ECO501 – Principles of Economics

Tutorial 3 – Elasticity of Demand and Supply

Do the multiple choice and discussion questions below

Part A - Multiple Choice Questions

1) The price elasticity of demand is a measure of
A) the equilibrium price of a product.
B) buyers' responsiveness to changes in the price of a product.
C) the amount of a product purchased when income increases.
D) whether a product is a substitute or a complement.
E) how much a change in demand affects the equilibrium price.

2) To determine the price elasticity of demand, we

A) need information on consumers' incomes.
B) need to know how much is available.
C) compare the percentage change in the quantity demanded to the percentage change in the price.
D) compare the change in the quantity to the change in price.
E) divide the quantity by the price.

3) Suppose the price of a box of cereal rises from $4 to $6. Using the midpoint method, what is
the percentage change in price?
A) 50 percent
B) 40 percent
C) 33 percent
D) 67 percent
E) None of the above answers is correct.
4) If the demand for a good is elastic, then
A) people do not change the quantity they demand when the price of the good changes.
B) a change in price leads to a smaller percentage change in the quantity demanded.
C) people substantially decrease the quantity of the good they buy if its price increases by a small
percentage.
D) a change in the quantity demanded is smaller than the change in price.
E) the quantity demanded divided by the price exceeds 1.00.
5) If the percentage change in price is 10 percent and the demand is elastic, then the percentage
change in the quantity demanded
A) is greater than 0 percent but less than 10 percent.
B) is larger than 10 percent.
C) equals 0 percent.
D) equals 10 percent.
E) More information is needed to determine the magnitude of the change in the quantity demanded.
6) Suppose the Chicago Bears football team raises ticket prices by 13 percent and as a result the
quantity of tickets demanded decreases by 21 percent. This response means that the demand
for Bears tickets is
A) inelastic.
B) elastic.
C) unit elastic.
D) perfectly inelastic.
E) perfectly elastic.

7) When the percentage change in the quantity demanded is less than the percentage change in
price, then demand is
A) inelastic.
B) unit elastic.
C) elastic.
D) irrelevant.
E) undefined.

8) If the price elasticity of demand for razors is 0.32, the demand for razors is
A) elastic.
B) unit elastic.
C) inelastic.
D) perfectly inelastic.
E) perfectly elastic.

9) Suppose the demand for rescue services in our national parks is perfectly inelastic. This fact
would mean that a 31 percent increase in rescue fees leads to
A) a 31 percent decrease in the quantity demanded.
B) a 31 percent increase in demand.
C) a 31 percent decrease in demand.
D) no change in the quantity demanded.
E) a decrease in the quantity demanded to 0 rescues.

10) If the price elasticity of demand for opera tickets in Orlando is 1.00, then the demand for
opera tickets in Orlando is
A) unit elastic.
B) elastic.
C) perfectly inelastic.
D) inelastic.
E) perfectly elastic.

11) Which of the following does NOT influence the price elasticity of demand?
A) the amount by which the demand curve shifts when the price of another good changes
B) the number of substitutes available to consumers
C) the price of the good relative to total income
D) the time period buyers have to respond to a price change
E) whether the good is a necessity or a luxury

12) If a substitute good is easy to find, then demand for a good is

A) elastic.
B) inelastic.
C) unit elastic.
D) perfectly inelastic.
E) Substitutes don't have any effect on elasticity.

13) If a good has many close substitutes, then its demand is most likely
A) elastic.
B) inelastic.
C) unit elastic.
D) perfectly inelastic.
E) elastic or inelastic depending on whether the price of the good is increasing or decreasing.

14) One reason why the demand for gasoline is inelastic is because
A) substitutes for gas abound.
B) substitutes for gas are hard to find.
C) gasoline is a luxury item.
D) people have a long time to shop around for automobiles that use less gas.
E) buses run on diesel fuel rather than gasoline.
 15) The demand for luxury suites at basketball games is more elastic if
A) these suites are a necessity.
B) these suites are a luxury item.
C) few close substitutes exist for these suites.
D) basketball fans have little time to look for alternative suites.
E) poorer fans cannot afford luxury suites.

