Question 1

If the price of one good increases by 3 percent and the quantity demanded of another good increases by 2 percent, the cross elasticity is ________ and the two goods are ________.
A) 2/3, substitutes
B) 2/3, complements
C) 3/2, complements
D) 3/2, substitutes

Accepted Answer

The answer of If the price of one good increases...

Question 2

The cross-elasticity of demand between Homer's Holesome Doughnuts and Krusty's Krispy Crullers is 5.0, which indicates that Homer's doughnuts and Krusty's crullers are
A) complements and the relationship between the two goods is strong (that is, the quantity demanded of doughnuts is very responsive to changes in the price of crullers).
B) complements and the relationship between the two goods is weak (that is, the quantity demanded of doughnuts is not very responsive to changes in the price of crullers).
C) substitutes and the relationship between the two goods is strong (that is, the quantity demanded of doughnuts is very responsive to changes in the price of crullers).
D) substitutes and the relationship between the two goods is weak (that is, the quantity demanded of doughnuts is not very responsive to changes in the price of crullers).

Accepted Answer

A cross-elasticity of demand of 5.0 implies a strong relationship between two goods, indicating that they are substitutes rather than complements. When the price of one good (Krusty's Krispy Crullers) increases, the quantity demanded decreases and the demand for the other good (Homer's Holesome Doughnuts) increases. This implies that the goods are substitutes, not complements, as suggested in choices A and B. Choice D implies a weak relationship, which is not supported by the given cross-elasticity value. Therefore, the best choice is C.

Question 3

If goods A and B are complements, then
A) the cross elasticity of demand between A and B is negative.
B) the cross elasticity of demand between A and B is positive.
C) their income elasticities of demand are both greater than 1.
D) their income elasticities of demand are both less than 1.

Accepted Answer

Complementary goods are goods that are used together, such as peanut butter and jelly or coffee and creamer. When the price of one good, say A, increases, the quantity demanded for both A and its complement, B, will decrease. Therefore, the cross elasticity of demand between A and B is negative.

Question 4

If the cross elasticity of demand between goods A and B is negative,
A) the demands for A and B are both price elastic.
B) the demands for A and B are both price inelastic.
C) A and B are complements.
D) A and B are substitutes.

Accepted Answer

A negative cross elasticity of demand indicates that goods A and B are complements, meaning that the demand for one good is negatively affected by a change in the price of the other good. Therefore, the best choice is C.

Question 5

If the cross elasticity of demand between coffee and tea is positive, an increase in the price of tea will shift the demand curve for
A) tea rightward.
B) tea leftward.
C) coffee rightward.
D) coffee leftward.

Accepted Answer

The answer of If the cross elasticity of demand between...

Question 6

If the cross elasticity of demand between goods A and B is positive,
A) the demands for A and B are both price elastic.
B) the demands for A and B are both price inelastic.
C) A and B are complements.
D) A and B are substitutes.

Accepted Answer

A positive cross elasticity of demand indicates that goods A and B are substitutes. This means that an increase in the price of one good (e.g. good A) leads to an increase in the demand for the other good (e.g. good B) as consumers switch to the substitute. Therefore, the demands for both goods are likely to be price elastic.

Question 7

Dell lowers the price of their PCs by 10 percent. As a result, the quantity of Gateway computers demanded at the current price decreases by 12 percent. What is the cross elasticity of demand for Gateway computers with respect to the price of Dell computers?
A) -1.20
B) -0.83
C) 1.20
D) 0.83

Accepted Answer

The answer of Dell lowers the price of their PCs...

Question 8

If there is an increase in the price of broccoli because of disastrous weather that destroys about half of this year's spinach crop, which of the following could be true?
A) The cross elasticity of demand between spinach and broccoli is negative 1.25.
B) The demand curve for broccoli has shifted rightward and the cross elasticity of demand between spinach and broccoli is positive.
C) The demand curve for spinach has shifted to the leftward and the cross elasticity of demand between spinach and broccoli is positive.
D) The demand curves for spinach and broccoli have become more cross inelastic.

