inelastic.
Answer: B
Comment: Recurring
21) Assume that when the price of cantaloupes is $2.50 the demand for cantaloupes is unit-
elastic, and that the demand curve for cantaloupes is linear and downward sloping. If firms lower
the price of cantaloupes to $2.00 which of the following statements can be made regarding the
price elasticity of demand for cantaloupes?
A) The demand for cantaloupes at $2.00 must be inelastic.
B) We cannot determine whether the demand for cantaloupes is elastic or inelastic without
knowing what the quantity demanded is at each price.
C) The demand for cantaloupes at $2.00 must be elastic.
D) The demand for cantaloupes at $2.00 must be unit-elastic.
Answer: A
Comment: Recurring
9
22) Assume that the demand curve for sunblock is linear and downward sloping. Which of the
following statements about the slope of the demand curve for sunblock and the price elasticity of
demand for sunblock are true?
A) The slope and the price elasticity of demand are constant at all points along the demand curve
for sunblock.
B) The slope is constant, but the price elasticity of demand is not constant at all points along the
demand curve for sunblock.
C) The slope is not constant, but the price elasticity of demand is constant at all points along the
demand curve for sunblock.
D) The slope of the demand curve for sunblock is constant and equal to zero; demand is perfectly
inelastic.
Answer: B
Comment: Recurring
23) If the percentage change in the quantity of teapots demanded is greater than the percentage
change in the price of teapots, then
A) the price elasticity of demand for teapots is greater than 1 in absolute value.
B) the demand for teapots is unit-elastic.
C) the price elasticity of demand for teapots is equal to zero.
D) the price elasticity of demand for teapots is less than 1 in absolute value.
Answer: A
Comment: Recurring
Diff: 2 Page Ref: 168-169/168-169
24) We should never assume that an inelastic demand curve is a perfectly inelastic demand curve
because
A) there has never been evidence of a perfectly inelastic demand curve.
B) an inelastic demand curve may be perfectly inelastic at some times but not others.
C) perfectly inelastic demand curves are rare.
D) an inelastic demand curve may be elastic at high prices.
Answer: C
Special Feature: Don't Let This Happen to YOU!: Don't Confuse Inelastic with Perfectly
Inelastic
10
Table 6-1
Price Quantity
$35 40
25 50
25) Refer to Table 6-1. Suppose you own a bookstore. You believe that you can sell 40 copies
per day of the latest Harry Potter novel when the price is $35. You consider lowering the price to
$25 and believe this will increase the quantity sold to 50 books per day. Compute the price
elasticity of demand using the mid-point formula and these data. Select the correct implication
from your work.
A) The demand for the Harry Potter book is inelastic. Revenue will fall if the price is lowered.
B) The demand for the Harry Potter book is elastic. Revenue will rise if the price is lowered.
C) The demand for the Harry Potter book is inelastic. Revenue will rise if the price is lowered.
D) The demand for the Harry Potter book is elastic. Revenue will fall if the price is lowered.
Answer: A
Diff: 3 Page Ref: 171-172/171-172
Special Feature: Solved Problem: Calculating the Price Elasticity of Demand
26) Of the following, which is the best example of good with a perfectly inelastic demand?
A) the demand for tickets in New York City when the Mets or Yankees are in the World Series
B) the demand for gasoline
C) a diabetic's demand for insulin
D) the demand for a college education by a student who has a full scholarship to an Ivy League
school
Answer: C
Comment: Recurring
11
27) A perfectly elastic demand curve is
A) vertical.
B) horizontal.
C) curvilinear.
D) upward sloping.
Answer: B
Comment: Recurring
Topic: Perfectly Elastic Demand
28) A newspaper story on the effect of higher milk prices on the market for ice cream contained
the following:
"As a result [of the increase in milk prices], retail prices for ice cream are up 4 percent from last
year. . . . And ice cream consumption is down 3 percent."
Source: John Curran, "Ice Cream, They Scream: Milk Fat Costs Drive Up Ice Cream Prices,"
Associated Press, July 23, 2001.
Based on the information given, what is the price elasticity of demand for ice cream?
A) 0.75 (in absolute value)
B) 1.33 (in absolute value)
C) 12%
D) We do not have enough information to calculate the elasticity.
Answer: A
Diff: 2 Page Ref: 171-172/171-172
29) Suppose that when the price per ream of recycled printer paper rises from $4 to $4.50, the
quantity demanded falls from 800 to 600 reams per day. Using the midpoint formula, what is the
price elasticity of demand (in absolute value) over this range?
A) 0.003
B) 0.41
C) 2.43
D) 4
Answer: C
Diff: 3 Page Ref: 171-172/171-172
12
30) If demand is inelastic, the absolute value of the price elasticity coefficient is greater than one.
Answer: FALSE
Comment: Recurring
31) If the demand for a product is elastic, the quantity demanded changes by a smaller
percentage than the percentage change in price.
Answer: FALSE
32) If the absolute value of the price elasticity of demand for gasoline is 0.5, then a 10 percent
increase in the price of gasoline leads to a 0.5 percent decrease in the quantity demanded.
Answer: FALSE
Comment: Recurring
Diff: 2 Page Ref: 168-169/168-169
33) If at a price of $10, a vendor sells 5 units of a product and at a price of $8, 6 units are sold,
then, using the midpoint formula, the demand for this good is inelastic.
Answer: TRUE
Comment: Recurring
34) Briefly explain the economic concept of elasticity.

Answer: Elasticity is a measure of how one economic variable responds to changes in another
economic variable.
Comment: Recurring
Topic: Elasticity
13
35) The current price of canvas messenger bags is $36 each and sales of the bags equal 400 per
week. If the price elasticity of demand is -2.5 and the price changes to $44, how many messenger
bags will be sold per week? Use the midpoint formula.
Answer:
Using the midpoint formula: -2.5 = (400 - X) / [(X + 400) / 2] / (36 - 44) / [(36 + 44)/2]
-2.5 × -0.2 = (400 - X) / [(X + 400) / 2]
0.5 = (400 - X) / [(X + 400) / 2]
0.5(200 + 0.5X) = 400 - X
1.25X = 300
X = 240 bags.
Comment: Recurring
36) The U.S. government's focus on supply reduction efforts in its "war on drugs" has been
relatively unsuccessful at addressing illegal drug use. Some economists believe that a successful
anti-drug program must concentrate on reducing demand; for example, through drug education
and voluntary treatment programs for addicts.
a. Suppose the price elasticity of demand for cocaine is -0.5. What will happen to the
equilibrium price, quantity and total revenue from cocaine sales if the government succeeds in its
efforts to reduce demand? What is likely to happen to the incentive to sell cocaine?
b. Suppose the government continues to concentrate its efforts on supply reduction and is able to
reduce the supply of cocaine. As a result of the reduction in supply the price of cocaine increases
by 25 percent. If the price elasticity of demand is -0.5, what is likely to happen to the incentive to
sell cocaine?
c. Based on your answers, explain why one approach might be preferred over the other.
Answer:
a. Since the demand is inelastic, a decrease in demand will lead to a decrease in price, quantity
and total revenue. Reduced revenue is likely to deter drug trafficking.
b. The increase in price increases revenue when demand is inelastic; this will increase the
incentive to sell cocaine.
c. If people respond to incentives, the government will have more success is reducing cocaine
consumption if it uses anti-drug programs that concentrate on reducing demand rather than
programs that concentrate on reducing supply.
Comment: Recurring
Diff: 3 Page Ref: 168-169/168-169
14
6.2 The Determinants of the Price Elasticity of Demand
1) The larger the share of a good in a consumer's budget, holding everything else constant, the
A) more price elastic is a consumer's demand.
B) more vertical is a consumer's demand curve.
C) more price inelastic is a consumer's demand.
D) more unit-elastic is a consumer's demand.
Answer: A
Comment: Recurring
Topic: Share of the Good in the Consumer's Budget
Objective: LO2: Understand the determinants of the price elasticity of demand.
2) The most important determinant of the price elasticity of demand for a good is
A) the definition of the market for a good.
B) the availability of substitutes for the good.
C) the share of the good in the consumer's budget.
D) whether the good is a necessity or a luxury.
Answer: B
Comment: Recurring
Topic: Availability of Close Substitutes
3) Which of the following statements is true?