16) You are more sensitive to a change in price if you

A) spend a lot of your income on the good.
B) spend a small percentage of your income on the good.
C) buy very little of the good.
D) do not buy the good regularly.
E) have a very inelastic demand for the good.

17) The price of furnace filters increased by 5 percent and the quantity demanded did not change.
The price elasticity of demand for furnace filters is
A) perfectly inelastic.
B) inelastic.
C) elastic.
D) unit elastic.
E) perfectly elastic.

18) If a 2 percent change in price leads to a ________ percent change in the quantity demanded,
then demand is ________.
A) 2; elastic
B) 1; unit elastic
C) 3; inelastic
D) 1; inelastic
E) 0; perfectly elastic

19) If a 2 percent change in price leads to a ________ percent change in the quantity demanded,
then demand is ________.
A) 2; elastic
B) 1; unit elastic
C) 3; inelastic
D) 4; elastic
E) 0; perfectly elastic

20) If the price elasticity of demand for a good is 2, then a 10 percent increase in the price of that
good ________ the quantity demanded by ________ percent.
A) increases; 20
B) decreases; 2
C) decreases; 10
D) decreases; 20
E) increases; 8

21) When the price of tacos rise 4 percent, the quantity demanded decreases 10 percent. What is
the price elasticity of demand for tacos?
A) 40.0
B) 25.0
C) 0.4
D) 2.5
E) 10.0

22) Suppose the price of a ticket to an Imagine Dragons concert is $41 and at that price, the
quantity of tickets demanded is 17,000 per concert. If Imagine Dragons raises the price to $48
and the quantity demanded decreases to 16,000, the price elasticity of demand for the concert
tickets at the midpoint between these two prices is
A) 15.73.
B) 6.06.
C) 1.00.
D) 0.39.
E) 0.93.

23) When the price of a burrito increases from $2 to $4, the quantity demanded decreases from 50
to 40. At the midpoint between these two prices, the price elasticity of demand equals
A) 1/3.
B) 3.
C) 2.
D) 1.
E) 1/2.

24) Suppose the University of Oklahoma increases the price of student football tickets for the
2012 season by 30 percent. If the price elasticity of demand for student tickets is 1.22, the
price increase leads to
A) a 36.6 percent decrease in the quantity demanded.
B) a 30 percent decrease in the quantity demanded.
C) a 1.22 percent decrease in the quantity demanded.
D) 28.78 percent decrease in the quantity demanded.
E) no change in the quantity demanded.

25) Ticket prices to a Kanye West concert increase from $40 to $60. As a result, ticket sales
decrease from 50,000 to 40,000. At the midpoint between these two prices, the elasticity of
demand for Kanye West tickets equals ________ and demand is ________.
A) 1.8; elastic
B) 0.55; inelastic
C) 0,22; inelastic
D) 0.40; inelastic
E) 5.0; elastic

26) Ticket prices to a Kanye West concert increase from $40 to $60. As a result, ticket sales
decrease from 50,000 to 40,000. Total revenue changes from ________ and demand is
________.
A) $2 million to $2.4 million; elastic
B) $40 to $60; elastic
C) $2 million to $2.4 million; inelastic
D) $2.4 million to $2 million; elastic
E) $1.6 million to $3 million; elastic
 27) The figure shows a demand curve. The price elasticity of demand at point C = 1.00.
If the price increases from $20 to $25, total revenue will
A) decrease because demand is elastic.
B) decrease because demand is unit elastic.
C) increase because the price has doubled.
D) increase because demand is inelastic.
E) more information is needed to determine what will happen to total revenue
28) The figure shows a demand curve. The price elasticity at point C equals 1.00.
Suppose the price falls from $10 to $5. As a result, total revenue will
A) increase because demand is inelastic.
B) decrease because demand is unit elastic.
C) decrease because demand is inelastic.
D) not change because the price change is too small.
E) increase because demand is elastic.

