Question 1

If the marginal cost of producing vanity license plates is virtually zero (by prison inmates with little else to do), then states would maximize their profits on plate sales at the point on a linear demand curve where
A)demand is inelastic.
B)demand is elastic.
C)demand is unit elastic.
D)the demand curve crosses the horizontal axis.

Accepted Answer

If the marginal cost of producing vanity license plates is virtually zero and the demand is unit elastic, the state can set the price equal to the marginal cost and sell a large volume of plates without reducing the price. This will maximize the state's profits on plate sales. If the demand is inelastic or elastic, the state can still make profits, but not as much as when the demand is unit elastic. When the demand curve crosses the horizontal axis, it indicates that the quantity demanded is zero, so the state cannot make any profits.

Question 2

Figure 6-7 
-In Figure 6-7, which total expenditure curve belongs to a demand curve that is unit elastic throughout?
A)1
B)2
C)3
D)4

Accepted Answer

The answer of Figure 6-7 
-In Figure 6-7, which total...

Question 3

Regarding demand elasticity, which of the following statements is correct?
A)If demand for seller's product is elastic, a price increase will decrease total revenue.
B)If demand for seller's product is elastic, a price increase will increase total revenue.
C)If demand is exactly unit-elastic, an increase in price will raise total revenue.
D)​If demand is exactly unit-elastic, an increase in price will raise total revenue.

Accepted Answer

If demand for seller's product is elastic, a price increase will lead to a proportionately larger decrease in quantity demanded, resulting in a decrease in total revenue. This is because the decrease in quantity demanded will offset the increase in price, resulting in a net decrease in revenue.

Question 4

The demand for Exxon gasoline is ____ the demand for all gasoline.
A)exactly as elastic as, and of a different slope from
B)more elastic than
C)less elastic than
D)exactly as elastic and of a different slope from

Accepted Answer

Exxon gasoline is a specific brand of gasoline, therefore it has close substitutes in terms of other brands of gasoline. Therefore, the demand for Exxon gasoline is more elastic than the demand for all gasoline, which includes different brands and has a more inelastic demand.

Question 5

When the price of penicillin tablets increases by $5 per dozen, the drug company's revenue increases by $6 million.Its elasticity of demand (in absolute terms) must be
A)zero.
B)greater than one.
C)less than one.
D)infinitely large.

Accepted Answer

The formula for calculating the elasticity of demand is % change in quantity demanded divided by % change in price. In this scenario, we know that the price has increased by $5 per dozen and the revenue has increased by $6 million. However, we do not know the actual percentage change in quantity demanded. Therefore, we cannot calculate the exact elasticity of demand. However, we do know that when the price increases, the revenue also increases, which means that the demand is relatively inelastic. Therefore, the correct choice is C - less than one.

Question 6

If, as price increases by 10 percent, total revenue decreases by 10 percent demand is
A)elastic.
B)unit elastic.
C)inelastic.
D)perfectly inelastic.

Accepted Answer

The answer of If, as price increases by 10 percent,...

Question 7

Would a profit-maximizing firm sell where demand is inelastic?
A)No, this would not follow the rule of MC = MR.
B)No, the firm could not profitably raise price.
C)Yes, the firm could profitably lower price to attract sales.
D)Yes, in this case there are few substitutes for the good.

Accepted Answer

The answer of Would a profit-maximizing firm sell where demand...

Question 8

John's Bait Shop was surprised to learn that when it raised prices by 10 percent, total revenue was unaffected.This is because the elasticity for bait is
A)unit elastic.
B)inelastic.
C)elastic.
D)Not enough information is given.

Accepted Answer

If the price increase did not result in any change in total revenue, it indicates that the percentage decrease in quantity demanded is equal to the percentage increase in price, making the demand for bait unit elastic.

Question 9

Julia knows the price elasticity of movie rentals is 3.She knows, therefore, that if she raises her price from $2 to $2.50, her rentals will drop by approximately
A)150 percent.
B)100 percent.
C)75 percent.
D)33 percent.

Accepted Answer

The formula to calculate the percentage change in quantity demanded is (change in price / average price) x price elasticity of demand. In this case, the change in price is $0.50 ($2.50 - $2) and the average price is $2.25. So the percentage change in quantity demanded would be (0.5/2.25) x 3 = 0.667 or approximately 67%. Therefore, if Julia raises her price from $2 to $2.50, her rentals will drop by approximately 67%, which is closest to answer choice C (75%).