A) In general, if a product has few substitutes it will have an elastic demand.
B) The more time that passes the more inelastic the demand for a product becomes.
C) The demand curve for a necessity is more elastic than the demand curve for a luxury.
D) The more narrowly we define a market, the more elastic the demand for a product will be.
Answer: D
Comment: Recurring
Topic: Definition of the Market
15
4) Which of the following is not a determinant of a good's price elasticity of demand?
A) the slope of the demand curve
B) the share of the good in the consumer's total budget
C) whether the good is a luxury or a necessity
D) the passage of time
Answer: A
Comment: Recurring
Topic: Determinants of the Price Elasticity of Demand
5) If the absolute value of the price elasticity of demand for DVD movies is 0.8 then the
elasticity of demand for the DVD for the Bruce Willis movie Die Hard should be
A) less than 0.8 in absolute value.
B) greater than 0.8 in absolute value.
C) equal to 1 in absolute value.
D) equal to zero because the DVD of this movie has been out for several years.
Answer: B
Comment: Recurring
6) Holding everything else constant, the demand for a good tends to be more elastic
A) the more substitutes there are for the good.
B) the shorter the time period involved.
C) the more consumers perceive the good to be a necessity.
D) the less important the product is in consumers' budgets.
Answer: A
Comment: Recurring
16
7) Holding everything else constant, the absolute value of the price elasticity of demand for
Saucony tennis shoes is ________ the price elasticity of demand for tennis shoes.
A) less than
B) equal to
C) twice as great as
D) greater than
Answer: D
Comment: Recurring
8) Which of the following could explain why the demand for table salt is inelastic?
A) Salt is a luxury good.
B) Salt is a rare commodity.
C) Households devote a very small portion of their income to salt purchases.
D) Salt is a luxury for high income consumers but a necessity for low income consumers.
Answer: C
Comment: Recurring
9) Economist Jerry Hausman estimated the price elasticity of demand for breakfast cereal. He
found that
A) the price elasticity for a particular brand of raisin bran was the same as the elasticity of
demand for all family cereals.
B) the price elasticity of demand for Post Raisin Bran is less than the price elasticity of demand
for Kellogg's Raisin Bran.
C) the price elasticity of all family breakfast cereals is greater than the price elasticity of demand
for Post Raisin Bran or Kellogg's Raisin Bran.
D) the price elasticity of demand for a particular brand of raisin bran was larger in absolute value
than the elasticity for all family cereals.
Answer: D
Diff: 2 Page Ref: 176-177/176-177
Special Feature: Making the Connection: The Price Elasticity of Demand for Breakfast Cereal
17
10) Economist Jerry Hausman estimated the price elasticity of demand for "Post Raisin Bran"
and "All types of breakfast cereals." He found that the price elasticity of demand for Post Raisin
Bran was -2.5 and the price elasticity of demand for "All types of breakfast cereals" was -0.9.
Which of the following can be implied from Hausman's estimates?
A) The demand for "All types of breakfast cereals" is elastic.
B) A 1 percent increase in the price of Post Raisin Bran will lead to a 25 percent decrease in the
quantity demanded of Post Raisin Bran.
C) The demand for Post Raisin Bran is more elastic than the demand for "All types of breakfast
cereals."
D) A 1 percent decrease in the price of breakfast cereals will lead to a 2.5 percent increase in the
quantity demanded of Post Raisin Bran.
Answer: C
Diff: 2 Page Ref: 176-177/176-177
Special Feature: Making the Connection: The Price Elasticity of Demand for Breakfast Cereal
11) Most people buy salt infrequently and in small quantities. Even a doubling of the price of salt
is likely to result in a small decline in the quantity of salt demanded. Therefore,
A) the demand for salt will be perfectly inelastic.
B) salt is a normal good.
C) the demand for salt is relatively inelastic.
D) the price elasticity of demand for salt is greater than 1 (in absolute value).
Answer: C
Comment: Recurring
18
Table 6-2
Estimated Price Elasticity of

Demand
Coca-Cola -3.0
All carbonated soft drinks -1.5
All soft drinks -0.8
12) Refer to Table 6-2. Assume that an economist has estimated the price elasticity of demand
values in the table above. Use the data in the table to select the correct statement.
A) The demand for Coca-Cola is inelastic.
B) The elasticity for "All soft drinks" is less than the elasticity for Coca-Cola because Coca-Cola
is more of a luxury than a necessity; "All soft drinks" represent goods that are more necessity
than luxury.
C) The difference in elasticity values is explained by the fact that the more narrowly we define a
market the more elastic the demand will be.
D) There are fewer substitutes for "All carbonated soft drinks" than there are for "All soft
drinks."
Answer: C
Comment: Recurring
13) In general, a "big ticket item" such as a house or new car will
A) tend to have a more elastic demand than a lower priced good.
B) tend to have an inelastic demand because spending on the item takes up a large share of the
average consumer's budget.
C) tend to have an inelastic demand because it has many substitutes.
D) tend to have a more inelastic demand the more time that passes.
Answer: A
Comment: Recurring
19
14) Jill Borts believes that the price elasticity of demand for her economics textbook is relatively
inelastic. She argues "I was told I had to purchase a book written by Hubbard and O'Brien that is
required by my instructor. If I wanted to buy a mystery novel I would have many authors to
choose from. Therefore, the demand for mystery novels is more elastic than the demand for my
textbook." Is Jill correct?
A) The demand for the textbook is more inelastic, but Jill's reasoning is incorrect. The reason the
textbook has an inelastic demand is that it is more expensive than any novel.
B) She is correct.
C) She is confused. She should have concluded that the textbook has a more elastic demand than
a novel.
D) She is correct that the textbook has a more inelastic demand, but that is because most students
pay for their textbooks with credit or debit cards. Most people pay for novels and other books
with cash or by check.
Answer: B
Comment: Recurring
15) As gasoline prices increased throughout 2007 and into 2008, consumers began to explore
alternatives to driving their cars and more people eventually ended up using public
transportation. This exemplifies that for a specific product, the longer the time period involved,
A) the larger (in absolute value) the price elasticity of demand.
B) the smaller (in absolute value) the price elasticity of demand.
C) the closer the price elasticity of demand is to reaching a value of zero.
D) the more people come to rely on that product.
Answer: A
Topic: Passage of Time
Special Feature: An Inside LOOK: Consumers Change Their Behavior in Response to the Gas
Prices
16) The demand for The Federalist Papers is likely to be more elastic than the demand for a
best-selling mystery novel.
Answer: FALSE
Comment: Recurring
20
17) The demand for heating oil in the short run is more elastic than the long run demand for
heating oil.
Answer: FALSE
Comment: Recurring
Topic: Passage of Time
18) The price elasticity of demand for Kellogg's Raisin Bran is larger in absolute value than the
price elasticity for all breakfast cereals.
Answer: TRUE
Comment: Recurring
19) For each pair of items below determine which product would have the higher price elasticity
of demand (in absolute value).
a. Blood pressure medicine for someone who has high blood pressure and the purchase of
Clairol hair coloring product.
b. A new Ford Fusion or a tank of gas for your current car.
c. A Seiko watch or watches in general.
Answer:
a. The demand for the hair product is more price elastic (its elasticity has a higher absolute
value) than the demand for blood pressure medicine. The latter is more necessity than luxury and
has virtually no substitutes. There are substitutes for the Clairol hair coloring product and it is
not a necessity.
b. The demand for a new car is more price elastic than the demand for a tank of gas for your
current car. The Ford Fusion: (a) has many substitutes, including your current car and (b) will
consume a relatively large portion of your budget. Gasoline for the car you own is more
necessity than luxury.
c. The demand for Seiko watches is more price elastic than demand for watches in general.
Narrowly defined markets (such as the Seiko watch market) have many substitutes.
21
20) The estimated price elasticities of demand for the products listed in the table as "Product A"
are from Table 6-2 in the text. Indicate whether the products listed as "Product B" will have a
more elastic or less elastic demand than the corresponding Product A.
Is Estimated Elasticity for

