Question 1

Cross-price elasticity of demand is calculated as the
A) percentage change in quantity demanded divided by percentage change in price of a good.
B) percentage change in quantity demanded of one good divided by percentage change in price of a different good.
C) percentage change in quantity sold divided by percentage change in buyers' incomes.
D) percentage change in quantity supplied divided by percentage change in price of a good.

Accepted Answer

Cross-price elasticity of demand measures the responsiveness of quantity demanded of one good to the change in the price of a different good. Therefore, the correct formula is the percentage change in quantity demanded of one good divided by the percentage change in the price of a different good.

Question 2

Consider the following pairs of items: 
a. shampoo and conditioner
b. iPhones and earbuds
c. a laptop computer and a desktop computer
d. beef and pork
e. air-travel and weed killer
Which of the pairs listed will have cross-price elasticity of zero?
A) a and b only
B) c only since most people cannot do without computers
C) e only
D) none of the pairs listed

Accepted Answer

Air-travel and weed killer are unrelated goods, so a change in the price of one does not affect the demand for the other, resulting in a cross-price elasticity of zero.

Question 3

Suppose the governor of California has proposed increasing toll rates on California's toll roads, and has presented two possible scenarios to implement these increases. Following are projected data for the two scenarios for the California toll roads:
Scenario 1: Toll rate in 2015: $10.00. Toll rate in 2019: $22.50
For every 100 cars using the toll roads in 2015, only 81.6 cars will use the toll roads in 2019.
Scenario 2: Toll rate in 2015: $10.00. Toll rate in 2019: $17.50
For every 100 cars using the toll roads in 2015, only 96.2 cars will use the toll roads in 2019.
a. Using the midpoint formula, calculate the price elasticity of demand for Scenario 1 and Scenario 2.
b. Assume 10,000 cars use California toll roads every day in 2015. What would be the daily total revenue received for each scenario in 2015 and in 2019?
c. Is demand under Scenario 1 and under Scenario 2 price elastic, inelastic, or unit elastic. Briefly explain.
(For above questions, assume that nothing other than the toll change occurs during the time frame listed that would affect consumer demand.)

Accepted Answer

The answer of Suppose the governor of California has proposed...

Question 4

Studies show that the income elasticity of demand for wine is approximately five. What does this mean?
A) A 1 percent decrease in the price of wine leads to a 5 percent increase in wine consumption.
B) A 1 percent increase in income leads to a 5 percent increase in wine consumption.
C) A 5 percent increase in income leads to a 1 percent increase in wine consumption.
D) Wine is a relatively elastic good.

Accepted Answer

The income elasticity of demand for wine being approximately five means that for a 1 percent increase in income, there will be a 5 percent increase in the quantity demanded of wine. This implies that wine is a normal good, and as income increases, people are willing to spend more on wine, leading to a proportionally higher increase in demand.

Question 5

You are the manager of a theater. At present the theater charges the same admission price of $8 to all customers, regardless of age. You propose a two-tier pricing scheme: $5 for children under the age of 12 and $10 for adults. You tell your supervisor that your proposal is likely to increase revenue. What must be true about the price elasticity of demand if your proposal is to achieve its goal of raising revenue? Explain your answer.

Accepted Answer

The answer of You are the manager of a theater....

Question 6

Ali's Gyros operates near a college campus. Ali has been selling 120 gyros a day at $4.50 each and is considering a price cut. He estimates that he would be able to sell 200 gyros per day at $3.50 each.
a. Calculate the price elasticity of demand using the midpoint formula.
b. Calculate the change in revenue as a result of the price cut.

Accepted Answer

The answer of Ali's Gyros operates near a college campus....

Question 7

The Mass Rapid Transit (MRT) System in Hong Kong has been running significant losses. Transport Ministry officials have argued over whether to raise fares to combat the losses. One argument against a fare increase is that it will aggravate traffic congestion on the streets during peak commuter hours. Suppose that the current fare is $4 and the government is considering raising it to $6. Officials estimate that this reduces the number of rides purchased from 10,000 to 8,000 per day.
a. Using the midpoint formula, what is the estimated elasticity of demand for MRT rides?
b. What does this elasticity of demand suggest to you about what will happen to total revenue earned by the transit system if the fare increase happens?
c. Last year, the MRT system incurred a loss of $50,000 per day. Do you think the fare increase will resolve the deficit problem as well as Ministry officials anticipate? Explain.

