Question 1

Figure 5-1
 
-Refer to Figure 5-1. Between point A and point B, price elasticity of demand is equal to
A)0.33.
B)0.67.
C)1.5.
D)2.67.

Accepted Answer

Price elasticity of demand between two points is calculated using the midpoint formula, which is the percentage change in quantity demanded divided by the percentage change in price. The correct answer, 1.5, suggests a relatively elastic demand between points A and B, meaning the quantity demanded changes by a greater percentage than the price does.

Question 2

Goods with many close substitutes tend to have
A)more elastic demands.
B)less elastic demands.
C)price elasticities of demand that are unit elastic.
D)income elasticities of demand that are negative.

Accepted Answer

Goods with many close substitutes tend to have more elastic demands because consumers can easily switch to other products if the price of the good increases.

Question 3

For a particular good, a 12 percent increase in price causes a 3 percent decrease in quantity demanded. Which of the following statements is most likely applicable to this good?
A)There are many substitutes for this good.
B)The good is a necessity.
C)The market for the good is narrowly defined.
D)The relevant time horizon is long.

Accepted Answer

The relatively small decrease in quantity demanded in response to a price increase suggests that the good is a necessity. People continue to buy it despite the price increase because they need it, indicating inelastic demand.

Question 4

Table 5-1
​
​
 $$\begin{array} { | c | c | } 
\hline \text { Good } & \begin{array} { c } 
\text { Price Elasticity } \
\text { of Demand }
\end{array} \
\hline \mathrm { A }& 1.9 \
\hline \mathrm { B } & 0.8 \
\hline
\end{array}$$ ​
-Refer to Table 5-1. Which of the following is consistent with the elasticities given in Table 5-1?
A)A is a luxury and B is a necessity.
B)A is a good after an increase in income and B is that same good after a decrease in income.
C)A has fewer substitutes than B.
D)A is a good immediately after a price increase and B is that same good three years after the price increase.

Accepted Answer

Goods with a price elasticity of demand greater than 1, like Good A with an elasticity of 1.9, are considered elastic and often are luxuries because consumers are more sensitive to price changes. Goods with a price elasticity of demand less than 1, like Good B with an elasticity of 0.8, are considered inelastic and often are necessities because consumers are less sensitive to price changes.

Question 5

Which of the following is likely to have the most price elastic demand?
A)Dental floss
B)Milk
C)Diamond earrings
D)Salt

Accepted Answer

Diamond earrings have the most price elastic demand among the options given. This is because they are a luxury item, and consumers are more sensitive to price changes for luxury items than for necessities like dental floss, milk, or salt. When the price of luxury items like diamond earrings increases, demand tends to decrease significantly, and vice versa.

Question 6

If a 9 percent increase in price for a good results in an 8 percent decrease in quantity demanded, the price elasticity of demand is
A)1.13.
B)0.09.
C)0.89.
D)0.08.

Accepted Answer

The price elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in price, which in this case is -8% / 9% = -0.89. The negative sign indicates the inverse relationship between price and quantity demanded, but the magnitude (0.89) is what's typically reported.

Question 7

Using the midpoint method, the price elasticity of demand for a good is computed to be approximately 1.45. Which of the following events is consistent with a 20 percent decrease in the quantity of the good demanded?
A)An increase of 29.0 percent in the price of the good
B)An increase of 13.79 percent in the price of the good
C)An increase in the price of the good from $29.00 to $20
D)An increase in the price of the good from $20 to $49.00

Accepted Answer

The price elasticity of demand formula using the midpoint method is: Elasticity = (ΔQ / [(Q1 + Q2)/2]) / (ΔP / [(P1 + P2)/2]), where ΔQ is the change in quantity demanded, ΔP is the change in price, Q1 and Q2 are the initial and final quantities, and P1 and P2 are the initial and final prices. Given an elasticity of 1.45 and a 20% decrease in quantity demanded, the price must increase by approximately 13.79% to maintain this elasticity, as elasticity is the percentage change in quantity demanded divided by the percentage change in price.