Estimated Product B More Elastic or
Elasticity for Less Elastic than for
Product A Product A Product B Product A?
Samuel
Adams Boston
Beer -0.23 Lager
Organically
Chicken -0.37 raised chicken
Illegal
Cocaine -0.28 narcotics
Marlboro
Cigarettes -0.25 Lights
Denny's
Restaurant Grand Slam
meals -0.67 breakfast
Is Estimated Elasticity for

Estimated Product B More Elastic
Answer: Elasticity for or Less Elastic than for
Product A Product A Product B Product A?
Samuel
Adams Boston
Beer -0.23 Lager More elastic
Organically
Chicken -0.37 raised chicken More elastic
Illegal
Cocaine -0.28 narcotics Less elastic
Marlboro
Cigarettes -0.25 Lights More elastic
Denny's
Restaurant Grand Slam
meals -0.67 breakfast More elastic
Comment: Recurring
22
6.3 The Relationship between Price Elasticity of Demand and Total Revenue
1) Total revenue is equal to

A) the amount of funds earned by a firm minus its costs of production.
B) the total quantity sold of a product over a given period of time.
C) the price of a product multiplied by the number of units of the product sold.
D) the monetary value of the capital (for example, plant and equipment) a firm owns.
Answer: C
Comment: Recurring
Diff: 1 Page Ref: 177-178/177-178
Topic: Price Elasticity of Demand and Total Revenue
Objective: LO3: Understand the relationship between the price elasticity of demand and total
revenue.

A) Whenever a firm raises its price its total revenue will increase.
B) When a firm lowers its price its total revenue may either increase or decrease.
C) Whenever a firm increases its quantity sold its revenue will increase.
D) Total revenue will equal zero when the demand for a product is unit-elastic.
Answer: B
Comment: Recurring
Diff: 2 Page Ref: 177-178/177-178
revenue.
3) If demand is perfectly inelastic, the absolute value of the price elasticity coefficient is
A) infinity.
B) zero.
C) more than one.
D) equal to the absolute value of the slope of the demand curve.
Answer: B
Comment: Recurring
Diff: 1 Page Ref: 177-178/177-178
23
4) If a firm raised its price and discovered that its total revenue fell, then the demand for its
product is
A) perfectly inelastic.
B) relatively inelastic.
C) perfectly elastic.
D) relatively elastic.
Answer: D
Comment: Recurring
Diff: 2 Page Ref: 177-178/177-178
revenue.
Table 6-3
Hourly Quantity
Rental Rate Demanded
(dollars) (hours)
$60 40
75 32
80 30
100 24
5) Refer to Table 6-3. Katie Graham owns a kayak rental service in Santa Barbara. Table 6.3
below shows her estimated demand schedule for kayak rentals per week. She would like to
increase her sales revenue by changing the price she charges for rentals. At present she charges
$75. Based on the information in the table, Katie
A) is not able to increase her revenue by changing her price because the demand for kayak
rentals is unit-elastic.
B) should lower her price to $60 to increase her revenue because the demand for kayak rentals is
price elastic.
C) should raise her price to $80 to increase her revenue because the demand for kayak rentals is
price inelastic.
D) should raise her price to earn the most revenue.
Answer: A
Comment: Recurring
Diff: 3 Page Ref: 177-178/177-178
revenue.
24
6) Which of the following explains why a firm would be interested in the knowing the price
elasticity of demand for a good it sells?
A) The price elasticity of demand can be used to determine the impact of changes in income on
quantity sold.
B) Knowing the price elasticity of demand allows the firm to determine how the cost of
producing additional units of the good will change.
C) Knowing the price elasticity of demand allows the firm to calculate how changes in the price
of the good will affect the firm's total profit.
D) The price elasticity of demand allows the firm to calculate how changes in the price of the
good will affect the firm's total revenue.
Answer: D
Comment: Recurring
Diff: 2 Page Ref: 177-178/177-178
revenue.
7) Opera Estate Girls' School is considering increasing its tuition to raise revenue. If the school
believes that raising tuition will increase revenue
A) it is assuming that the demand for attending the school is inelastic.
B) it is assuming that the demand for attending the school is elastic.
C) it is assuming that the demand for attending the school is unit-elastic.
D) it is assuming that the demand for attending the school is perfectly elastic.
Answer: A
Comment: Recurring
Diff: 2 Page Ref: 177-178/177-178
revenue.
8) Along a downward sloping, linear demand curve, total revenue is the greatest
A) where demand is normal.
B) where demand is the most inelastic.
C) where demand is the most elastic.
D) where demand is unit-elastic.
Answer: D
Comment: Recurring
Diff: 2 Page Ref: 177-178/177-178
revenue.
25
Figure 6-3
9) Refer to Figure 6-3. Between points a and b on the demand curve, demand is
B) unit-elastic.
C) perfectly elastic.
D) elastic.
Answer: B
Comment: Recurring
Diff: 1 Page Ref: 177-178/177-178
Skill: Graphing
revenue.
10) In July 2008, the average price of gasoline in the United States was $4.09 per gallon, and
consumers purchased nearly 6 percent less gasoline than they had during July 2007, when the
average price of gasoline was $2.96 per gallon. Based on these figures, when the price of
gasoline rose from $2.96 per gallon to $4.09 per gallon, total revenue
A) increased.
B) decreased.
C) did not change.
D) There is not enough information to determine what happened to total revenue.
Answer: A
Special Feature: Chapter Opener: Do People Respond to Changes in the Price of Gasoline
26
11) Assume that the market for barley is in equilibrium and the demand for barley is inelastic.
Predict what happens to the revenue of barley farmers if a prolonged drought reduces the supply
of barley. The drought will cause farm revenue to
A) rise because there will be a shortage of barley.
B) rise because the percentage decrease in quantity sold is less than the percentage increase in
price.
C) rise because the percentage increase in quantity sold is greater than the percentage increase in
price.
D) fall because of the decrease in the quantity of barley sold.
Answer: B
Comment: Recurring
Diff: 3 Page Ref: 177-178/177-178
revenue.
12) Assume that you own a small boutique hotel. In an attempt to raise revenue you reduce your
rates by 20 percent. However, your revenue falls. What does this indicate about the demand for
your boutique hotel rooms?
A) Boutique hotel rooms are inferior goods.
B) Demand is inelastic.
C) The demand curve for your hotel rooms is vertical.
D) Demand is elastic.
Answer: B
Comment: Recurring
Diff: 2 Page Ref: 177-178/177-178
revenue.
27
13) Suppose when Nablom's Bakery raised the price of its breads by 10 percent, the quantity
demanded fell by 15 percent. What was the effect on sales revenue?
A) Sales revenue increased.
B) Sales revenue remained unchanged.
C) Sales revenue decreased.
D) It cannot be determined without information on prices.
Answer: C
Comment: Recurring
Diff: 2 Page Ref: 177-178/177-178
revenue.
14) Suppose at the current price, the demand for copper is estimated at -3.14. What happens to
sales revenue if the government imposes a price ceiling below the free market equilibrium price
in the copper market?
A) Sales revenue falls.
B) Sales revenue rises.
C) Sales revenue remains unchanged because copper is a necessity for most industries.
D) It cannot be determined without information on prices.
Answer: B
Comment: Recurring
Diff: 3 Page Ref: 177-178/177-178
revenue.
15) Suppose a decrease in the supply of paper results in an increase in revenue. This indicates
that
A) the demand for paper is inelastic.
B) the demand for paper is elastic.
C) the supply of paper is inelastic.
D) the supply of paper is elastic.
Answer: A
Comment: Recurring
Diff: 3 Page Ref: 177-178/177-178
revenue.
28
A) If the price of a good is lowered and total revenue decreases, demand is elastic.
B) If the price of a good is raised and total revenue does not change, demand is perfectly elastic.
C) If the price of a good is raised and total revenue increases, demand is inelastic.
D) If the price of a good is lowered and total revenue increases, demand is inelastic.
Answer: C
Comment: Recurring
Diff: 2 Page Ref: 177-178/177-178
revenue.
17) Which of the following correctly comments on the following statement? "The only way to
increase the revenue from selling a product is to increase the product's price."
A) It is not true. Revenue will increase as the price of the product increases only if demand is
elastic.
B) This statement is not true. Revenue will increase as the price of the product increases only if
demand is inelastic.
C) The statement is true.
D) This statement is not true. Revenue will decrease as the price of the product increases because
quantity demanded will fall.
Answer: B
Diff: 3 Page Ref: 179-180/179-180
revenue.
Special Feature: Solved Problem: Price and Revenue Don't Always Move in the Same Direction
29
18) In 2001, the prices of VHS movie tapes were practically identical while DVD prices for
different movie titles varied considerably. What explanation can be given for this?
A) In 2001, VHS tapes were inferior goods while DVDs were luxuries.
B) In 2001, most VHS tapes were sold by discount retailers such as Wal-Mart; most DVDs were
sold online.
C) In 2001, the price elasticity demand for VHS tapes was inelastic; for DVDs the price
elasticity of demand was elastic.
D) In 2001, movie studies had determined their pricing strategies for VHS tapes but were unsure
of the price elasticities of DVDs.
Answer: D
Diff: 2 Page Ref: 180-181/180-181
revenue.
Special Feature: Making the Connection: Determining the Price Elasticity of Demand through
Market Experiments
30
Article Summary
The governor of New Jersey has proposed increasing toll rates on New Jersey's toll roads,
and has presented several possible scenarios to implement these increases. Following are
projected data for two of these scenarios for the New Jersey Turnpike:
Scenario 1: Toll rate in 2008: $10.00. Toll rate in 2014: $22.50

