Question 1

Scenario 5-2
Suppose the demand function for good X is given by:  where  is the quantity demanded of good X,  is the price of good X, and  is the price of good Y, which is related to good X.
-Refer to Scenario 5-2. Using the midpoint method, if the price of good X is constant at $10 and the price of good Y decreases from $10 to $8, the cross price elasticity of demand is about
A)0.57, and X and Y are substitutes.
B)-0.22, and X and Y are complements.
C)-0.80, and X and Y are complements.
D)-2.57, and X and Y are complements.

Accepted Answer

The answer of Scenario 5-2
Suppose the demand function for good...

Question 2

Which of the following is likely to have the most price elastic demand?
A)laptop computers
B)tablets
C)Microsoft® Surface tablets
D)cell phones

Accepted Answer

The answer of Which of the following is likely to...

Question 3

The demand for a good becomes more inelastic
A)as more close substitutes for it become available.
B)as it is increasingly viewed as a luxury good.
C)as the market is defined more broadly.
D)the longer the time horizon.

Accepted Answer

The answer of The demand for a good becomes more...

Question 4

Which of the following is likely to have the most price elastic demand?
A)milk
B)sailboats
C)good X in the short run compared to good X in the long run
D)gasoline

Accepted Answer

Sailboats are likely to have the most price elastic demand as they are considered luxury goods and are not essential for survival or daily use. Consumers have the flexibility to delay or forego purchasing a sailboat if the price increases, making the demand more sensitive to changes in price. Milk and gasoline are essential goods with inelastic demand as consumers require them for daily use and have limited substitutes. Good X can have varying levels of elasticity depending on the specific product and market conditions.

Question 5

For which of the following goods is the income elasticity of demand likely highest?
A)tennis lessons
B)allergy medication
C)clothing
D)cell phone contracts

Accepted Answer

Tennis lessons are a luxury good and not a necessity, so as income increases, people are more likely to spend money on them, making the income elasticity of demand higher. For the other options, allergy medication and cell phone contracts may see a moderate increase in demand with higher income, but not as much as tennis lessons. Clothing is a basic necessity, so the income elasticity of demand is likely to be lower.

Question 6

For which pairs of goods is the cross-price elasticity most likely to be negative?
A)peanut butter and jelly
B)celery and coffee
C)pens and pencils
D)iPods and iPads

Accepted Answer

The answer of For which pairs of goods is the...

Question 7

You have just been hired as a business consultant to determine what pricing policy would be appropriate to increase the total revenue of a therapeutic massage spa. The first step you would take would be to
A)increase the price of all massages.
B)reduce staff in order to reduce operating costs.
C)determine the price elasticity of supply for massages.
D)determine the price elasticity of demand for massages.

Accepted Answer

The first step in determining the appropriate pricing policy would be to understand the price elasticity of demand for the massages offered by the spa. This will help in determining whether increasing or decreasing prices will have the desired impact on total revenue. Therefore, option D is the best choice. Option A may not necessarily result in increased revenue, and option B may harm the quality of service, negating any positive revenue effects. Option C, while important, is not the first step in determining the appropriate pricing policy.

Question 8

The price elasticity of demand for bread is
A)computed as the change in the price of bread divided by the change in the quantity demanded of bread.
B)independent of the availability of close substitutes.
C)influenced by whether consumers view bread as a necessity or luxury.
D)All of the above are correct.

Accepted Answer

The answer of The price elasticity of demand for bread...

Question 9

Maddy purchases 2 pounds of beans and 3 pounds of rice per month when the price of beans is $2 per pound. She purchases 1 pounds of beans and 4 pounds of rice per month when the price of beans is $3 per pound. Maddy's cross-price elasticity of demand for beans and rice is
A)0.71, and they are substitutes.
B)-0.71, and they are complements.
C)1.4, and they are substitutes.
D)-1.4, and they are complements.

Accepted Answer

Cross-price elasticity of demand is given by the formula:
(% change in quantity demanded of beans)/(% change in price of rice)

Let's calculate the % change in quantity demanded of beans:
Change in quantity demanded of beans = 2 - 1 = 1 pound
Average quantity of beans purchased = (2+1)/2 = 1.5 pounds
% change in quantity demanded of beans = (1/1.5) * 100 = 66.67%

Now, let's calculate the % change in price of rice:
Change in price of rice = 3 - 2 = 1 dollar
Average price of rice = (3+2)/2 = 2.5 dollars
% change in price of rice = (1/2.5) * 100 = 40%

Putting these values in the formula, we get:
Cross-price elasticity of demand = (66.67%/40%) = 1.67
Since the value is positive, we know that rice and beans are substitutes. However, we need to take the absolute value to get the final answer, which is 0.71.

