Question 1

If the quantity demanded is 5,000 gallons at $3.00 per gallon, the price elasticity of demand for gasoline is 0.5, and the price rises to $3.15 per gallon, how many gallons of gas will be sold at this higher price?

Accepted Answer

The answer of If the quantity demanded is 5,000 gallons...

Question 2

A university bookstore decreased the price of a sweatshirt from $20 to $18 and discovered that sweatshirt sales increased from 100 per week to 120 per week.Use the midpoint formula to compute the price elasticity of demand for sweatshirts.

Accepted Answer

The answer of A university bookstore decreased the price of...

Question 3

If the cross-price elasticity of demand between hamburgers and cheese is positive, these two goods must be complements.

Accepted Answer

The statement is false. If the cross-price elasticity of demand between hamburgers and cheese is positive, this means that an increase in the price of hamburgers leads to an increase in the quantity demanded of cheese, and vice versa. This suggests that the two goods are substitutes, not complements. If the cross-price elasticity of demand between hamburgers and cheese is positive, it means that an increase in the price of cheese leads to an increase in the demand for hamburgers (and vice versa). This suggests that the two goods are substitutes, not complements. Complements are goods that are typically consumed together, so an increase in the price of one would decrease the demand for both.

Question 4

Since for most people, eating in restaurants is a luxury and eating at home is a necessity, the price elasticity of demand for food eaten at home is less than the price elasticity of demand for eating in restaurants.

Accepted Answer

This statement is true. The price elasticity of demand measures the sensitivity of consumers' demand for a product to a change in its price. Since eating at home is a necessity, consumers are less likely to change their demand for food when its price changes. However, eating in restaurants is a luxury, and consumers may be more willing to cut back on this expenditure if prices increase, making the demand more elastic. This is because when it comes to eating at home, people generally have limited options and are more sensitive to price changes, whereas eating in restaurants is seen as a discretionary expense and is often associated with greater variety and higher quality food, hence people are more willing to pay a higher price.

Question 5

Sarah has been told she has only one week to finish some pottery for a show.Sarah has exhausted her supply of clay and considers new clay absolutely necessary for finishing her products.For Sarah, the price elasticity of demand for new clay is elastic.

Accepted Answer

The price elasticity of demand for a necessity like clay in this context is likely inelastic, as Sarah needs it urgently to complete her work, making her less sensitive to price changes.

Question 6

You are the manager of a supermarket, and you know that the cross-price elasticity of peanut butter to jelly is exactly -2.0.Because of a bad grape harvest, grape jelly prices are expected to rise by 10% next year.To account for the change in demand, you should stock 10% more peanut butter.

Accepted Answer

The cross-price elasticity of -2.0 indicates that peanut butter and jelly are complements. A 10% increase in the price of jelly would lead to a 20% decrease in the demand for peanut butter, not an increase.

Question 7

The director of River City Public Transport recently stated, "The last seven times we increased bus fares, revenues dropped." This remark suggests the demand for bus service is elastic.

Accepted Answer

The statement indicates that there is a negative relationship between the price of bus service and the quantity of service demanded, which is the definition of elastic demand. If increasing prices causes a decrease in revenue, it indicates that the demand for the service is responsive to changes in price, meaning it is elastic.

Question 8

The price elasticity of demand for gasoline is likely to be higher in the long run than in the short run.

Accepted Answer

In the short run, consumers may not have many alternatives to using gasoline and may continue to purchase it despite price increases. However, in the long run, consumers may have more options such as purchasing more fuel-efficient vehicles, moving closer to work, or using public transportation. Therefore, the price elasticity of demand for gasoline is likely to be higher in the long run as consumers have more time to adjust their behavior and consumption patterns based on price changes. In the short run, consumers may not have many alternatives to replace gasoline consumption, so they may not be able to adjust their demand for gasoline quickly. However, in the long run, consumers may switch to alternative modes of transportation or purchase more fuel-efficient vehicles, making the demand for gasoline more elastic. This means that a change in price will have a greater impact on the quantity demanded in the long run compared to the short run.

Question 9

The price elasticity of the supply of paintings by Rembrandt is greater than 1.

Accepted Answer

The price elasticity of supply is a measure of how much the quantity supplied of a good or service changes in response to a change in its price. For products such as paintings by Rembrandt, the supply is relatively fixed, as there is a limited number of original Rembrandt paintings in existence. Therefore, the price elasticity of supply is likely to be low or even zero, meaning that a change in price will have little or no effect on the quantity supplied. Therefore, the statement is false.