For every 100 cars using the Turnpike in 2008, only 81.6 cars will use the Turnpike in 2014.
According to a survey by the British consulting firm Steer Davies Gleave, in comparison
with most other states, the toll rates in New Jersey are low, while the advantages of using
the toll roads are high, so toll rates can be raised significantly before commuters will
consider using a free alternative.
Source: "New Jersey toll increases proposed by Corzine were a political decision -
REVIEW of T&R reports" TOLLROADSnews, January 21, 2008.
19) Refer to the Article Summary. If tolls on the New Jersey Turnpike can be raised
significantly before commuters will consider using a free alternative, demand for using the toll
road must be
A) inelastic.
B) elastic.
C) unit elastic.
Answer: A
Diff: 1 Page Ref: 177-178/177-178
revenue.
Special Feature: Making the Connection: New Jersey Toll Increases Proposed by Corzine Were
a Political Decision - REVIEW of T&R Reports
31
20) Refer to the Article Summary. If tolls on the New Jersey Turnpike can be raised
significantly before commuters will consider using a free alternative, then an increase in tolls
will result in
A) a decrease in total revenue.
B) a decrease in non-toll road usage.
C) an increase in total revenue.
D) an increase in toll road usage.
Answer: C
Diff: 1 Page Ref: 177-178/177-178
revenue.
21) If the price elasticity of demand is unit-elastic, a 10 percent increase in price will result in a
10 percent increase in revenue.
Answer: FALSE
Comment: Recurring
Diff: 1 Page Ref: 177-178/177-178
revenue.
22) If demand for a product is perfectly inelastic a change in price will not change total revenue.
Answer: FALSE
Comment: Recurring
Diff: 1 Page Ref: 177-178/177-178
revenue.
32
23) Suppose the absolute value of the price elasticity of demand for basketball game tickets on
your campus is greater than 1. Increasing ticket prices will increase the total revenue from ticket
sales.
Answer: FALSE
Comment: Recurring
Diff: 1 Page Ref: 177-178/177-178
revenue.
24) Ali's Gyros operates near a college campus. Ali has been selling 120 gyros a day at $4.50
each and is considering a price cut. He estimates that he would be able to sell 200 gyros per day
at $3.50 each.
a. Calculate the price elasticity of demand using the midpoint formula.

b. Calculate the change in revenue as a result of the price cut.
Answer:
a. Price elasticity of demand = (120 - 200) / [(200 + 120) / 2] / (4.50 - 3.50) / 3.50 + 4.50) / 2] =
(-80 / 160) / (1 / 4) = -2
b. Change in revenue = $700-$540 = $160
Comment: Recurring
Diff: 2 Page Ref: 177-178/177-178
revenue.
25) You are the manager of a theater. At present the theater charges the same admission price of
$8 to all customers, regardless of age. You propose a two-tier pricing scheme: $5 for children
under the age of 12 and $10 for adults. You tell your supervisor that your proposal is likely to
increase revenues. What must be true about the price elasticity of demand if your proposal is to
achieve its goal of raising revenue? Explain your answer.
Answer: You believe that the price elasticity of demand for theatre tickets for children is elastic.
Hence, a decrease in price will increase revenue. The demand for tickets for adults is inelastic;
therefore, increasing price for this group will increase revenue.
Comment: Recurring
Diff: 2 Page Ref: 177-178/177-178
revenue.
33
Article Summary
The governor of New Jersey has proposed increasing toll rates on New Jersey's toll roads,
and has presented several possible scenarios to implement these increases. Following are
projected data for two of these scenarios for the New Jersey Turnpike:

According to a survey by the British consulting firm Steer Davies Gleave, in comparison
with most other states, the toll rates in New Jersey are low, while the advantages of using
the toll roads are high, so toll rates can be raised significantly before commuters will
consider using a free alternative.
Source: "New Jersey toll increases proposed by Corzine were a political decision -
REVIEW of T&R reports" TOLLROADSnews, January 21, 2008.
26) Refer to the Article Summary.

a. Using the midpoint formula, calculate the price elasticity of demand for Scenario 1 and
Scenario 2.
b. Assume 10,000 cars used the New Jersey Turnpike every day in 2008. What would be the
daily total revenue received for each scenario in 2008 and in 2014?
c. Is demand under Scenario 1 and under Scenario 2 price elastic, inelastic, or unit elastic. Briefly
explain.
(For above questions, assume that nothing other than the toll change occurs during the time
frame listed that would affect consumer demand.)
Answer: a. For Scenario 1:
Percentage change in quantity demanded = [(81.6 - 100) / 90.8] × 100 = -20.3%
Percentage change in price = [($22.50 - $10.00) / $16.25] × 100 = 76.9%
Price elasticity of demand = -20.3% / 76.9% = -0.26.
For Scenario 2:
Percentage change in quantity demanded = [(96.2 - 100) / 98.1] × 100 = -3.9%
Percentage change in price = [($17.50 - $10.00) / $13.75] × 100 = 54.5%
Price elasticity of demand = -3.9% / 54.5% = -0.07.
b. The daily total revenue in 2008 under both scenarios is (10,000 cars × $10.00) = $100,000.
The daily total revenue in 2014 under Scenario 1 is (8,160 cars × $22.50) = $183,600.
The daily total revenue in 2014 under Scenario 2 is (9,620 cars × $17.50) = $168,320.
c. For both scenarios, total revenue increases when the toll increases, because the demand under
both scenarios is price inelastic.
Diff: 3 Page Ref: 177-178/177-178
revenue.
34
6.4 Other Demand Elasticities
1) The income elasticity of demand measures