Accepted Answer

The answer of The Mass Rapid Transit (MRT) System in...

Question 8

Which of the following items is likely to have the highest income elasticity of demand?
A) a bus ride
B) a meal at Taco Bell
C) a vacation home in the Swiss Alps
D) a tank of gasoline

Accepted Answer

Items that are considered luxury goods, such as vacation homes, tend to have a higher income elasticity of demand. As consumers' incomes increase, they are more likely to purchase these items or demand more of them.

Question 9

According to a study of the U.S. demand for alcoholic beverages, the price elasticity of demand for beer is -0.30. Which of the following could explain why the price elasticity of demand for beer is low?
A) Beer is an inferior alcoholic beverage.
B) More and more people are switching to wine and cocktails rather than beer.
C) The price of beer is relatively low and for many people it is a habit forming product.
D) There are only a few major suppliers of beer.

Accepted Answer

The price elasticity of demand for beer is low because the low price of beer makes it a habit forming product for many people.

Question 10

Last year, Sefton purchased 60 pounds of potatoes to feed his family of five when his household income was $30,000. This year, his household income fell to $20,000 and Sefton purchased 80 pounds of potatoes. All else constant, Sefton's income elasticity of demand for potatoes is
A) negative, so Sefton considers potatoes to be an inferior good.
B) positive, so Sefton considers potatoes to be an inferior good.
C) positive, so Sefton considers potatoes to be a normal good and a necessity.
D) negative, so Sefton considers potatoes to be a normal good.

Accepted Answer

The answer of Last year, Sefton purchased 60 pounds of...

Question 11

If the cross-price elasticity of demand for computers and software is negative, this means the two goods are
A) substitutes.
B) complements.
C) inferior.
D) normal.

Accepted Answer

The answer of If the cross-price elasticity of demand for...

Question 12

Consider the following pairs of items: 
a. shampoo and conditioner
b. iPhones and earbuds
c. a laptop computer and a desktop computer
d. beef and pork
e. air-travel and weed killer
Which of the pairs listed will have a negative cross-price elasticity?
A) a and b only
B) c and d only
C) e only
D) a, b, and c only

Accepted Answer

The answer of Consider the following pairs of items: 
a....

Question 13

Suppose that at a price of $55, 100 units were sold while at a price of $33, 153 units were sold. Without calculating the price elasticity value, can you determine whether demand is elastic, unit elastic, or inelastic? Explain your answer.

Accepted Answer

The answer of Suppose that at a price of $55,...

Question 14

Income elasticity measures how a good's quantity demanded responds to
A) change in the goods price.
B) change in the price of another good.
C) change in buyers' incomes.
D) producers' incomes.

Accepted Answer

Income elasticity measures how sensitive the quantity demanded of a good is to changes in buyers' incomes. It is a measure of how a change in income affects the demand for a product.

Question 15

Linesha, a college student working part-time received a wage increase. An avid movie buff, she increased her purchases of Blu-ray discs and reduced her purchases of DVDs. Based on this information
A) DVDs and Blu-ray discs are substitutes.
B) Blu-ray discs are normal goods and DVDs are inferior goods.
C) DVDs and Blu-ray discs are normal goods.
D) the cross-price elasticity between DVDs and Blu-ray discs is negative.

Accepted Answer

The answer of Linesha, a college student working part-time received...

Question 16

If you expect the economy is going to experience a boom and average income in the economy will rise in the foreseeable future, the type of firm that would be able to increase its sales if your expectations are met is
A) one that sells an inferior good.
B) one that sells a necessity good.
C) one that sells a luxury good.
D) one that sells a price-inelastic good.

Accepted Answer

A luxury good is a type of product that people purchase more frequently when their income rises. Therefore, if the economy experiences a boom and average income increases, the demand for luxury goods will increase, leading to an increase in sales for firms that sell luxury goods.