Accepted Answer

The increase in the price of broccoli due to a decrease in the spinach supply suggests that spinach and broccoli are substitutes. This would cause the demand for broccoli to increase, shifting its demand curve rightward, and the cross elasticity of demand would be positive.

Question 9

If a price hike of 5 percent increases the quantity demanded of another good by 2 percent, the goods must be ________ and the cross elasticity of demand equals ________.
A) substitutes; 0.40
B) substitutes; 2.5
C) complements; 0.40
D) complements; 2.5

Accepted Answer

The answer of If a price hike of 5 percent...

Question 10

If the cross elasticity of demand is -5 between french fries and orange drink, then french fries
A) and orange drink are complements.
B) and orange drink are substitutes.
C) are a normal good and orange drink is an inferior good.
D) are an inferior good and orange drink is a normal good.

Accepted Answer

A negative cross elasticity of demand indicates that the two goods are substitutes, meaning that if the price of one good increases, consumers will switch to purchasing more of the other good. In this case, if the price of french fries increases, consumers will choose to buy more orange drink as a substitute. Therefore, french fries and orange drink are substitutes.

Question 11

Suppose Clyde always eats ice cream and chocolate syrup together. If the price of syrup increases by 10 percent, and the cross elasticity of demand is -2, the demand for ice cream
A) increases by 5 percent.
B) increases by 20 percent.
C) decreases by 5 percent.
D) decreases by 20 percent.

Accepted Answer

The cross elasticity of demand measures the responsiveness of demand for one good to a change in the price of another good. Since the cross elasticity of demand is negative, we know that ice cream and chocolate syrup are complements, and an increase in the price of syrup will lead to a decrease in the quantity demanded of ice cream. The magnitude of the effect will be twice the percentage change in the price of syrup, so a 10 percent increase in syrup price will lead to a 20 percent decrease in the quantity demanded of ice cream. Therefore, the demand for ice cream decreases by 20 percent.

Question 12

The greater the substitutability between Northwest timber and Southeast timber, the ________ is the cross elasticity of demand between timber from the two regions and the ________ is the elasticity of demand for Northwest timber.
A) smaller; smaller
B) smaller; larger
C) larger; smaller
D) larger; larger

Accepted Answer

The answer of The greater the substitutability between Northwest timber...

Question 13

If the cross elasticity of demand between two goods is -0.56, then a fall in the price of one good leads to a ________ shift in the ________ of the other good.
A) rightward; demand
B) rightward; supply
C) leftward; demand
D) leftward; supply

Accepted Answer

The answer of If the cross elasticity of demand between...

Question 14

Suppose inter-city bus travel is a substitute for transportation by train. Which of the following could then be true?
A) The cross elasticity between bus and train travel could equal 0.65.
B) The cross elasticity between bus and train travel could equal 1.0.
C) The cross elasticity between bus and train travel could equal 1.25.
D) All of the above could be true.

Accepted Answer

The cross elasticity of demand measures how the quantity demanded of one good responds to a price change in another good. For substitutes, this value is positive, so all given values (0.65, 1.0, 1.25) could be true.

Question 15

If a fall in the price of good A increases the quantity demanded of good B,
A) A and B are substitutes.
B) A and B are complements.
C) A is a substitute for B, but B is a complement to A.
D) B is a substitute for A, but A is a complement to B.

Accepted Answer

The answer of If a fall in the price of...

Question 16

Suppose that the cross elasticity of demand for Dell computers with respect to Hewlett Packard computers is 2.1. If Hewlett-Packard lowers its price by 5 percent, other things being equal, what will be the percentage change in the quantity of Dell computers demanded?
A) 2.4 percent
B) -10.5 percent
C) 10.5 percent
D) -42 percent

Accepted Answer

The answer of Suppose that the cross elasticity of demand...

Question 17

If a rise in the price of good B increases the quantity demanded of good A,
A) A and B are substitutes.
B) A and B are complements.
C) A is a substitute for B, but B is a complement to A.
D) B is a substitute for A, but A is a complement to B.

Accepted Answer

A rise in the price of good B causing an increase in the quantity demanded of good A implies that the two goods can be used in place of each other to some extent, making them substitutes.