A) the responsiveness of quantity demanded to changes in income.
B) how a consumer's purchasing power is affected by a change in the price of a product.
C) the percentage change in the price of a product divided by the percentage change in consumer
income.
D) the income effect of a change in price.
Answer: A
Comment: Recurring
Topic: Income Elasticity of Demand
Objective: LO4: Define cross-price elasticity of demand and income elasticity of demand and
understand their determinants and how they are measured.
2) If a good has a negative income elasticity of demand, this indicates that the good is
A) a substitute with another good.
B) a complement with another good.
C) inferior.
D) normal.
Answer: C
Comment: Recurring
3) If a 5 percent increase in income leads to a 10 percent increase in quantity demanded for

airline travel, then airline travel is
A) a necessity.
B) a substitute for another good.
C) a luxury.
D) an inferior good.
Answer: C
Comment: Recurring
35
4) If a 6 percent increase in income leads to a 4 percent increase in quantity demanded for audio
books the income elasticity of demand is
A) -0.67.
B) 0.67.
C) 1.5.
D) 2.
Answer: B
Comment: Recurring
5) If a 5 percent increase in income leads to a 10 percent decrease in quantity demanded for a

product this product is
A) an income elastic good.
B) an inferior good.
C) a necessity.
D) a luxury good.
Answer: B
Comment: Recurring
6) If the quantity demanded for a good rises as income rises then the income elasticity of demand
for this good is ________ than 0, and the good is ________ good.
A) greater; an inferior
B) less; a normal
C) less; an inferior
D) greater; a normal
Answer: D
Comment: Recurring
36
7) Demand for a luxury item, such as a yacht, is likely to be
A) both income and price inelastic.
B) both income elastic and price elastic.
C) income elastic and price inelastic.
D) income inelastic and price elastic.
Answer: B
Comment: Recurring
Figure 6-4
8) Refer to Figure 6-4. The data in the diagram indicates that DVDs are
A) luxury goods.
B) inelastic goods.
C) necessities.
D) both luxury goods and inelastic goods.
E) both necessities and inelastic goods.
Answer: A
Comment: Recurring
Skill: Graphing
37
9) Suppose you have surveyed a few industries and obtained information about the income
elasticity of demand for their products. If you expect that the economy is headed for a long
recession, you would advise people to look for jobs in an industry with
A) a high positive income elasticity coefficient such as 5.
B) a low positive income elasticity coefficient such as 0.8.
C) a "high" negative income elasticity coefficient such as -4.
D) a "low" negative income elasticity coefficient such as -0.2.
Answer: C
Comment: Recurring
10) Last year, Joan bought 50 pounds of hamburger when her household income was $40,000.
This year, her household income was only $30,000 and Joan bought 60 pounds of hamburger.
Holding everything else constant, Joan's income elasticity of demand for hamburger is
A) positive, so Joan considers hamburger to be an inferior good.
B) negative, so Joan considers hamburger to be an inferior good.
C) positive, so Joan considers hamburger to be a normal good and a necessity.
D) negative, so Joan considers hamburger to be a normal good.
Answer: B
Comment: Recurring
11) Which of the following items is likely to have the highest income elasticity of demand?
A) a luxury cruise to several European countries
B) water
C) breakfast cereal
D) a hamburger
Answer: A
Comment: Recurring
38
12) Suppose you are considering buying stock in the stock market, and your objective is to
maximize your net worth. Furthermore, your study of the market reveals that the economy will
be slowing down over the next several months. Under these conditions, it would be best to
purchase stock in companies that produce
A) normal goods.
B) luxury goods.
C) inferior goods.
D) price elastic goods.
Answer: C
Comment: Recurring
13) The cross-price elasticity of demand measures the

A) absolute change in the quantity demanded of one good divided by the absolute change in the
price of another good.
B) percentage change in the quantity demanded of one good divided by the percentage change in
the price of another good.
C) percentage change in the price of one good divided by the percentage change in the quantity
demanded of another good.
D) percentage change in the quantity demanded of one good in one location divided by the price
of the same good in another location.
Answer: B
Comment: Recurring
Diff: 1 Page Ref: 181-182/181-182
Topic: Cross-Price Elasticity of Demand
39
14) The cross-price elasticity of demand between Coca-Cola and Pepsi-Cola is calculated by
dividing
A) the percentage change in quantity demanded of Coca-Cola by the percentage change in the
quantity demanded of Pepsi-Cola.
B) the percentage change in the price of Pepsi-Cola by the percentage change in quantity
demanded of Coca-Cola.
C) the percentage change in the price of Coca-Cola by the percentage change in the price of
Pepsi-Cola.
D) the percentage change in the quantity demanded of Coca-Cola by the percentage change in
the price of Pepsi-Cola.
Answer: D
Comment: Recurring
Diff: 1 Page Ref: 181-182/181-182
15) In order to prove that Motrin and Ibuprofen are substitutes, one should measure the
________ and get a ________.
A) cross-price elasticity; positive number
B) cross-price elasticity; negative number
C) price elasticity of demand; number greater than 1 (in absolute value)
D) price elasticity of demand; number less than 1 (in absolute value)
Answer: A
Comment: Recurring
Diff: 2 Page Ref: 181-182/181-182
40
16) The cross-price elasticity between Gillette razors and a related good is -3.4. What happens to
the demand for the related good if the price of Gillette razors falls by 10 percent?
A) The quantity demanded of the related good rises by 3.4 percent.
B) The quantity demanded of the related good falls by 34 percent.
C) The quantity demanded of the related good rises by 34 percent.
D) The quantity demanded of the related good falls by 3.4 percent.
Answer: C
Comment: Recurring
Diff: 2 Page Ref: 181-182/181-182
17) If the cross-price elasticity of demand between beer and wine is 0.31, then beer and wine are
A) complements.
B) price inelastic goods.
C) substitutes.
D) necessities.
Answer: C
Comment: Recurring
Diff: 2 Page Ref: 181-182/181-182
41
18) Consider the following pairs of items:
a. shampoo and conditioner
b. iPhones and earbuds
c. a laptop computer and a desktop computer
d. beef and pork
e. air-travel and weed killer
Which of the pairs listed will have a positive cross-price elasticity?