29) When the percentage change in the quantity supplied is less than the percentage change in
price, the supply is
A) elastic.
B) inelastic.
C) unit elastic.
D) perfectly unit elastic.
E) perfectly elastic.

30) If a small percentage change in the price brings a very large percentage change in the quantity
supplied, then the supply is almost perfectly ________ and the supply curve is almost
________.
A) elastic; vertical
B) elastic; horizontal
C) inelastic; horizontal
D) inelastic; vertical
E) elastic; 45 degrees

31) If the supply curve is ________, the elasticity of supply is ________.

A) vertical; infinite
B) vertical; 0
C) horizontal; 1
D) horizontal; 0
E) a straight, upward sloping line through the origin; 0
32) The fact that there is a very limited amount of land in Hong Kong means the supply of new
apartments in Hong Kong is
A) inelastic.
B) elastic.
C) unit elastic.
D) perfectly elastic.
E) limited by the demand.

33) The opportunity cost of producing a good rises only slightly as the quantity produced
increases. This good has
A) an inelastic demand.
B) an elastic demand.
C) an elastic supply.
D) an inelastic supply.
E) a perfectly elastic supply.

34) For a product with a constant or gently increasing opportunity cost of producing additional
units, as more is produced, we expect that
A) demand is price elastic.
B) supply is price elastic.
C) demand is price inelastic.
D) supply is price inelastic.
E) demand is unit elastic.

35) Running shoes are likely to have a ________ elasticity of supply compared to bananas
because ________.
A) higher; shoes are easier to store compared to bananas
B) lower; shoes are easier to store compared to bananas
C) lower; as incomes increase people are more likely to buy running shoes
D) higher; as incomes increase people are more likely to buy running shoes
E) similar; both goods are easily produced
36) If the price elasticity of supply for a good is 0.75, then
A) the percentage change in the quantity supplied is less than the percentage change in price.
B) the supply is elastic.
C) an increase in the price boosts the quantity supplied by a larger percentage.
D) the supply is inelastic so the demand must also be inelastic.
E) None of the above answers is correct.

37) Suppose a 20 percent increase in the price of gasoline results in a 25 percent increase in the
quantity supplied. This response means that gasoline has
A) an elastic supply.
B) an inelastic supply.
C) a unit elastic supply.
D) an inelastic demand.
E) an elastic demand.

38) The price of beef increased by 20 percent and the quantity supplied increased by 10 percent.
The supply of beef is
A) elastic.
B) perfectly elastic.
C) perfectly inelastic.
D) inelastic.
E) unit elastic.

Part B – Discussion Questions

1. Explain why the number of substitutes influences the price elasticity of demand.
2. Studies have shown that the price elasticity of demand for necessities, such as food, are higher
in developing countries and lower in developed countries. What is the reason for this
difference in elasticity?
3. What effect does a price hike have on the total revenue of the producers?
4. Suppose the price elasticity of demand for bouquets of flowers is 4.0. You are charging $8 per
bouquet. If you want to increase the quantity of bouquets you sell by 20 percent, what price
should you charge?
5. How does elasticity of supply differ for a product that can be stored, compared to a product
that cannot be stored?
6. Explain why the cross elasticity of demand for substitute goods is positive and the cross
elasticity of demand for complements is negative.
7. When the price of bananas rises 2 percent, the quantity demanded of peanut butter falls 4
percent.
a. What is the cross elasticity of demand between these two goods?
b. How are these goods related?
c. If the price of bananas rises, how will that affect the demand curve for peanut butter?
8. A 10 percent increase in income brings about a 15 percent decrease in the demand for a good.
What is the income elasticity of demand and is the good a normal good or an inferior good?