Question 10

A demand curve to remain unit elastic along its entire length should
A)cross the X axis.
B)touch the X axis but not the Y axis.
C)never touch either the X or the Y axis.
D)touch the Y axis but not the X axis.

Accepted Answer

For a demand curve to remain unit elastic along its entire length, it must never touch either the X or the Y axis. This ensures that the percentage change in quantity demanded is always equal to the percentage change in price, maintaining unit elasticity throughout.

Question 11

Figure 6-8 
-Libya sold more crude oil in 1985 than it sold five years earlier, but revenues were 17 percent less.Which graph in Figure 6-8 is consistent with this set of facts?
A)1
B)2
C)3
D)4

Accepted Answer

Graph 3 shows an increase in the quantity of oil sold (shown by the higher bar in 1985 compared to 1980), but a decrease in revenue (shown by the lower line for revenue in 1985 compared to 1980). This is consistent with the given information. The other graphs do not fit this pattern.

Question 12

If demand is unit elastic, revenue
A)and price rise and fall together.
B)rises as price falls.
C)falls as price rises.
D)remains constant as price rises or falls.

Accepted Answer

When demand is unit elastic, a change in price will result in an equal proportionate change in quantity demanded, thereby resulting in constant revenue. This means revenue will not be affected as price rises or falls.

Question 13

Tele-Com, Inc., the nation's largest cable TV company, tested the effect of a price reduction for the Disney Channel.It lowered prices from $10.75 to $7.95 and found that the number of customers more than doubled.This means the
A)demand curve for the Disney Channel shifted to the right.
B)supply curve of the Disney Channel shifted to the left.
C)demand for the Disney Channel is elastic in this price range.
D)demand for the Disney Channel is inelastic in this price range.

Accepted Answer

The significant increase in the number of customers in response to a price reduction indicates that the demand for the Disney Channel is elastic in this price range, meaning consumers are highly responsive to price changes.

Question 14

When Scuba, Inc., lowered the price of a tank of compressed air by 20 percent, it sold 10 percent more tankfuls.The price elasticity for compressed air is
A)2.
B)1/2.
C)1.
D)20.

Accepted Answer

The price elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in price. Here, the percentage change in quantity demanded is +10%, and the percentage change in price is -20%. Thus, the price elasticity of demand is 10% / 20% = 1/2 or 0.5.

Question 15

Big Alice Ice Cream Parlor reduced its price of an ice cream cone from $1 to 90 cents.Sales consequently increased from 1,000 cones per week to 1,050.The approximate price elasticity is
A)0.20.
B)0.46.
C)2.16.
D)5.00.

Accepted Answer

The formula for price elasticity of demand is:

% Change in Quantity Demanded / % Change in Price

We know that the price has been reduced by 10% (from $1 to 90 cents), and the quantity demanded has increased by 5% (from 1,000 to 1,050 cones per week).

% Change in Quantity Demanded = [(1,050 – 1,000) / 1,000] x 100% = 5%
% Change in Price = [(0.90 – 1) / 1] x 100% = -10%

Using the formula, we get:

% Change in Quantity Demanded / % Change in Price = 5% / -10% = -0.5

Since the price elasticity of demand is always a positive number, we take the absolute value of -0.5 to get:

Price Elasticity of Demand = 0.5

Therefore, the best choice is B, as it is the closest answer to 0.5.

Question 16

Suppose that the supply of insulin is perfectly elastic and the demand for insulin perfectly inelastic.Then the result of an excise tax would be
A)a significant increase in government revenue and a significant decrease in the quantity consumed.
B)a significant decrease in the quantity consumed with no change in government revenue.
C)a significant increase in government revenue and no change in the quantity consumed.
D)no increase in government revenue and no change in the quantity consumed.

Accepted Answer

In this scenario, when supply is perfectly elastic and demand is perfectly inelastic, the entire burden of the tax falls on consumers. As the demand for insulin will not change despite the increase in price due to the tax, the quantity consumed will not change. Therefore, there will be no decrease in quantity consumed. However, as consumers bear the entire burden of the tax, the price will increase, leading to a significant increase in government revenue. Hence, the answer is C.

Question 17

A recent study on enrollment at a liberal arts college concluded that demand elasticity is 0.91.The administration is considering a tuition increase to help balance the budget.The revenue-maximizing decision is to
A)decrease tuition, which should boost enrollment enough to balance the budget.
B)decrease tuition, which would bring in more revenue.
C)leave tuition as is-an increase would not help balance the budget.
D)increase tuition, which would bring in more revenue.