A) a and b only
B) c and d only
C) e only
D) a, b, and c only
Answer: B
Comment: Recurring
Diff: 1 Page Ref: 181-182/181-182
19) Which of the following pairs of goods is likely to have a negative cross-price elasticity of
demand?
A) pancakes and syrup
B) hot dogs and hamburgers
C) orange juice and grapefruit juice
D) peanuts and cat food
Answer: A
Comment: Recurring
Diff: 2 Page Ref: 181-182/181-182
42
20) When the price of tortilla chips rose by 10 percent, the quantity of tortilla chips sold fell 4
percent, and the sale of dips (like salsa and bean dip) fell 8 percent. This set of facts indicates
that
A) the cross-price elasticity between tortilla chips and dips is 0.8, so the two are substitutes.
B) the cross-price elasticity between tortilla chips and dips is -0.4, so the two are complements.
C) the cross-price elasticity between tortilla chips and dips is -0.8, so the two are complements.
D) the cross-price elasticity between tortilla chips and dips is 0.4, so the two are substitutes.
Answer: C
Comment: Recurring
Diff: 2 Page Ref: 181-182/181-182
21) Suppose the cross-price elasticity of demand between DVDs at Amazon.com and DVDs at
Buy.com is 3.5. Based on this information, predict what happens when Amazon.com lowers its
DVD prices by 10 percent.
A) The quantity of DVDs demanded on Amazon.com will increase by 35 percent.
B) The quantity of DVDs demanded on Buy.com will increase by 35 percent.
C) The quantity of DVDs demanded on Amazon.com will decrease by 35 percent.
D) The quantity of DVDs demanded on Buy.com will decrease by 35 percent.
Answer: D
Comment: Recurring
Diff: 2 Page Ref: 181-182/181-182
22) For people who live near a bus route, a subway station, or a commuter rail line, public
transportation provides a substitute to driving their own cars. So, for these people, the ________
between gasoline and public transportation is positive.
A) income elasticity of demand
B) price elasticity of demand
C) cross-price elasticity of demand
D) price elasticity of supply
Answer: C
Special Feature: An Inside LOOK: Consumers Change Their Behavior in Response to the Gas
Prices
43
23) During an economic expansion as consumer incomes rise, holding everything else constant,
A) the demand for most goods, except luxuries, will rise.
B) the demand for luxuries will rise while the demand for inferior goods will fall.
C) the demand for luxuries and inferior goods will rise.
D) the prices of luxuries will fall while the prices of inferior goods will rise.
Answer: B
Comment: Recurring
24) Studies show that the income elasticity of demand for wine is 5.03 and the income elasticity
of demand for spirits is 1.21. This indicates that
A) wine and spirits are luxury goods.
B) wine is a luxury good and spirits are inferior goods.
C) wine and spirits are highly price elastic.
D) wine is a luxury good and spirits are necessities.
Answer: A
Special Feature: Making the Connection: Price Elasticity, Cross-Price Elasticity, and Income
Elasticity in the Market for Alcoholic Beverages
25) Barbara, the consummate hostess, proudly announced as she served dessert, "A port is often
the perfect end to a meal, sipped with a piece of my scrumptious chocolate cake." Evidently,
Barbara views
A) port and chocolate cake as luxury items.
B) port and chocolate cake as necessities.
C) port and chocolate cake as complementary goods.
D) port and chocolate cake as substitutes to other desserts.
Answer: C
Comment: Recurring
Diff: 2 Page Ref: 181-182/181-182
AACSB: Communication
44
26) Economists estimated that the cross-price elasticity of demand for beer and wine is 0.31 and
the income elasticity of wine is 5.03. This means that
A) beer and wine are substitutes and wine is an inferior good.
B) beer and wine are complements and wine is a luxury good.
C) beer and wine are substitutes and wine is a luxury good.
D) beer and wine are complements and wine is an inferior good.
Answer: C
Topic: Cross-Price and Income Elasticities of Demand
27) Economists have estimated that the cross-price elasticity of demand between beer and spirits
is 0.15, the income elasticity for spirits is 1.21 and the income elasticity for wine is 5.03. These
elasticities mean that
A) beer and spirits are complements, spirits and wine are luxuries.
B) beer and spirits are normal goods, spirits and wine are luxuries.
C) beer and spirits are complements, spirits are substitutes.
D) beer and spirits are substitutes, spirits and wine are luxuries.
Answer: D
28) The absolute value of the price elasticity of demand for telescopes is 1.5. Therefore,
telescopes can be classified as a luxury.
Answer: FALSE
Comment: Recurring
45
29) If the income elasticity for canned food is 0.8, then canned food is an inferior good.
Answer: FALSE
Comment: Recurring
Diff: 1 Page Ref: 181-182/181-182
30) If the cross-price elasticity of demand for goods A and B is zero, this means the two goods
are unrelated.
Answer: TRUE
Comment: Recurring
Diff: 1 Page Ref: 181-182/181-182
31) A recent study indicated that "Stricter college alcohol policies such as raising the price of
alcohol, or banning alcohol on campus, decreases the number of students who use marijuana."
This indicates that the cross-price elasticity between alcohol and marijuana is positive.
Answer: FALSE
Comment: Recurring
Diff: 2 Page Ref: 181-182/181-182
46
32) Explain the concepts of cross-price elasticity of demand and income elasticity of demand.
What do positive and negative values indicate for each of these demand elasticities
Answer: Cross-price elasticity of demand measures the percentage change in quantity demanded
of one good based on the percentage change in the price of another good. If cross price elasticity
is positive, the two goods are substitutes. If cross-price elasticity is negative, the two goods are
complements.
Income elasticity of demand measures the responsiveness of quantity demanded to changes in
income. If income elasticity is positive but less than one, the product is a normal good and a
necessity. If income elasticity is positive and greater than one, the product is a normal good and a
luxury. If income elasticity is negative, the product is an inferior good.
Comment: Recurring
Diff: 2 Page Ref: 181-182/181-182
Table 6-4
Quantities Quantities
Purchased Purchased
Income Prices Good X Good Y
$30,000 Px = $6, Py = $3 2 20
50,000 Px = $6, Py = $4 5 10
33) Refer to Table 6-4.

