Question 1

Which of the following would cause a demand curve for a good to be price inelastic?
A) The good is a luxury.
B) There are a great number of substitutes for the good.
C) The good is a necessity.
D) The good is an inferior good.

Accepted Answer

A necessary good is one where the consumer does not have many substitutes or alternatives. This means that regardless of price changes, consumers will still purchase the good as they have no other option. This results in demand for the good being price inelastic.

Question 2

If an increase in income results in a decrease in the quantity demanded of a good, then for that good, the
A) cross-price elasticity of demand is negative.
B) price elasticity of demand is elastic.
C) income elasticity of demand is negative.
D) income elasticity of demand is positive.

Accepted Answer

This is because a decrease in quantity demanded in response to an increase in income indicates that the good is an inferior good, which will have a negative income elasticity of demand.

Question 3

If consumers always spend 15 percent of their income on food, then the income elasticity of demand for food is
A) 1.50.
B) 1.15.
C) 15
D) 0.15.
E) 1.00.

Accepted Answer

The income elasticity of demand is 1.00 when the proportion of income spent on a good remains constant as income changes.

Question 4

Total revenue
A) always increases as price increases.
B) increases as price increases, as long as demand is elastic.
C) decreases as price increases, as long as demand is inelastic.
D) remains unchanged as price increases when demand is unit elastic.

Accepted Answer

The answer of Total revenue
A) always increases as price increases.
B)...

Question 5

If an increase in the price of a good has no impact on the total revenue in that market, demand must be
A) perfectly elastic
B) price inelastic.
C) unit price elastic.
D) price elastic.

Accepted Answer

If an increase in the price of a good has no impact on the total revenue in that market, the demand must be unit price elastic. This means that the percentage change in quantity demanded is equal to the percentage change in price, resulting in no change in total revenue. In contrast, if demand were perfectly elastic, a price increase would cause total revenue to decrease, while in price inelastic demand, a price increase would result in an increase in total revenue. If demand were price elastic, a small increase in price would lead to a large decrease in quantity demanded, resulting in a decrease in total revenue.

Question 6

The cross-price elasticity of demand for substitute goods must be
A) greater than one.
B) less than one.
C) zero.
D) greater than zero.

Accepted Answer

The cross-price elasticity of demand measures the responsiveness of the demand for one good to a change in the price of a different good. Since substitute goods are alternatives to each other, an increase in the price of one will lead to an increase in the demand for the other. Therefore, the cross-price elasticity of demand for substitute goods will be positive and greater than zero.

Question 7

A perfectly inelastic supply curve represents a
A) product supply that is extremely responsive to a price change.
B) product with a constant price, regardless of the quantity offered for sale.
C) product in abundant supply.
D) fixed supply of a good.

Accepted Answer

A perfectly inelastic supply curve means that the quantity supplied does not change in response to a change in price. This could be due to a fixed quantity of the good being produced, which would make D the correct answer.

Question 8

If a supply curve for a good is price elastic, then
A) the quantity supplied is sensitive to changes in the price of that good.
B) the quantity demanded is insensitive to changes in the price of that good.
C) the quantity demanded is sensitive to changes in the price of that good.
D) the quantity supplied is insensitive to changes in the price of that good.

Accepted Answer

If the supply curve for a good is price elastic, it means that producers are able to respond quickly to changes in the price of that good by increasing or decreasing the quantity supplied. This indicates that the quantity supplied is sensitive to changes in the price of that good.

Question 9

If the price elasticity of supply equals zero, this implies that
A) suppliers can easily change quantity supplied when price changes.
B) the supply curve is vertical.
C) the percentage change in price of the good supplied is zero.
D) the percentage change in quantity supplied equals the percentage change in price.

Accepted Answer

A price elasticity of supply equal to zero means the quantity supplied will not respond at all to changes in price. This results in a vertical supply curve.

Question 10

If the income elasticity of demand for a good is negative, it must be
A) an elastic good.
B) an inferior good.
C) a normal good.
D) a luxury good.

Accepted Answer

A negative income elasticity of demand indicates that as income increases, the demand for the good decreases. This is a characteristic of inferior goods, which are cheaper alternatives to superior goods. As income increases, consumers switch to superior alternatives, causing the demand for the inferior good to decrease.

Question 11

Suppose that the price elasticity of supply of lawn mowers is 1.5. If the price of lawn mowers rises 5 per cent, the quantity supplied of lawn mowers would
A) decline 7.5 per cent.
B) rise 7.5 per cent.
C) rise 1.5 per cent.
D) rise 0.3 per cent.

Accepted Answer

The price elasticity of supply is 1.5, meaning that for a 1% increase in price, the quantity supplied increases by 1.5%. Therefore, a 5% increase in price would lead to a 7.5% increase in quantity supplied (1.5 * 5% = 7.5%).

Question 12

If there is excess capacity in a production facility, it is likely that the firm's supply curve is
A) price inelastic.
B) perfectly inelastic
C) unit price elastic.
D) price elastic.

Accepted Answer

If there is excess capacity in a production facility, it means that the firm is not operating at full capacity and can increase its output without a significant increase in costs. This indicates that the firm's supply curve is likely price elastic, as it can increase its output significantly in response to a small increase in price. Thus, the best choice is D, price elastic.

