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BE Quiz

The document consists of a quiz on Managerial Economics focusing on the concepts of elasticity of demand and supply. It includes multiple-choice questions that test understanding of price elasticity, factors affecting demand, and the relationship between price changes and quantity demanded or supplied. The quiz also addresses specific scenarios to calculate elasticity and differentiate between normal and inferior goods.

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rishu jain
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0% found this document useful (0 votes)
21 views59 pages

BE Quiz

The document consists of a quiz on Managerial Economics focusing on the concepts of elasticity of demand and supply. It includes multiple-choice questions that test understanding of price elasticity, factors affecting demand, and the relationship between price changes and quantity demanded or supplied. The quiz also addresses specific scenarios to calculate elasticity and differentiate between normal and inferior goods.

Uploaded by

rishu jain
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Managerial Economics

Quiz

Elasticity of
Demand & Supply
1. More “elastic” means:

a. less desirable

b.more responsive

c. less responsive

d. more desirable
2. Price elasticity of demand is calculated as
a. the percentage change in quantity
demanded divided by the percentage
change in price
b. the percentage change in price divided by
the percentage change in quantity
demanded
c. the absolute change in quantity demanded
divided by the absolute change in price
• A. A percent change is measured by the
difference between the two numbers
divided by the original number. For
example, what is the percent increase
from 3 to 5 units? 2 divided by 3. What is
the percent decrease from 5 to 3? 2
divided by 5.
3. Without making an adjustment such as
finding the absolute values of the percentage
changes, the price elasticity of demand would
be negative because

a. price and demand are directly related

b. price and demand are inversely related

c. price and quantity demanded are inversely


related
4. Price elasticity of demand is not influenced
by:

a.the units of measurement used for price or for


quantity demanded

b. the proportion of the consumer’s budget


spent on the good
c. the length of the time period under
consideration
d. the number of substitutes available
5. Edith buys 9 magazines per week when the
price is $3. She buys 11 magazines per week
when their price is $2. Edith’s price elasticity
of demand is:

a. -1/2 = -0.5
b. -2/3 = -0.667
c. -1.0
Answer
A. The difference between 9 and 11 units is
2 and the average quantity is 10. The
difference between $3 and $2 is 1 and the
average price is 2.5.
2/10 / 1/2.5 = 2/10 x 2.5/1 = 5/10 = 1/2
= .5.
* most authors drop the negative sign,
McEachern does not in his book.
6. Matt bought 6 CDs last month, when the
price was $14. This month, when the price of
CDs increased to $16, Matt bought only 4
CDs. Matt’s price elasticity of demand is
a. -1/3 = -0.333
b. -3/7 = -0.429
c. -7/3 = -2.333
d. -3
Answer
D. The difference between the quantities
demanded is 2 and the average quantity
is 5. The difference between the prices is
2 and the average price is 15. So:
2/5 divided by 2/15 = 2/5 x 15/2 = 30/10 = 3
* Again, McEachern uses the negative sign.
7. If a 5% increase in price leads to an 8%
decrease in quantity demanded, demand is
a. perfectly elastic
b. elastic
c. unit elastic
d. inelastic
Answer
• B. When price increases and a sellers
total revenue increases, the demand is
inelastic. When the price increases and
the sellers total revenue decreases, the
demand is elastic. In this case total
revenue will decrease because the
quantity demanded is decreasing at a
greater percentage than the increase in
price.
8. Unit elastic demand occurs when
a. a one-unit increase in price leads to a one-
unit decrease in quantity demanded
b. a 1% increase in price leads to a one-unit
decrease in quantity demanded
c.price elasticity of demand is exactly -1
d. price elasticity of demand is positive
Answer
• D. The price elasticity of demand is
unitary elastic when the percent change
in quantity demanded divided by the
percent change in price is equal to one.
9. In calculating price elasticity of demand,
which of the following is assumed to be held
constant?
a. the price of the product itself
b. the quantity demanded of the product
c. total revenue received from the sale of the
product
d. the prices of all other products
• D. Anytime we change something and
want to know the result we always
assume that everything else stays the
same. The Latin term for this assumption
is ceteris paribus.
10. John spends exactly the same dollar amount
of candy bars each week, regardless of their
price. John’s demand curve for candy bars is
a. upward-sloping
b. backward-bending
c. perfectly inelastic
d. unit elastic
• C. A perfectly inelastic demand curve is
perfectly vertical. This means that a
change in price has no effect on the
quantity demanded.
11. Along a linear, downward-sloping demand
curve, price elasticity of demand
a. is impossible to calculate