a. Using the information in the table, calculate the income elasticity of demand for good X and
characterize the good. Use the midpoint formula.
b. Can you calculate the income elasticity of demand for good Y? If you can, show your
calculation and characterize the good. If you cannot, explain why.
Answer:
a. The income elasticity of demand for good X = (3 / 3.5) / (20,000 / 40,000) = (0.8571 / 0.5) =
1.71. X is both a normal good and a luxury.
b. Since both income and Py change, you cannot calculate the income elasticity for good Y. The
income elasticity can be measured if a change in income causes the quantity of Y purchased to
change, holding everything else constant.
Comment: Recurring
47
34) When the price of Starbucks coffee increased by 8 percent, the quantity demanded of Peets
coffee increased by 10 percent. Calculate the cross price elasticity of demand between Starbucks
coffee and Peets coffee. What is the relationship between the two products?
Answer: The cross price elasticity = 1.25. The two products are substitutes.
Comment: Recurring
Diff: 2 Page Ref: 181-182/181-182
6.5 Using Elasticity to Analyze the Disappearing Family Farm
1) From 1950 to 2006 the number of people who lived on farms fell from 23 million to fewer
than 3 million? Which of the following factors have contributed to this trend?
A) increases in the cost of farming and a desire for young adults to move to urban areas
B) rapid growth in farm production and low income and price elasticities for food products
C) slow growth in agricultural productivity and low income elasticities for food products
D) government policies that have increased the cost of living and working on farms
Answer: B
Comment: Recurring
Diff: 2 Page Ref: 183-184/183-184
Topic: Elasticity and Economic Issues
Objective: LO5: Use price elasticity and income elasticity to analyze economic issues.
2) Between 1950 and 2006 the productivity of wheat farmers in the United States more than
doubled. This means that
A) the amount of land and other resources devoted to wheat production more than doubled.
B) the incomes of wheat farmers more than doubled.
C) the total amount of wheat produced more than doubled.
D) the amount of wheat produced by the average farmer more than doubled.
Answer: D
Comment: Recurring
Diff: 2 Page Ref: 183-184/183-184
48
3) The paradox of American farming is
A) the demand for imported luxury food products has risen as the demand for domestic food
products has fallen.
B) the demand for food has risen as the number of people who pursue farming as a career has
fallen.
C) food has become cheaper and more abundant as the number of farms has decreased.
D) the amount of food produced has increased as the average farm size has fallen.
Answer: C
Comment: Recurring
Diff: 1 Page Ref: 183-184/183-184
4) Since 1950 there has been a substantial increase in wheat production. The increase in
production has led to a decrease in the price of wheat because of which of the following factors?
A) The absolute value of the price elasticity of demand for wheat is less than 1 and the income
elasticity of demand for wheat is greater than 1.
B) The absolute value of the price elasticity of demand for wheat is greater than 1 and wheat is a
close substitute for other food products.
C) The absolute value of the price elasticity of demand for wheat is less than 1 and the income
elasticity of demand for wheat is low.
D) The income elasticity of demand for wheat is high and wheat is an inferior good.
Answer: C
Comment: Recurring
Diff: 3 Page Ref: 183-184/183-184
5) Assume that the price elasticity of demand for cocaine is -2.0. If legalization causes the price
of cocaine to fall by 95 percent what will be the increase in the quantity of cocaine demanded?
A) 0.9 percent
B) 1.9 percent
C) 19 percent
D) 190 percent
Answer: D
Diff: 2 Page Ref: 184-185/184-185
Special Feature: Solved Problem: Using Price Elasticity to Analyze Policy toward Illegal Drugs
49
6) Assume that legalization of cocaine use led to a large decrease in its price and only a small
increase in the quantity of cocaine demanded. Economic analysis would lead one to conclude
that
A) cocaine should be legalized because the benefits of legalization would exceed the costs.
B) cocaine should not be legalized because the benefits are uncertain.
C) cocaine should not be legalized on moral grounds since moral benefits and costs can't be
measured.
D) legalization is a normative issue. Economic analysis can be used to contribute to discussion of
this issue but cannot decide it.
Answer: D
Diff: 1 Page Ref: 184-185/184-185
7) Most food products have low income and price elasticities of demand.
Answer: TRUE
Comment: Recurring
Diff: 2 Page Ref: 183-184/183-184
8) The government of Bassaland is looking for new revenue sources. It is considering imposing
an excise tax on two goods: palm wine and diapers. If the price elasticity of demand for the
goods are -0.47 and -1.89 respectively, which good should it tax if the goal is to raise revenue? If
the government wants to tax only one good, which good should it tax if the goal is to discourage
consumption? Explain your answer.
Answer: If the goal is to raise revenue, it should tax palm wine. The demand for palm wine is
inelastic, so an increase in its price will result in an increase in revenue. If the goal is to
discourage consumption it should tax diapers since the demand for diapers is elastic, while the
demand for palm wine is inelastic.
Comment: Recurring
Diff: 2 Page Ref: 183-184/183-184
50
9) Suppose the price elasticity of demand for methamphetamine is -0.35. If decriminalization
caused the price of methamphetamine to fall by 75 percent, what will be the percentage increase
in the quantity of methamphetamine demanded? If the price elasticity is -3.5, what will be the
percentage increase in quantity demanded?
Answer: If price elasticity of demand is -0.35, a 75 percent drop in price would increase the
quantity demanded by 26.25 percent.
If price elasticity of demand is -3.5, a 75 percent drop in price would increase the quantity
demanded by 262.5 percent.
Diff: 2 Page Ref: 184-185/184-185
6.6 The Price Elasticity of Supply and Its Measurement
1) The price elasticity of supply measures

A) the responsiveness of quantity supplied to changes in input prices.
B) the responsiveness of quantity supplied to changes in technology.
C) the responsiveness of quantity supplied to changes in price.
D) a supplier's ability to produce a good in the face of scarcity.
Answer: C
Comment: Recurring
Diff: 1 Page Ref: 185-186/185-186
Topic: Price Elasticity of Supply
Objective: LO6: Define price elasticity of supply and understand its main determinants and how
it is measured.
2) To calculate the price elasticity of supply we divide

A) the percentage change in price by the percentage change in quantity supplied.
B) the percentage change in quantity supplied by the percentage change in price.
C) rise by the run.
D) the average price by the average quantity supplied.
Answer: B
Comment: Recurring
Diff: 1 Page Ref: 185-186/185-186
it is measured.
51
3) Suppose the supply of bicycles is price elastic. This means that
A) consumers will respond significantly to an increase in the quantity supplied of bicycles.
B) suppliers will increase the quantity supplied of bicycles, but not immediately.
C) suppliers face many substitutes for bicycles.
D) suppliers will respond significantly to changes in the price of bicycles.
Answer: D
Comment: Recurring
Diff: 1 Page Ref: 185-186/185-186
it is measured.
4) If the quantity supplied of walkie-talkies increases by 5 percent when prices increase by 12

percent, then
A) the supply of walkie-talkies is inelastic.
B) the supply of walkie-talkies is elastic.
C) the walkie-talkie supply curve will shift to the right.
D) the walkie-talkie supply curve will shift to the left.
Answer: A
Comment: Recurring
Diff: 2 Page Ref: 185-186/185-186
it is measured.
5) Suppose when the price of jean-jackets increased by 10 percent, the quantity supplied
increased by 16 percent. Based on this information the price elasticity of supply of jean-jackets is
A) 0.625.
B) 6%.
C) 1.6.
D) 1.6%.
Answer: C
Comment: Recurring
Diff: 2 Page Ref: 185-186/185-186
it is measured.
52
6) If an 8 percent decrease in the price of lobster leads to a 15 percent decrease in the quantity
supplied of lobster, then the supply of lobster is
A) unit-elastic.
B) unitarily elastic.
C) elastic.
D) perfectly inelastic.
Answer: C
Comment: Recurring
Diff: 1 Page Ref: 185-186/185-186
it is measured.
7) Inelastic supply occurs whenever the elasticity of supply value is

A) negative and < -1.
B) any positive number.
C) positive and > 1.
D) positive and < 1.
Answer: D
Comment: Recurring
Diff: 1 Page Ref: 185-186/185-186
it is measured.
8) If a supply curve is a horizontal line, supply is said to be

B) unit-elastic.
C) inelastic.
Answer: D
Comment: Recurring
Diff: 1 Page Ref: 185-186/185-186
it is measured.
53
9) A supply curve that is vertical
A) is perfectly elastic.
B) is perfectly inelastic.
C) is impossible.
D) has an elasticity equal to 1.
Answer: B
Comment: Recurring
Diff: 1 Page Ref: 185-186/185-186
it is measured.
Table 6-5
Quantity Quantity
Price
Demanded Supplied
$6 5,000 2,000
7 4,000 2,000
8 3,000 2,000
9 2,000 2,000
10 1,000 2,000
The town of Bloomfield is well known for its basketball team. The price of basketball game
tickets is determined by market forces. Table 6-5 above shows the demand and supply schedules
for basketball games tickets.
10) Refer to Table 6-5. What is the most distinctive feature of the supply curve?
A) The supply curve is perfectly inelastic.
B) The supply curve is horizontal.
C) The supply curve is upward sloping.
D) The supply curve is perfectly elastic.
Answer: A
Comment: Recurring
Diff: 2 Page Ref: 185-186/185-186
it is measured.
54
11) Refer to Table 6-5. What is the numerical value of the price elasticity of supply?
A) 1
B) greater than 0 but less than 1
C) 0
D) greater than 1
Answer: C
Comment: Recurring
Diff: 2 Page Ref: 185-186/185-186
it is measured.
12) The price elasticity of supply is usually a positive number because