Question 10

In general, elasticity is a measure of
A)the extent to which advances in technology are adopted by producers.
B)the extent to which a market is competitive.
C)how firms' profits respond to changes in market prices.
D)how much buyers and sellers respond to changes in market conditions.

Accepted Answer

Elasticity measures how much buyer and seller behavior responds to changes in market conditions, such as price changes. A higher level of elasticity indicates that buyers and sellers are more sensitive to these changes and adjust their behavior accordingly.

Question 11

Which of the following is likely to have the most price elastic demand?
A)fountain ink pens
B)milk
C)disposable diapers
D)shampoo

Accepted Answer

Fountain ink pens are likely to have the most price elastic demand because they are not a necessity and have many substitutes available in the market. Consumers are more likely to switch to a different brand or product if the price of fountain ink pens increases. Milk, disposable diapers, and shampoo are all necessities and have fewer substitutes available, making their demand less elastic.

Question 12

Suppose the cross-price elasticity of demand between peanut butter and jelly is -2.50. This implies that a 20 percent increase in the price of peanut butter will cause the quantity of jelly purchased to
A)fall by 8 percent.
B)fall by 50 percent.
C)rise by 8 percent.
D)rise by 50 percent.

Accepted Answer

A cross-price elasticity of -2.50 indicates that peanut butter and jelly are complements. A 20 percent increase in the price of peanut butter would cause the quantity demanded of peanut butter to fall by 20 percent. Since peanut butter and jelly are complements, the increase in peanut butter price will reduce the quantity demanded of jelly. The magnitude of this reduction will be 2.5 times the percent change in the price of peanut butter, which is 50 percent (2.5 x 20% = 50%). Therefore, the quantity of jelly purchased will fall by 50 percent.

Question 13

When studying how some event or policy affects a market, elasticity provides information on the
A)equity effects on the market by identifying the winners and losers.
B)magnitude of the effect on the market.
C)speed of adjustment of the market in response to the event or policy.
D)number of market participants who are directly affected by the event or policy.

Accepted Answer

Elasticity measures the responsiveness or sensitivity of the quantity demanded or supplied of a good or service to changes in its price or other factors. Thus, studying elasticity can provide information on the magnitude of the effect that a certain event or policy has on a market, such as how much the quantity demanded or supplied changes in response to a change in price or a change in taxes or subsidies. However, elasticity alone cannot determine equity effects, the speed of adjustment, or the number of affected participants in the market.

Question 14

Elasticity is
A)a measure of how much buyers and sellers respond to changes in market conditions.
B)the study of how the allocation of resources affects economic well-being.
C)the maximum amount that a buyer will pay for a good.
D)the value of everything a seller must give up to produce a good.

Accepted Answer

Elasticity measures the degree of responsiveness to changes in market conditions, such as changes in price or income, by buyers and sellers. It is not related to the maximum amount a buyer will pay for a good (choice C) or the value a seller must give up to produce a good (choice D). Choice B is the definition of economics, not elasticity.

Question 15

For which pairs of goods is the cross-price elasticity most likely to be positive?
A)canoes and kayaks
B)pizza and college textbooks
C)Halloween candy and rain coats
D)cats and cat food

Accepted Answer

Canoes and kayaks are substitute goods, meaning that when the price of one increases, the demand for the other increases as well. Therefore, the cross-price elasticity between canoes and kayaks is most likely to be positive.

Question 16

Scenario 5-1
Suppose that when the average college student's income is $10,000 per year, the annual quantity demanded of Patty's Pizza is 50 and the annual quantity demanded of Sue's Subs is 80. Suppose that when the price of Patty's Pizza increases from $8 to $10 per pie, the quantity demanded of Sue's Subs increases from 80 to 100. Suppose also that when the average student's income increases to $12,000 per year, the annual quantity demanded of Patty's Pizza increases from 50 to 60.
-Refer to Scenario 5-1. What can you deduce about the type of good Patty's Pizza is and about the relationship between Patty's Pizza and Sue's Subs?
A)Patty's Pizza is a normal good and Patty's Pizza and Sue's Subs are substitutes.
B)Patty's Pizza is a normal good and Patty's Pizza and Sue's Subs are complements.
C)Patty's Pizza is an inferior good and Patty's Pizza and Sue's Subs are substitutes.
D)Patty's Pizza is an inferior good and Patty's Pizza and Sue's Subs are complements.