Question 13

For which of the following goods is the income elasticity of demand likely lowest?
A) water
B) sapphire pendant necklaces
C) filet mignon steaks
D) fresh fruit

Accepted Answer

Water is a basic necessity and has a very low income elasticity of demand, meaning that a change in income will not have a significant effect on the quantity demanded.

Question 14

If the cross-price elasticity between two goods is negative, the two goods are likely to be
A) substitutes.
B) complements.
C) necessities.
D) luxuries.

Accepted Answer

If the cross-price elasticity between two goods is negative, it means that as the price of one good increases, the demand for the other good decreases. This is the case with complementary goods, such as gasoline and automobiles. As the price of gasoline goes up, the demand for automobiles decreases as people are less likely to purchase cars that they cannot afford to fill with gas. Therefore, if the cross-price elasticity between two goods is negative, the two goods are likely to be complements.

Question 15

If supply is price inelastic, the value of the price elasticity of supply must be
A) infinite.
B) zero.
C) less than 1.
D) unity
E) greater than 1.

Accepted Answer

If supply is price inelastic, it means that the percentage change in quantity supplied is less than the percentage change in price. This is only possible if the value of the price elasticity of supply (Ep) is less than 1. If Ep was equal to 1 or greater than 1, the percentage change in quantity supplied would be greater than the percentage change in price, resulting in price elastic supply. If Ep was zero, it would mean that there is no change in quantity supplied even if there is a change in price, which is unlikely to happen in most cases. If Ep was infinite, it would mean that any change in price would result in an infinite change in quantity supplied, which is also unlikely to happen in reality.

Question 16

Price elasticity of supply for the long run is
A) always greater than the long-run price elasticity of demand.
B) always zero.
C) perfectly inelastic.
D) always greater than the short-run price elasticity of supply.

Accepted Answer

In the long run, firms have more time to adjust their production levels and inputs, making them more responsive to changes in price. Therefore, the long-run price elasticity of supply is generally greater than the short-run price elasticity of supply. A and B are incorrect as they make generalizations that are not always true, and C is incorrect as perfectly inelastic supply means that quantity supplied does not change at all in response to changes in price.

Question 17

Technological improvements in agriculture that shift the supply of agricultural commodities to the right tend to
A) increase total revenue to farmers as a whole because the demand for food is elastic.
B) increase total revenue to farmers as a whole because the demand for food is inelastic.
C) reduce total revenue to farmers as a whole because the demand for food is elastic.
D) reduce total revenue to farmers as a whole because the demand for food is inelastic.

Accepted Answer

When supply increases, prices tend to fall. If demand is inelastic, the percentage drop in price is greater than the percentage increase in quantity sold, leading to a decrease in total revenue.

Question 18

The midpoint method is used to compute elasticity because it
A) automatically computes a positive number instead of a negative number.
B) results in an elasticity that is the same as the slope of the demand curve.
C) gives the same answer regardless of the direction of change.
D) automatically rounds quantities to the nearest whole unit.

Accepted Answer

The midpoint method calculates elasticity by taking the average of the initial and final values for both price and quantity, which ensures that the elasticity is the same regardless of whether the values are increasing or decreasing. This makes it a more accurate measure of elasticity than simply calculating the slope of the demand curve. The method also does not round quantities, and the result can be negative depending on the nature of the change being analyzed.

Question 19

Suppose that quantity demand falls by 30% as a result of a 5% increase in price. The price elasticity of demand for this good is
A) inelastic and equal to 6.
B) elastic and equal to 6.
C) inelastic and equal to 0.17.
D) elastic and equal to 0.17.

Accepted Answer

The answer of Suppose that quantity demand falls by 30%...

Question 20

The demand for which of the following is likely to be the most price inelastic?
A) transportation
B) taxi rides
C) bus tickets
D) airline tickets

Accepted Answer

Transportation is a broad category that includes various modes such as taxis, buses, and airlines. However, the demand for transportation, in general, is likely to be the most price inelastic as it is a necessary part of daily life, and consumers have limited substitutes. Even if the prices of individual modes of transportation such as taxis or airlines increase, consumers will still need to find a way to travel, and they might not be able to switch to other modes or choose not to travel altogether.

Quiz 4: Elasticity and Its Applications

Which of the following would cause a demand curve for a good to be price inelastic?

If an increase in income results in a decrease in the quantity demanded of a good, then for that good, the

If consumers always spend 15 percent of their income on food, then the income elasticity of demand for food is

Total revenue

If an increase in the price of a good has no impact on the total revenue in that market, demand must be

The cross-price elasticity of demand for substitute goods must be

A perfectly inelastic supply curve represents a

If a supply curve for a good is price elastic, then

If the price elasticity of supply equals zero, this implies that

If the income elasticity of demand for a good is negative, it must be

Suppose that the price elasticity of supply of lawn mowers is 1.5. If the price of lawn mowers rises 5 per cent, the quantity supplied of lawn mowers would

If there is excess capacity in a production facility, it is likely that the firm's supply curve is

For which of the following goods is the income elasticity of demand likely lowest?

If the cross-price elasticity between two goods is negative, the two goods are likely to be

If supply is price inelastic, the value of the price elasticity of supply must be

Price elasticity of supply for the long run is

Technological improvements in agriculture that shift the supply of agricultural commodities to the right tend to

The midpoint method is used to compute elasticity because it

Suppose that quantity demand falls by 30% as a result of a 5% increase in price. The price elasticity of demand for this good is

The demand for which of the following is likely to be the most price inelastic?