A) quantity supplied increases in response to income increases.
B) quantity supplied increases in response to price increases.
C) the quantity demanded usually rises when price falls and therefore suppliers would want to
capitalize on this increase in demand.
D) price rises when supply increases.
Answer: B
Comment: Recurring
Diff: 1 Page Ref: 185-186/185-186
it is measured.
13) The price elasticity of supply of hot dog buns is estimated to be 1.5. Holding everything else
constant, this means that a 10 percent decrease in the price of hot dog buns will cause the
quantity of hot dog buns supplied to decrease by
A) 1.5 percent.
B) 15 percent.
C) approximately 25 percent.
D) approximately 5 percent.
Answer: B
Comment: Recurring
Diff: 2 Page Ref: 185-186/185-186
it is measured.
55
14) Which of the following is a key determinant of the price elasticity of supply?
A) the slope of the supply curve
B) the availability of substitutes in production
C) the available technology
D) the time it takes to change output in response to a change in price
Answer: D
Comment: Recurring
Topic: Determinants of the Price Elasticity of Supply
it is measured.
56
Figure 6-5
15) Refer to Figure 6-5. Suppose the diagram shows the supply curves for a product in the short
run and in the long run. Which supply curve represents supply in the short run and which curve
represents supply in the long run?
A) SB represents supply in the short run and SA represents supply in the long run.
B) Either SA or SB could represent supply in the short run; in the long run the supply curve must
be a vertical line.
C) Either SA or SB could represent supply in the long run; in the short run the supply curve must
be a horizontal line.
D) SA represents supply in the short run and SB represents supply in the long run.
Answer: D
Comment: Recurring
Skill: Graphing
it is measured.
57
16) Refer to Figure 6-5. The diagram shows two supply curves, SA and SB. As price rises from
P0 to P1, which supply curve is more elastic?
A) SA
B) SB
C) They are equally inelastic.
D) They are equally elastic.
Answer: B
Comment: Recurring
Diff: 1 Page Ref: 185-186/185-186
Skill: Graphing
it is measured.
17) Suppose the demand curve for a product is represented by a typical downward-sloping curve.
Now suppose the demand for this product increases. Which of the following statements
accurately predicts the resulting increase in price?
A) The more elastic the supply curve, the greater the price increase.
B) The more elastic the supply curve, the smaller the price increase.
C) The increase in price is not affected by the elasticity of the supply curve.
D) There will be no increase in price if the supply curve is perfectly inelastic.
Answer: B
Comment: Recurring
Diff: 3 Page Ref: 185-186/185-186
it is measured.
18) Suppose the demand curve for hybrid cars shifts to the right. This will cause a relatively
small increase in the price of hybrid cars if
A) demand is elastic and supply is inelastic.
B) demand is inelastic and supply is elastic.
C) both demand and supply are inelastic.
D) both demand and supply are elastic.
Answer: D
Comment: Recurring
Diff: 3 Page Ref: 185-186/185-186
it is measured.
58
19) The process involved in bringing oil to world markets can take years. Substitutes for oil-
based products such as gasoline are limited. As a result
A) the supply of oil is very elastic and the demand for oil is very elastic over short periods of
time.
B) the supply of oil is very inelastic and the demand for gasoline is inelastic over short periods of
time.
C) the supply of oil and the demand for oil shift to the right over short periods of time.
D) the supply of oil and the demand for oil are both perfectly elastic over short periods of time.
Answer: B
Diff: 2 Page Ref: 186-187/186-187
it is measured.
Special Feature: Making the Connection: Why Are Oil Prices So Unstable?
20) Shifts in the supply of oil have caused large changes in price since the 1970s because
A) the supply of oil is very inelastic while the demand for oil is very elastic over short periods of
time.
B) the supply of oil is very elastic while the demand for oil is inelastic over short periods of time.
C) both the supply of oil and the demand for oil are inelastic over short periods of time.
D) the supply of oil and the demand for oil are perfectly elastic over short periods of time.
Answer: C
Diff: 2 Page Ref: 186-187/186-187
it is measured.
59
A) The supply of oil is very elastic over short time periods but becomes perfectly inelastic over
time. A given shift in supply results in a greater increase in the price of oil when the supply of oil
is perfectly inelastic.
B) The supply of oil is very inelastic over short time periods but becomes more elastic over time.
A given shift in supply results in a smaller increase in the price of oil when the supply is more
elastic.
C) The supply of oil is perfectly inelastic; therefore, as the demand for oil increases over time the
price of oil increases significantly.
D) Over short periods of time increases in the demand for oil are greater than increases in the
supply of oil. Over the long run increases in the demand and the supply of oil are about equal. As
a result, the price of oil increases greatly in the short run but is stable in the long run.
Answer: B
Diff: 2 Page Ref: 186-187/186-187
it is measured.
22) Supply is elastic whenever the elasticity value for supply is positive and greater than 1.
Answer: TRUE
Comment: Recurring
Diff: 1 Page Ref: 185-186/185-186
it is measured.
23) There are a limited number of original Picasso paintings. This means that the supply of
original Picasso paintings is perfectly inelastic.
Answer: TRUE
Comment: Recurring
Diff: 1 Page Ref: 185-186/185-186
it is measured.
60
24) Suppose the current price of copper is $3 per pound and the quantity supplied is 200 pounds
per day. If the price of copper falls to $2.50 per pound, the quantity supplied drops to 180 pounds
per day. Use the midpoint formula to calculate the price elasticity of supply for copper.
Answer: The price elasticity of supply for copper = (20 / 190) / (0.5 / 2.75) = (0.1053 / 0.1818) =
0.58.
Comment: Recurring
Diff: 2 Page Ref: 185-186/185-186
it is measured.
25) For a given demand curve, will there be a greater loss of economic efficiency from a binding
price floor when supply is elastic or inelastic? Illustrate your answer with a demand and supply
graph. In your graph you must show two supply curves, one elastic and the other inelastic.
Answer:
See the figure above. SA is the elastic supply curve, and SB the inelastic supply curve. For a
given demand curve, a binding price floor at Pf creates a greater loss of economic efficiency
when supply is inelastic rather than elastic. This can be seen from the diagram: When the supply
curve is SA (elastic) the loss in economic efficiency is represented by the area abe while the loss
in economic efficiency is represented by the area ace when the supply curve is SB (inelastic).
Comment: Recurring
Diff: 3 Page Ref: 185-186/185-186
Skill: Graphing
it is measured.
61

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Microeconomics, 3e (Hubbard/O'Brien) - TB2

6.1 The Price Elasticity of Demand and Its Measurement

2) The price elasticity of demand is equal to

4) To calculate the price elasticity of demand we divide

6) If the slope of a demand curve is equal to -0.1 then

16) If the demand for a steak is unit-elastic, then

17) If the demand for cell phone service is inelastic, then

34) Briefly explain the economic concept of elasticity.

3) Which of the following statements is true?

Estimated Price Elasticity of

Is Estimated Elasticity for

Is Estimated Elasticity for

1) Total revenue is equal to

2) Which of the following statements is true?

Scenario 1: Toll rate in 2008: $10.00. Toll rate in 2014: $22.50

a. Calculate the price elasticity of demand using the midpoint formula.

Scenario 1: Toll rate in 2008: $10.00. Toll rate in 2014: $22.50

26) Refer to the Article Summary.

1) The income elasticity of demand measures

3) If a 5 percent increase in income leads to a 10 percent increase in quantity demanded for

5) If a 5 percent increase in income leads to a 10 percent decrease in quantity demanded for a

13) The cross-price elasticity of demand measures the

Which of the pairs listed will have a positive cross-price elasticity?

33) Refer to Table 6-4.

6.5 Using Elasticity to Analyze the Disappearing Family Farm

6.6 The Price Elasticity of Supply and Its Measurement

1) The price elasticity of supply measures

2) To calculate the price elasticity of supply we divide

4) If the quantity supplied of walkie-talkies increases by 5 percent when prices increase by 12

7) Inelastic supply occurs whenever the elasticity of supply value is

8) If a supply curve is a horizontal line, supply is said to be

12) The price elasticity of supply is usually a positive number because

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