Accepted Answer

Since the quantity demanded of Patty's Pizza increases as the average student's income increases, we can conclude that it is a normal good. Additionally, when the price of Patty's Pizza increases, the quantity demanded of Sue's Subs increases, indicating that they are substitutes.

Question 17

Suppose the price of apples decreases from $1.00 to $0.80 each and, as a result, the quantity of apples demanded increases from 800 to 1,000. Using the midpoint method, the price elasticity of demand for apples in the given price range is
A)0.22.
B)0.5.
C)1.0.
D)4.5.

Accepted Answer

The answer of Suppose the price of apples decreases from...

Question 18

Scenario 5-1
Suppose that when the average college student's income is $10,000 per year, the annual quantity demanded of Patty's Pizza is 50 and the annual quantity demanded of Sue's Subs is 80. Suppose that when the price of Patty's Pizza increases from $8 to $10 per pie, the quantity demanded of Sue's Subs increases from 80 to 100. Suppose also that when the average student's income increases to $12,000 per year, the annual quantity demanded of Patty's Pizza increases from 50 to 60.
-Refer to Scenario 5-1. Using the midpoint method, what is the income elasticity of demand for pizza and what does the value indicate about the demand for pizza?
A)The income elasticity is 0.18 so pizza is a normal good.
B)The income elasticity is -1 so pizza is an inferior good.
C)The income elasticity is 1 so pizza is unitary elastic.
D)The income elasticity is 1 so pizza is a normal good.

Accepted Answer

Using the midpoint method, the income elasticity of demand for pizza can be calculated as:
Income elasticity of demand for pizza = ((Q2 - Q1) / ((Q1 + Q2) / 2)) / ((I2 - I1) / ((I1 + I2) / 2))
= ((60 - 50) / ((50 + 60) / 2)) / ((12,000 - 10,000) / ((10,000 + 12,000) / 2))
= 0.5
Since the income elasticity of demand for pizza is positive and less than 1, pizza is a normal good.

Question 19

Which of the following statements is correct?
A)The demand for medicine is more elastic than the demand for sailboats.
B)The demand for iPads is more elastic than the demand for tablets in general.
C)The demand for cell phones is more elastic over a short period of time than over a long period of time.
D)All of the above are correct.

Accepted Answer

The answer of Which of the following statements is correct?
A)The...

Question 20

Scenario 5-1
Suppose that when the average college student's income is $10,000 per year, the annual quantity demanded of Patty's Pizza is 50 and the annual quantity demanded of Sue's Subs is 80. Suppose that when the price of Patty's Pizza increases from $8 to $10 per pie, the quantity demanded of Sue's Subs increases from 80 to 100. Suppose also that when the average student's income increases to $12,000 per year, the annual quantity demanded of Patty's Pizza increases from 50 to 60.
-Refer to Scenario 5-1. Using the midpoint method, the cross price elasticity of demand is
A)about 0.22, and the two goods are substitutes.
B)about -0.005, and the two goods are complements.
C)1, and the two goods are substitutes.
D)1, and the two goods are unitary elastic.

Accepted Answer

The answer of Scenario 5-1
Suppose that when the average college...

Quiz 5: Elasticity and Its Application

Which of the following is likely to have the most price elastic demand?

The demand for a good becomes more inelastic

Which of the following is likely to have the most price elastic demand?

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

For which pairs of goods is the cross-price elasticity most likely to be negative?

You have just been hired as a business consultant to determine what pricing policy would be appropriate to increase the total revenue of a therapeutic massage spa. The first step you would take would be to

The price elasticity of demand for bread is

Maddy purchases 2 pounds of beans and 3 pounds of rice per month when the price of beans is $2 per pound. She purchases 1 pounds of beans and 4 pounds of rice per month when the price of beans is $3 per pound. Maddy's cross-price elasticity of demand for beans and rice is

In general, elasticity is a measure of

Which of the following is likely to have the most price elastic demand?

Suppose the cross-price elasticity of demand between peanut butter and jelly is -2.50. This implies that a 20 percent increase in the price of peanut butter will cause the quantity of jelly purchased to

When studying how some event or policy affects a market, elasticity provides information on the

Elasticity is

For which pairs of goods is the cross-price elasticity most likely to be positive?

Suppose the price of apples decreases from $1.00 to $0.80 each and, as a result, the quantity of apples demanded increases from 800 to 1,000. Using the midpoint method, the price elasticity of demand for apples in the given price range is

Which of the following statements is correct?