Question 1

Which of the following pairs of goods is most likely to have a positive cross-price elasticity?

Accepted Answer

A positive cross-price elasticity of demand indicates that the goods are substitutes, meaning if the price of one good increases, the demand for the other good also increases. A privately-owned car and public transportation are substitutes because if the price (or cost) of using a privately-owned car increases, people are more likely to use public transportation instead, and vice versa.

Question 2

Which of the following statements best describes an inferior good?

Accepted Answer

An inferior good is a good whose demand decreases with an increase in consumers' income. This is because as consumers' income rises, they tend to switch to higher-quality or more expensive goods, causing a decrease in demand for the inferior good. Examples of inferior goods include store-brand groceries, fast food, and used cars.

Question 3

Which of the following pairs of goods is likely to have a negative cross-price elasticity?

Accepted Answer

Negative cross-price elasticity indicates that the goods are complements, meaning that an increase in the price of one good leads to a decrease in the demand for the other. Pens and paper notebooks are typically used together, so they are complements.

Question 4

Suppose the government imposes a tax on Good X.In order to estimate the effect of the tax on the quantity demanded Good Y,a related good,we can use the concept of ________.

Accepted Answer

The concept that can help us estimate the effect of the tax on the quantity demanded of Good Y is the cross-price elasticity of demand. This measures the responsiveness of the quantity demanded of one good (Good Y) to a change in the price of a related good (Good X). By calculating the cross-price elasticity of demand, we can determine whether the tax on Good X will cause an increase or decrease in the quantity demanded of Good Y. Options A, B, and D are not directly related to estimating the effect of the tax on the quantity demanded of Good Y.

Question 5

When the price of one pen is $1,the number of notebooks demanded is 50.When the price per pen increases to $5,the number of notebooks demanded decreases to 30.What is the cross-price elasticity of demand between the two goods using the arc elasticity method?

Accepted Answer

The cross-price elasticity of demand is calculated using the formula: (Q2 - Q1) / [(Q2 + Q1)/2] / (P2 - P1) / [(P2 + P1)/2], where Q1 and Q2 are the initial and final quantities demanded of notebooks, and P1 and P2 are the initial and final prices of pens. Substituting the given values: (30 - 50) / [(30 + 50)/2] / (5 - 1) / [(5 + 1)/2] = -20 / 40 / 4 / 3 = -0.375.

Question 6

Which of the following statements is true about the income elasticity of demand?

Accepted Answer

The income elasticity of demand for normal goods is always positive, meaning that as income increases, the demand for normal goods also increases. Option A and B are incorrect as the income elasticity of demand can be positive or negative for both normal and inferior goods. Option D is incorrect as the income elasticity of demand for inferior goods is always negative, indicating that as income increases, the demand for inferior goods decreases.

Question 7

What are the determinants of the price elasticity of demand?

Accepted Answer

The answer of What are the determinants of the price...

Question 8

Which of the following statements best describes a normal good?

Accepted Answer

A normal good is a type of good whose demand increases with an increase in consumers' income. This means that as consumers' income rises, they are willing and able to buy more of the good. Example of normal goods include clothing, food, and entertainment. The other options do not accurately describe a normal good.

Question 9

Greenaqua Corp.is the only supplier of bottled drinking water in Lithasia.Its positive economic profits in the short run attract new companies to the market.If new companies producing their own line of bottled drinking water enter the market,which of the following statements is likely to be true?

Accepted Answer

When new companies enter the market, consumers have more options, making them more responsive to price changes in Greenaqua Corp.'s bottled water, thus increasing the price elasticity of demand.

Question 10

When the price of margarine is $2 per pound,10 pounds of butter are demanded.When the price of margarine increases to $6 per pound,30 pounds of butter are demanded.What is the cross-price elasticity between the two goods?

Accepted Answer

Cross-price elasticity of demand is calculated as the percentage change in quantity demanded of one good divided by the percentage change in price of another good.

Using the given information: 
- Price of margarine increases from $2 to $6 per pound = a 200% increase 
- Quantity demanded of butter increases from 10 to 30 pounds = a 200% increase

Therefore, cross-price elasticity = (200%/200%) = 1.

Since the quantity demanded of butter is directly proportional to the price of margarine, the cross-price elasticity is positive, indicating that the two goods are substitutes. Choice B is the correct answer.

Question 11

Luxury goods have an income elasticity ________.

Accepted Answer

Luxury goods have an income elasticity greater than one, indicating that as income increases, the demand for luxury goods increases at a faster rate. This is because luxury goods are seen as high-end products and are often associated with status, so as income increases, people are willing to spend more on luxury goods to showcase their status.

Question 12

Holly spends exactly $50 on coffee each month.The price of tea decrease,while the price of coffee remains the same.Holly's cross price elasticity of demand of coffee with respect to tea is ________.

Accepted Answer

Since Holly's spending on coffee remains constant regardless of the price change in tea, her demand for coffee is unaffected by the price of tea, indicating a cross price elasticity of 0.

Question 13

Which of the following statements correctly identifies the difference between the cross-price elasticity of demand and the income elasticity of demand?

Accepted Answer

The income elasticity of demand measures how the quantity demanded of a good responds to a change in consumers' income, independent of price changes of related goods. In contrast, the cross-price elasticity of demand measures how the quantity demanded of one good responds to a change in the price of another good, independent of changes in consumers' income.

Question 14

Which of the following statements is true of the cross-price elasticity of demand?

Accepted Answer

The cross-price elasticity of demand measures how the quantity demanded of one good responds to a change in the price of another good. For complements, the cross-price elasticity of demand is negative, indicating that an increase in the price of one good leads to a decrease in the demand for its complement.

Question 15

Gary consumes 10,000 kilowatt-hours of electricity when his income is $500.When his income increases to $1,000,his consumption of electricity increases to 18,000 kilowatt-hours.What is Gary's income elasticity of demand for electricity?

Accepted Answer

The answer of Gary consumes 10,000 kilowatt-hours of electricity when...

Question 16

When a consumer spends a larger share of her income on a particular good,the price elasticity of demand for that good ________.

Accepted Answer

When a consumer spends a larger share of their income on a particular good, the good becomes more important to the consumer, and therefore they become more sensitive to changes in the price of that good. As a result, the price elasticity of demand for that good increases.

Question 17

Which of the following statements is true of the price elasticity of demand?

Accepted Answer

The price elasticity of demand tends to be higher in the long run than in the short run because consumers have more time to find substitutes and adjust their consumption habits in response to price changes.

Question 18

Kate's income is increased by 25%.Her quantity demanded of restaurant meals increases from 10 to 12.Restaurant meals are considered ________ for Kate.

Accepted Answer

The answer of Kate's income is increased by 25%.Her quantity...

Question 19

The ________ measures the change in the quantity demanded of a good due to a percentage change in consumers' income.

Accepted Answer

The income elasticity of demand measures the responsiveness of the quantity demanded of a good to a change in consumers' income. It is calculated as the percentage change in quantity demanded divided by the percentage change in income. It can be positive or negative, indicating whether the good is a normal or inferior good, respectively.

Question 20

The cross-price elasticity of demand for a good is the ________.

Accepted Answer

The cross-price elasticity of demand measures the percentage change in the quantity demanded of a good due to a percentage change in the price of a related good. Therefore, option D is the correct answer. Options A, B, and C describe other types of elasticity measures, but not cross-price elasticity.

Quiz 5: Consumers and Incentives