b.becomes more elastic as price increases

c. is constant and is equal to the inverse of the


slope

d. is constant and is equal to the slope


• B. Linear means a straight line.
Consumers will have a greater response
to a change in price at higher prices than
they will at lower prices.
12. A perfectly elastic demand curve is
a. a vertical straight line
b. a horizontal straight line
c. a downward-sloping straight line
d. an upward-sloping straight line
Answer
• B. A perfectly horizontal demand curve
shows that any increase in price beyond
the price at which the demand curve is at
will lead to zero sales.
13. If a firm facing a perfectly inelastic demand
curve raises its price,
a. it will still sell exactly the same amount of
output as it did at the lower price
b. it will lose some, but not all, of its sales
c. its sales will decrease to zero
d. its sales will increase
Answer
• A. In this case, a change in price has no
effect on the quantity demanded.
13. The more broadly a good is defined
a. the more substitutes it has, so its demand
will be more elastic
b. the less substitutes it has, so its demand
will be more elastic
c. the more substitutes it has, so its demand
will be less elastic
d. the less substitutes it has, so its demand
will be less elastic
Answer
• D. Ease of substitution is a variable that
determines a product’s elasticity. The
easier the substitution, the more elastic
the demand curve. The more broadly
defined the good, the more difficult it is
to find substitutes.
13. Price elasticity of supply is calculated as
a. the unit change in quantity supplied caused
by a $1 change in price
b. the percent change in quantity supplied
caused by a 1% change in price
c. the dollar change in price caused by a one-
unit change in quantity supplied
d. the percent change in price caused by a 1%
change in quantity supplied
• D. When considering supply curves,
suppliers are interested in the
relationship between a change in price
and a change in the quantity supplied.
14. When price increases from $45 to $55, the
quantity supplied increases from 20 units to
30 units. The price elasticity of supply is
a. 1/2 = 0.5
b. 1.0
c. 2.0
C. *We always use the arc elasticity of
demand and supply formula, that is, we
use average values. Also, the sign is
always positive because there is a direct
relationship between the change in price
and the change in quantity supplied.
The percent change in the quantity
supplied is 10/25 and the percent change
in price is 10/50. So the price elasticity of
supply is 10/25 divided by 10/50 or 10/25
x 50/10 = 500/250 = 2.
15. A perfectly elastic supply curve
a. has no relevance, since real-world supply
curves are never perfectly elastic
b. is a horizontal straight line
c. is a vertical straight line
d. is not a straight line
• B. A perfectly elastic supply curve is
perfectly horizontal for the same reason
that a perfectly demand curve is perfectly
horizontal. In this case, a change in price
will have an infinite effect on the change
in the quantity supplied.
16. Which of the following products would be
most likely to have a perfectly inelastic supply
curve?
a. wheat
b. cigarettes
c. economic textbooks
d. precious metal crockery set used by
President John F. Kennedy
• D. As price changes the suppliers of
wheat, cigarettes, and economic
textbooks can change the quantity
supplied of these goods. But with the
crokery set used by Kennedy, the supply
cannot be changed from what it is
because the quantity is fixed.
17. The most important determinant of price
elasticity of supply is
a. price elasticity of demand
b. how rapidly costs increase when a firm
increases its output
c. whether the production process relies
heavily on capital or on labor
• B. If the cost of supplying each
additional unit rises sharply as output
expands, then a higher price will elicit
little increase in quantity supplied, so
supply will tend to be inelastic. But if the
additional cost rises slowly as output
expands, the lure of a higher price will
prompt a large increase in output and the
supply curve is very price elastic.
38. Tax incidence refers to
a. who bears the burden of the tax
b. the principle of taxation being applied
c. the percent of a dollar of earned income
which a typical household in that country
pays in taxes
d. the percent of government spending which
is financed by taxes rather than by
borrowng or by printing money
A. If the government raises the sales tax
across the board, who is affected the most?
In this case, low income people will be
effected more than high income people.
42. Economists distinguish between normal and
inferior goods using
a. price elasticity of demand
b. price elasticity of supply
c. income elasticity of demand
d. tax incidence
• C. A normal good is one that consumers
will purchase more of as their incomes
increase. An inferior good is one that
consumers will buy less of as their
incomes increase.
43. An inferior good is defined as one for which
demand increases as
a. price decreases
b. price increases
c. income increases
d. income decreases

D. New cars are an example of a normal good


and used cars is an example of an inferior
good. As consumer’s income decreases they
will tend to purchase more used cars and
fewer new cars.
44. Luxury goods are usually
a. price inelastic
b. income inelastic
c. income elastic
d. goods with negative income elasticity