Question 18

Microsoft raises the price of its Office software by 10 percent. As a result, the quantity of personal computers demanded at the current price decreases by 5 percent. What is the cross elasticity of demand for personal computers with respect to the price of Microsoft Office software?
A) -2.0
B) -0.5
C) 0.5
D) 2.0

Accepted Answer

The formula for cross elasticity of demand is (% change in quantity demanded of good A)/(% change in price of good B). In this case, % change in quantity demanded of personal computers = -5% (as it decreased by 5%) and % change in price of Microsoft Office software = 10% (as the price increased by 10%). Substituting in the formula, we get (-5%)/10% = -0.5. Therefore, the cross elasticity of demand for personal computers with respect to the price of Microsoft Office software is -0.5.

Question 19

Based on the following pieces of information, which fast food product do consumers see as the closest substitute for Wendy's Hamburgers?
A) Kentucky Fried Chicken, which has a cross elasticity of 1.70 with Wendy's
B) McDonald's hamburgers, which have a cross elasticity of 1.01 with Wendy's
C) Pizza Hut pizza, which has a cross elasticity of zero with Wendy's
D) Taco Bell tacos, which have a cross elasticity of -1.25 with Wendy's

Accepted Answer

The answer of Based on the following pieces of information,...

Question 20

The cross elasticity of demand between Coca-Cola and Pepsi-Cola is ________ so that Coke and Pepsi are ________.
A) positive; complements
B) positive; substitutes
C) negative; normal goods
D) negative; substitutes

Accepted Answer

The answer of The cross elasticity of demand between Coca-Cola...

Quiz 4: Elasticity

If the price of one good increases by 3 percent and the quantity demanded of another good increases by 2 percent, the cross elasticity is and the two goods are .

The cross-elasticity of demand between Homer's Holesome Doughnuts and Krusty's Krispy Crullers is 5.0, which indicates that Homer's doughnuts and Krusty's crullers are

If goods A and B are complements, then

If the cross elasticity of demand between goods A and B is negative,

If the cross elasticity of demand between coffee and tea is positive, an increase in the price of tea will shift the demand curve for

If the cross elasticity of demand between goods A and B is positive,

Dell lowers the price of their PCs by 10 percent. As a result, the quantity of Gateway computers demanded at the current price decreases by 12 percent. What is the cross elasticity of demand for Gateway computers with respect to the price of Dell computers?

If there is an increase in the price of broccoli because of disastrous weather that destroys about half of this year's spinach crop, which of the following could be true?

If a price hike of 5 percent increases the quantity demanded of another good by 2 percent, the goods must be and the cross elasticity of demand equals .

If the cross elasticity of demand is -5 between french fries and orange drink, then french fries

Suppose Clyde always eats ice cream and chocolate syrup together. If the price of syrup increases by 10 percent, and the cross elasticity of demand is -2, the demand for ice cream

The greater the substitutability between Northwest timber and Southeast timber, the is the cross elasticity of demand between timber from the two regions and the is the elasticity of demand for Northwest timber.

If the cross elasticity of demand between two goods is -0.56, then a fall in the price of one good leads to a shift in the of the other good.

Suppose inter-city bus travel is a substitute for transportation by train. Which of the following could then be true?

If a fall in the price of good A increases the quantity demanded of good B,

Suppose that the cross elasticity of demand for Dell computers with respect to Hewlett Packard computers is 2.1. If Hewlett-Packard lowers its price by 5 percent, other things being equal, what will be the percentage change in the quantity of Dell computers demanded?

If a rise in the price of good B increases the quantity demanded of good A,

Microsoft raises the price of its Office software by 10 percent. As a result, the quantity of personal computers demanded at the current price decreases by 5 percent. What is the cross elasticity of demand for personal computers with respect to the price of Microsoft Office software?

Based on the following pieces of information, which fast food product do consumers see as the closest substitute for Wendy's Hamburgers?

The cross elasticity of demand between Coca-Cola and Pepsi-Cola is so that Coke and Pepsi are .