Question 17

Calculate the income elasticity if an 8 percent increase in income leads to a 4 percent increase in quantity demanded for organic produce.
A) -0.66
B) 0.5
C) 1.5
D) 2

Accepted Answer

Income elasticity of demand = (% change in quantity demanded / % change in income)
Income elasticity = (4% / 8%) = 0.5

Question 18

Economists estimated that the price elasticity of beer is -0.30 and the income elasticity of beer is 0.09. This means that
A) an increase in the price of beer will increase the quantity demanded of beer and beer is a normal good.
B) an increase in the price of beer will lead to an increase in revenue for beer sellers and beer is a normal good.
C) a decrease in the price of beer will lead to an increase in revenue for beer sellers and beer is an inferior good.
D) an increase in the price of beer will lead to a decrease in the quantity demanded of beer and beer is a luxury.

Accepted Answer

The answer of Economists estimated that the price elasticity of...

Question 19

Using cross-sectional data from the two Housing Assistance Supply Experiment (HASE) sites-Brown County, Wisconsin, and St. Joseph County, Indiana-John Mulford of Rand Research estimates the long-run "permanent" income elasticity of housing expenditures to be 0.45 for owners. Using this information, what is likely to happen to housing expenditures if the government increases income transfers to recipients in HASE sites?
A) Housing expenditures will not change.
B) Housing expenditures in HASE sites will fall significantly as recipients move out of these areas to higher-income areas.
C) Housing expenditures will increase.
D) Housing expenditures will decrease by a small amount.

Accepted Answer

The long-run "permanent" income elasticity of housing expenditures for owners is estimated to be 0.45, which means that a 1% increase in income results in a 0.45% increase in housing expenditures. Therefore, if the government increases income transfers to recipients in HASE sites, their income will increase and they are likely to increase their housing expenditures accordingly.

Question 20

Suppose Pump-U-Up lowers the price of its gym membership by 10 percent and as a result, Sweat-It-Out experienced a 16 percent decline in its gym membership. What is the value of the cross-price elasticity between the two gym memberships?
A) -1.6
B) -0.625
C) 0.625
D) 1.6

Accepted Answer

The answer of Suppose Pump-U-Up lowers the price of its...

Quiz 6: Elasticity: the Responsiveness of Demand and Supply

Cross-price elasticity of demand is calculated as the

Consider the following pairs of items: a. shampoo and conditioner b. iPhones and earbuds c. a laptop computer and a desktop computer d. beef and pork e. air-travel and weed killer Which of the pairs listed will have cross-price elasticity of zero?

Studies show that the income elasticity of demand for wine is approximately five. What does this mean?

Which of the following items is likely to have the highest income elasticity of demand?

According to a study of the U.S. demand for alcoholic beverages, the price elasticity of demand for beer is -0.30. Which of the following could explain why the price elasticity of demand for beer is low?

Last year, Sefton purchased 60 pounds of potatoes to feed his family of five when his household income was $30,000. This year, his household income fell to $20,000 and Sefton purchased 80 pounds of potatoes. All else constant, Sefton's income elasticity of demand for potatoes is

If the cross-price elasticity of demand for computers and software is negative, this means the two goods are

Consider the following pairs of items: a. shampoo and conditioner b. iPhones and earbuds c. a laptop computer and a desktop computer d. beef and pork e. air-travel and weed killer Which of the pairs listed will have a negative cross-price elasticity?

Suppose that at a price of $55, 100 units were sold while at a price of $33, 153 units were sold. Without calculating the price elasticity value, can you determine whether demand is elastic, unit elastic, or inelastic? Explain your answer.

Income elasticity measures how a good's quantity demanded responds to

Linesha, a college student working part-time received a wage increase. An avid movie buff, she increased her purchases of Blu-ray discs and reduced her purchases of DVDs. Based on this information

If you expect the economy is going to experience a boom and average income in the economy will rise in the foreseeable future, the type of firm that would be able to increase its sales if your expectations are met is

Calculate the income elasticity if an 8 percent increase in income leads to a 4 percent increase in quantity demanded for organic produce.

Economists estimated that the price elasticity of beer is -0.30 and the income elasticity of beer is 0.09. This means that

Suppose Pump-U-Up lowers the price of its gym membership by 10 percent and as a result, Sweat-It-Out experienced a 16 percent decline in its gym membership. What is the value of the cross-price elasticity between the two gym memberships?