C. A luxury good is one that consumers can


live without. So as the price of luxury goods
increase, there is a large effect on the
quantity demanded as consumers choose to
buy less of the good.
45. Income elasticity of demand is important to
producers because it indicates
a. the probable decrease in sales when price is
raised
b. the probable increase in quantity supplied
when price is raised
c. how a firm’s sales react to movements of
the economy through the business cycle
d. how a firm’s total revenue changes in
response to a price increase
C. This question deals with income elasticity
of demand and not price elasticity of
demand. Movements in the economy effect
consumer’s incomes.
46. Which of the following is not a cause of
special problems in U.S. agricultural markets?
a. many factors which determine farm
production are beyond the farmer’s control
b. the demand for farm products tends to be
price inelastic
c. the demand for farm products tends to be
income elastic
C. How much consumers spend on food is not
effected much by a change in their income. At
least in America, if people’s income increases,
they will tend to buy more new cars, but will
spend about the same on food.
47. A characteristic of many unregulated
agricultural markets is that
a. total farm revenue increases when there
are bumper (large) crops and decreases
when there are meager (small) crops
b. total farm revenue decreases when there
are bumper crops and it increases when
there are meager crops
c. total farm revenue increases when demand
decreases and decreases when demand
increases
B. The bumper crops lead to such low prices
that the farmer makes very little money. The
shortage leads to higher prices enabling the
farmer to make more money.
48. Cross-price elasticity of demand is used to
determine whether
a. a product is an inferior or normal good
b. a product is a necessity or a luxury
c. two products are substitutes or
complements
d. price and total revenue are directly or
inversely related
C. When two products are related, a change in
the price of one will effect the demand for the
other. For example, steak and steak sauce are
related. As the price of steak changes, the
demand for steak sauce will change.
49. Substitutes are defined as products with
a. positive cross-price elasticity of demand
b. negative cross-price elasticity of demand
c. positive income elasticity of demand
d. negative income elasticity of demand

A. Sherbet is a substitute for ice cream. As the


price of ice cream increases, consumers will
tend to buy more sherbet. The cross-price
elasticity of demand is positive, in this case,
because as the price of ice cream increases
there is a corresponding increase in the
demand for sherbet.
50. Negative cross-price elasticity of demand
indicates that
a. the product is an inferior good
b. the product is a necessity
c. the product is a luxury
d. the two products are complements
D. Steak and steak sauce are complementary
goods because they tend to be used together. As
the price of steak increases (people will
therefore buy less steak) the demand for steak
sauce will decrease. The cross-price elasticity is
negative because the increase in price leads to a
decrease in the quantity demanded.
Price Demand
Last slide viewed

Quantity

Exhibit 18.1
51. The price elasticity of demand in
Exhibit 18-1 is
a. unit elastic
b. somewhat elastic
c. perfectly elastic
d. perfectly inelastic
D. It is perfectly inelastic because a
change in price will have no effect
on the quantity demanded.
52. What is the price elasticity of demand in
Exhibit 18-1 ?
a. 0
b. -1
c. negative infinity
d. 1
A. The price elasticity of demand is the
percent change in quantity divided by the
percent change in price. In this case there
is 0 change in the quantity demanded as
the price changes.
Price Last slide viewed

De
$40 ma
nd
$20
0
6 8 Quantity
Exhibit 18.2
53. What is the price elasticity of demand
between $20 and $40 in Exhibit 18-2?
a. -1
b. -3/7
c. -2 1/3
d. -7
B. The percent change in quantity is 2/7 and
the percent change in price is 20/30 so the
price elasticity of demand is 2/7 x 30/20 =
60/140 = 6/14 = 3/7. *Remember, your author
uses the negative sign when referring to
elasticity of demand.
54. What is the price elasticity of demand in the
segment of the demand curve below $40 and
above $20 in Exhibit 18-2?
a. elastic
b. inelastic
c. unit elastic
d. 0

B. It is inelastic because 3/7 is less than one. An


elasticity greater than one is elastic, a value
of one is unitary elastic, and a value of less
than one is inelastic.
55. If a firm’s demand curve is illustrated in
Exhibit 18-2 and it is currently charging $20,
its total revenue will
a. remain unchanged, if it changes its price
slightly
b. increase, if it lowers its price substantially
c. increase, if it lowers its price slightly
d. increase, if it raises its price slightly
D. This is because the demand curve is price
inelastic, which means that the firm can raise
price and its total revenue will increase.
Price Last slide viewed
1
S
$40
S
$20
$10
Quantity
0
100 200

Exhibit 18.3
56. What is the price elasticity of supply
between $10 and $20 on supply curve S in
Exhibit 18-3?
a. 0
b. infinity
c. 1
d. 2
C. Price elasticity of supply is the percent
change quantity divided by the percent
change in price. The percent change in
quantity is 100/150 and the percent change in
price is 10/15. So price elasticity of supply is
100/150 x 15/10 = 1500/1500 = 1
57. What is the price elasticity of supply
between $20 and $40 on supply curve S1 in
Exhibit 18-3?
a. 0
b. infinity
c. 1
d. 2

C. The percent change in quantity is 100/150


and the percent change in price is 20/30. So
the price elasticity of supply is 100/150 x
30/20 = 3000/3000 = 1
58. Which supply curve tends to be more elastic
in Exhibit 18-3?
a. both S and S1 have the same elasticity
b. S is more elastic at lower prices, and S’ is
more elastic at higher prices
c. S
d. S1

A. Both have a price elasticity of one.


END

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