Question 8

For a good that is a luxury, demand
A)tends to be inelastic.
B)tends to be elastic.
C)has unit elasticity.
D)cannot be represented by a demand curve in the usual way.

Accepted Answer

Luxury goods tend to have elastic demand because consumers are more sensitive to price changes. When the price of a luxury good increases, demand decreases significantly, and vice versa, since these goods are not considered necessities.

Question 9

When the price of candy bars is $1.10, the quantity demanded is 340 per day. When the price falls to $0.90, the quantity demanded increases to 350. Given this information and using the midpoint method, we know that the demand for candy bars is
A)inelastic.
B)elastic.
C)unit elastic.
D)perfectly inelastic.

Accepted Answer

The midpoint method for elasticity is calculated as [(Q2 - Q1) / ((Q2 + Q1)/2)] / [(P2 - P1) / ((P2 + P1)/2)]. Plugging in the given numbers: [(350 - 340) / (350 + 340)/2] / [($0.90 - $1.10) / ($0.90 + $1.10)/2] = 10/345 / -0.20/1 = -0.058 / -0.20 = 0.29, which is less than 1, indicating inelastic demand.

Question 10

Studies indicate that the price elasticity of demand for cigarettes is about 0.4. A government policy aimed at reducing smoking changed the price of a pack of cigarettes from $2 to $6. According to the midpoint method, the government policy should have reduced smoking by
A)30 percent.
B)40 percent.
C)80 percent.
D)250 percent.

Accepted Answer

The price elasticity of demand is calculated using the midpoint method as the percentage change in quantity demanded divided by the percentage change in price. The price change is from $2 to $6, which is a 100% increase. With an elasticity of 0.4, the reduction in smoking would be 0.4 times 100%, which is 40%.

Question 11

If the price of apples rises, when is the price elasticity of demand likely to be the highest?
A)Immediately after the price increase
B)One month after the price increase
C)Three months after the price increase
D)One year after the price increase

Accepted Answer

The price elasticity of demand is likely to be the highest one year after the price increase because consumers have more time to find substitutes or adjust their consumption habits in response to the price change. Over a longer period, the demand tends to become more elastic as people explore and adapt to alternatives.

Question 12

Figure 5-1
 
-Refer to Figure 5-1. Between point A and point B on the graph, demand is
A)perfectly elastic.
B)inelastic.
C)unit elastic.
D)elastic, but not perfectly elastic.

Accepted Answer

Between points A and B, the demand curve is downward sloping but not horizontal or vertical, indicating that the demand is elastic (meaning consumers are responsive to price changes), but it is not perfectly elastic (which would be represented by a horizontal line).

Question 13

Suppose the price of a bag of frozen chicken nuggets decreases from $6.10 to $5.90 and, as a result, the quantity of bags demanded increases from 560 to 620. Using the midpoint method, the price elasticity of demand for frozen chicken nuggets in the given price range is
A)0.33.
B)0.10.
C)3.05.
D)0.03.

Accepted Answer

The midpoint method for calculating elasticity is given by the formula: Elasticity = [(Q2 - Q1) / ((Q2 + Q1)/2)] / [(P2 - P1) / ((P2 + P1)/2)], where Q1 and Q2 are the initial and final quantities, and P1 and P2 are the initial and final prices. Plugging in the given values: [(620 - 560) / ((620 + 560)/2)] / [($5.90 - $6.10) / (($5.90 + $6.10)/2)] = (60 / 590) / (-0.20 / 6) = 0.1017 / -0.0333 ≈ -3.05. The negative sign indicates the direction of the change, but elasticity is often reported in absolute value, making the answer 3.05.