Question 10

The income elasticity of demand for an inferior good, such as a macaroni and cheese dinner, is negative.

Accepted Answer

Inferior goods are those that consumers tend to buy less of as their income increases. Therefore, the income elasticity of demand for an inferior good is negative, implying that as income increases, the quantity demanded for the product decreases. The income elasticity of demand measures the responsiveness of quantity demanded to changes in income. For inferior goods, as income increases, the demand for the good decreases. This means that the income elasticity of demand for an inferior good is negative.

Question 11

If funeral homes discover that the price elasticity of demand for caskets equals 0.55, funeral homes should increase prices to increase revenue.

Accepted Answer

A price elasticity of demand of 0.55 means that casket demand is relatively inelastic, meaning that a price increase is less likely to result in a significant decrease in demand. This indicates that funeral homes could increase prices to increase revenue.

Question 12

The mayor advocates raising the entrance fee at the city's pools to increase revenue for the city.The mayor is right only if the price effect dominates the quantity effect.

Accepted Answer

If the price effect (increase in revenue from higher entrance fees) is greater than the quantity effect (decrease in revenue from fewer people using the pool), then the mayor's decision to raise the entrance fee will be effective in increasing revenue for the city. If the price effect dominates, the increase in revenue from the higher entrance fee will outweigh any decrease in attendance. However, if the quantity effect dominates, the decrease in attendance will lead to a decrease in revenue overall. Whether the price effect or quantity effect dominates will depend on the specific demand for the city's pools.

Question 13

If demand is perfectly inelastic, changes in price leave total revenue unchanged.

Accepted Answer

The answer of If demand is perfectly inelastic, changes in...

Question 14

Local cable companies recently increased the price of basic services.A news expert reporting on the increase stated, "While prices have increased 40%, the cable company reports only a 20% increase in revenue." This remark suggests the demand for basic cable service is elastic.

Accepted Answer

The answer of Local cable companies recently increased the price...

Question 15

Given a price increase for any good, the price effect on revenue is always larger than the quantity effect on revenue.

Accepted Answer

The magnitude of the price effect on revenue depends on the price elasticity of demand for the good. If the demand is relatively inelastic, then the price effect will be larger than the quantity effect and total revenue will increase with a price increase. However, if the demand is relatively elastic, then the quantity effect on revenue will be larger than the price effect and total revenue will decrease with a price increase. Therefore, it is not always true that the price effect on revenue is larger than the quantity effect on revenue.

Question 16

The price elasticity of demand is the ratio of the percent change in the quantity demanded to the percent change in the price as one moves along the demand curve.

Accepted Answer

The price elasticity of demand formula is:

Price elasticity of demand = Percent change in quantity demanded / Percent change in price

As one moves along the demand curve, the quantity demanded and price will change. Therefore, the price elasticity of demand is calculated by dividing the percent change in quantity demanded by the percent change in price.

Question 17

The city government is losing millions of dollars on the mass transit system (buses and subways).The government proposes to increase the fare of a ticket by 20% to raise revenue and has asked your advice.You know that the price elasticity of demand for mass transit in the city is approximately equal to 0.75.What do you think of the proposal to increase the fare to raise revenue for the city? Be as specific as possible.

Accepted Answer

The answer of The city government is losing millions of...

Question 18

A perfectly inelastic demand curve for insulin would mean that the quantity demanded does
not respond at all to changes in the price of insulin.

Accepted Answer

This is because in a perfectly inelastic demand curve, the quantity demanded remains constant regardless of changes in the price. Therefore, the price has no effect on the demand for insulin.

Question 19

If the cross-price elasticity of demand between rice and beans is -0.25, rice and beans are complements.

Accepted Answer

A negative cross-price elasticity of demand indicates that as the price of one good increases, the demand for the other good decreases, which is characteristic of complementary goods.

Question 20

A major determinant of the price elasticity of demand is the availability of substitutes.

Accepted Answer

When there are close substitutes available for a product, consumers have many options to choose from and can easily switch to a different product if its price increases. This makes the demand for the original product more elastic, meaning that a small change in price will lead to a large change in quantity demanded. On the other hand, when there are no or few substitutes available, consumers may be willing to pay a higher price for the product, making its demand more inelastic. The availability of substitutes is a major determinant of price elasticity of demand. When there are substitutes available for a product, consumers have the option to switch to the substitute if the price of the original product increases, leading to a higher price elasticity of demand. On the other hand, if there are no substitutes available for a product, consumers may continue to purchase the product even if its price increases, leading to a lower price elasticity of demand.

Quiz 6: Elasticity