Accepted Answer

The demand elasticity of 0.91 indicates that for every 1% increase in tuition, there will be a 0.91% decrease in enrollment. Therefore, if the administration increases tuition, they will likely see a decrease in enrollment. However, if the increase in revenue from the higher tuition is greater than the decrease in revenue from lower enrollment, then the net revenue will increase. The revenue-maximizing decision for the administration is to increase tuition, as this will bring in more revenue even with a decrease in enrollment.

Question 18

The demand for French Roast coffee is likely to be
A)elastic.
B)inelastic.
C)unit elastic.
D)perfectly inelastic.

Accepted Answer

French Roast coffee, being a specific type of coffee among many others, means consumers can easily switch to other types if the price of French Roast increases, indicating its demand is elastic.

Question 19

The local symphony recently raised its price for tickets to their summer concerts in the park.At the end of the summer season, the symphony was surprised to see that total revenue had actually decreased.The reason was that the elasticity of demand for tickets was
A)unit elastic.
B)inelastic.
C)elastic.
D)Not enough information is given.

Accepted Answer

Since the symphony increased the ticket prices and total revenue decreased, it indicates that demand for tickets was responsive to the price change. This means that the elasticity of demand for tickets was elastic, as a small change in price led to a relatively large change in quantity demanded.

Question 20

To avoid an increase in the local property tax, Sullivan County, New York, proposed a 2 percent hotel tax, which presumably would be passed on to tourists.The hotel industry argued that the tax would hurt hotel business.They are really arguing that
A)tourist and convention demand is inelastic, so hotel bookings will decline.
B)tourist and convention demand is very elastic, so hotel bookings will decline.
C)they would prefer a property tax increase instead.
D)it is unfair to tax people who do not live in the area.

Accepted Answer

The hotel industry is arguing that the tax will hurt hotel business, which implies that they believe tourist and convention demand is very elastic, meaning that even a small increase in price (such as the 2 percent tax) will lead to a significant decrease in hotel bookings.

Quiz 6: Demand and Elasticity

If the marginal cost of producing vanity license plates is virtually zero (by prison inmates with little else to do) , then states would maximize their profits on plate sales at the point on a linear demand curve where

Figure 6-7 -In Figure 6-7, which total expenditure curve belongs to a demand curve that is unit elastic throughout?

Regarding demand elasticity, which of the following statements is correct?

The demand for Exxon gasoline is ____ the demand for all gasoline.

When the price of penicillin tablets increases by $5 per dozen, the drug company's revenue increases by $6 million.Its elasticity of demand (in absolute terms) must be

If, as price increases by 10 percent, total revenue decreases by 10 percent demand is

Would a profit-maximizing firm sell where demand is inelastic?

John's Bait Shop was surprised to learn that when it raised prices by 10 percent, total revenue was unaffected.This is because the elasticity for bait is

Julia knows the price elasticity of movie rentals is 3.She knows, therefore, that if she raises her price from $2 to $2.50, her rentals will drop by approximately

A demand curve to remain unit elastic along its entire length should

Figure 6-8 -Libya sold more crude oil in 1985 than it sold five years earlier, but revenues were 17 percent less.Which graph in Figure 6-8 is consistent with this set of facts?

If demand is unit elastic, revenue

Tele-Com, Inc., the nation's largest cable TV company, tested the effect of a price reduction for the Disney Channel.It lowered prices from $10.75 to $7.95 and found that the number of customers more than doubled.This means the

When Scuba, Inc., lowered the price of a tank of compressed air by 20 percent, it sold 10 percent more tankfuls.The price elasticity for compressed air is

Big Alice Ice Cream Parlor reduced its price of an ice cream cone from $1 to 90 cents.Sales consequently increased from 1,000 cones per week to 1,050.The approximate price elasticity is

Suppose that the supply of insulin is perfectly elastic and the demand for insulin perfectly inelastic.Then the result of an excise tax would be

A recent study on enrollment at a liberal arts college concluded that demand elasticity is 0.91.The administration is considering a tuition increase to help balance the budget.The revenue-maximizing decision is to

The demand for French Roast coffee is likely to be

The local symphony recently raised its price for tickets to their summer concerts in the park.At the end of the summer season, the symphony was surprised to see that total revenue had actually decreased.The reason was that the elasticity of demand for tickets was

To avoid an increase in the local property tax, Sullivan County, New York, proposed a 2 percent hotel tax, which presumably would be passed on to tourists.The hotel industry argued that the tax would hurt hotel business.They are really arguing that