Question 14

Which of the following is likely to have the most price inelastic demand?
A)White chocolate chip with macadamia nut cookies
B)Cookies
C)Mrs.Field's chocolate chip cookies
D)Milk chocolate chip cookies

Accepted Answer

Cookies, as a general category, have the most price inelastic demand because they represent a broad category of goods. Consumers looking for cookies have a wide variety of preferences and substitutes within the category, making their demand less sensitive to price changes compared to more specific types of cookies.

Question 15

A good will have a more inelastic demand, the
A)greater the availability of close substitutes.
B)broader the definition of the market.
C)longer the period of time.
D)more it is regarded as a luxury.

Accepted Answer

A broader definition of the market means fewer substitutes are considered, leading to more inelastic demand.

Question 16

The demand for grape-flavored Hubba Bubba bubble gum is likely
A)inelastic because there are many close substitutes for grape-flavored Hubba Bubba.
B)elastic because there are many close substitutes for grape-flavored Hubba Bubba.
C)inelastic because the market is broadly defined.
D)elastic because the market is broadly defined.

Accepted Answer

The demand for grape-flavored Hubba Bubba bubble gum is considered elastic because there are many close substitutes available. When consumers have a variety of similar options to choose from, they are more sensitive to changes in the price of any one product, making the demand for that product elastic.

Question 17

Table 5-2
​
 $$\begin{array} { | c | c | } 
\hline \begin{array} { c } 
\text { Price } \
\text { (Dollars per unit) }
\end{array} & \begin{array} { c } 
\text { Quantity Demanded } \
\text { (Units) }
\end{array} \
\hline 100 & 0 \
\hline 80 & 50 \
\hline 60 & 100 \
\hline 40 & 150 \
\hline 20 & 200 \
\hline 0 & 250 \
\hline
\end{array}$$
-Refer to Table 5-2. Using the midpoint method, if the price falls from $80 to $60, the price elasticity of demand is
A)zero.
B)unit elastic.
C)inelastic.
D)elastic.

Accepted Answer

The midpoint method for calculating price elasticity of demand is given by the formula: $$E_d = \frac{\% \text{ change in quantity demanded}}{\% \text{ change in price}}$$ where $$\% \text{ change in quantity demanded} = \frac{Q_2 - Q_1}{(Q_2 + Q_1)/2}$$ and $$\% \text{ change in price} = \frac{P_2 - P_1}{(P_2 + P_1)/2}$$. Plugging in the values from the table for a price drop from $80 to $60 (Q1 = 50, Q2 = 100, P1 = 80, P2 = 60), we get: $$\% \text{ change in quantity demanded} = \frac{100 - 50}{(100 + 50)/2} = \frac{50}{75} = \frac{2}{3}$$ and $$\% \text{ change in price} = \frac{60 - 80}{(60 + 80)/2} = \frac{-20}{70} = -\frac{2}{7}$$. Thus, $$E_d = \frac{\frac{2}{3}}{-\frac{2}{7}} = -\frac{2}{3} * -\frac{7}{2} = \frac{7}{3}$$, which is greater than 1, indicating that the demand is elastic.

Question 18

Suppose that gasoline prices increase dramatically this month. Kaliah commutes 100 miles to work each weekday. Over the next few months, Kaliah drives less on the weekends to try to save money. Within the year, she sells her home and purchases one only 10 miles from her place of employment. These examples illustrate the importance of
A)the time horizon in determining the price elasticity of demand.
B)the availability of close substitutes in determining the price elasticity of demand.
C)a necessity versus a luxury in determining the price elasticity of demand.
D)the definition of a market in determining the price elasticity of demand.

Accepted Answer

The examples illustrate how Kaliah's demand for gasoline becomes more elastic over time as she adjusts her behavior (driving less on weekends and moving closer to work) in response to the price increase, highlighting the importance of the time horizon in determining the price elasticity of demand.

Question 19

If the price elasticity of demand for a good is 5, then a 10 percent increase in price results in a
A)0.50 percent decrease in the quantity demanded.
B)2.00 percent decrease in the quantity demanded.
C)50.00 percent decrease in the quantity demanded.
D)100.00 percent decrease in the quantity demanded.

Accepted Answer

The price elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in price. With an elasticity of 5, a 10 percent increase in price leads to a 50 percent (5 * 10%) decrease in quantity demanded.

Question 20

Table 5-2
​
 $$\begin{array} { | c | c | } 
\hline \begin{array} { c } 
\text { Price } \
\text { (Dollars per unit) }
\end{array} & \begin{array} { c } 
\text { Quantity Demanded } \
\text { (Units) }
\end{array} \
\hline 100 & 0 \
\hline 80 & 50 \
\hline 60 & 100 \
\hline 40 & 150 \
\hline 20 & 200 \
\hline 0 & 250 \
\hline
\end{array}$$
-Refer to Table 5-2. Using the midpoint method, if the price falls from $80 to $60, the absolute value of the price elasticity of demand is
A)0.43.
B)2.33.
C)0.29.
D)0.67.

Accepted Answer

The midpoint method for calculating the price elasticity of demand is given by the formula: $$E_d = \frac{\left(\frac{Q_2 - Q_1}{(Q_2 + Q_1)/2}\right)}{\left(\frac{P_2 - P_1}{(P_2 + P_1)/2}\right)}$$ where $Q_1$ and $Q_2$ are the initial and final quantities demanded, and $P_1$ and $P_2$ are the initial and final prices, respectively. Plugging in the values from the table for a price drop from $80 to $60 ($P_1 = 80$, $P_2 = 60$, $Q_1 = 50$, $Q_2 = 100$), we get: $$E_d = \frac{\left(\frac{100 - 50}{(100 + 50)/2}\right)}{\left(\frac{60 - 80}{(60 + 80)/2}\right)} = \frac{\left(\frac{50}{75}\right)}{\left(\frac{-20}{70}\right)} = \frac{2/3}{-2/7} = -\frac{2}{3} \cdot \frac{7}{2} = -\frac{7}{3} \approx -2.33$$ The absolute value is taken because elasticity is usually considered as a positive number when discussing its magnitude, making the correct answer 2.33.

Quiz 5: Elasticity and Its Application

Figure 5-1 -Refer to Figure 5-1. Between point A and point B, price elasticity of demand is equal to

Goods with many close substitutes tend to have

For a particular good, a 12 percent increase in price causes a 3 percent decrease in quantity demanded. Which of the following statements is most likely applicable to this good?

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

If a 9 percent increase in price for a good results in an 8 percent decrease in quantity demanded, the price elasticity of demand is

Using the midpoint method, the price elasticity of demand for a good is computed to be approximately 1.45. Which of the following events is consistent with a 20 percent decrease in the quantity of the good demanded?

For a good that is a luxury, demand

When the price of candy bars is $1.10, the quantity demanded is 340 per day. When the price falls to $0.90, the quantity demanded increases to 350. Given this information and using the midpoint method, we know that the demand for candy bars is

Studies indicate that the price elasticity of demand for cigarettes is about 0.4. A government policy aimed at reducing smoking changed the price of a pack of cigarettes from $2 to $6. According to the midpoint method, the government policy should have reduced smoking by

If the price of apples rises, when is the price elasticity of demand likely to be the highest?

Figure 5-1 -Refer to Figure 5-1. Between point A and point B on the graph, demand is

Suppose the price of a bag of frozen chicken nuggets decreases from $6.10 to $5.90 and, as a result, the quantity of bags demanded increases from 560 to 620. Using the midpoint method, the price elasticity of demand for frozen chicken nuggets in the given price range is

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

A good will have a more inelastic demand, the

The demand for grape-flavored Hubba Bubba bubble gum is likely

If the price elasticity of demand for a good is 5, then a 10 percent increase in price results in a