Question 1

Suppose that the income elasticity of demand for new clothes is positive. Other things being equal, which of the following statements is CORRECT?
A) New clothes are a normal good.
B) The quantity demanded of new clothes decreases as a consumer's income declines.
C) There exists a positive relationship between income and the demand for new clothes.
D) all of the above

Accepted Answer

When the income elasticity of demand for a good is positive, it means that as income increases, the demand for that good also increases. This characteristic defines normal goods (A), implies that the quantity demanded decreases as income decreases (B), and indicates a positive relationship between income and demand for the good (C). Thus, all of the statements are correct.

Question 2

The cross-price elasticity of demand between bananas and apples is most likely
A) positive.
B) negative.
C) zero.
D) More information is needed to determine.

Accepted Answer

Bananas and apples are substitutes as they can be used interchangeably in terms of fulfilling a person's fruit consumption, hence the cross-price elasticity of demand between the two fruits should be positive.

Question 3

If the quantity demanded of peanut butter falls by 12% when income rises by 10%, then peanut butter is
A) an inferior good.
B) a normal good.
C) income-elastic demand.
D) both A and C

Accepted Answer

When the quantity demanded of a good falls as income rises, it is considered an inferior good. Additionally, since the magnitude of the change in quantity demanded is larger than the change in income (12% vs. 10%), the income elasticity of demand is greater than one, indicating income-elastic demand. Therefore, option D is also correct, but A is the best choice.

Question 4

Suppose that the income elasticity of demand for frozen dinners is negative. Other things being equal, which of the following statements is INCORRECT?
A) Frozen dinners are an inferior good.
B) The quantity demanded of frozen dinners increases as a consumer's income declines.
C) There exists a negative relationship between income and the demand for frozen dinners.
D) The share of income spent on good X must decrease as a consumer's income decreases.

Accepted Answer

The statement is incorrect because as the income of a consumer declines, the share of income spent on frozen dinners may actually increase since the demand for frozen dinners increases.

Question 5

What happens to total revenue associated with a linear demand curve as price falls?

Accepted Answer

The answer of What happens to total revenue associated with...

Question 6

The percentage change in the quantity of peanut butter demanded divided by the percentage change in price of jelly measures
A) the price elasticity of demand for peanut butter.
B) the price elasticity of demand for jelly.
C) the cross-price elasticity of demand for peanut butter with respect to the price of jelly.
D) the cross-price elasticity of demand for jelly with respect to the price of peanut butter.

Accepted Answer

The percentage change in the quantity of peanut butter demanded divided by the percentage change in price of jelly is a measure of the cross-price elasticity of demand for peanut butter with respect to the price of jelly. It indicates how sensitive the demand for peanut butter is to changes in the price of jelly. If this measure is negative, it means that peanut butter and jelly are complements, while a positive measure indicates that they are substitutes.

Question 7

The percentage change in the quantity of bread demanded divided by the percentage change in price of jelly measures
A) the cross-price elasticity of demand for bread with respect to jelly.
B) the cross-price elasticity of demand for jelly with respect to bread.
C) the price elasticity of demand for bread.
D) the price elasticity of demand for jelly.

Accepted Answer

The percentage change in the quantity of bread demanded divided by the percentage change in price of jelly measures the responsiveness of the quantity demanded of bread to a change in the price of jelly, which is the definition of cross-price elasticity of demand. Therefore, the answer is A. It is not C or D because the question is asking about the relationship between bread and jelly, not just the responsiveness of demand for one good to a change in its own price. It is also not B because the question is asking about the demand for jelly with respect to bread, but the formula given is measuring the demand for bread with respect to jelly.

Question 8

Explain why the price elasticity varies even when a firm faces a linear demand curve.

Accepted Answer

The answer of Explain why the price elasticity varies even...

Question 9

The cross-price elasticity of demand between spaghetti and spaghetti sauce is most likely
A) positive.
B) negative.
C) zero.
D) More information is needed to determine.

Accepted Answer

The cross-price elasticity of demand between spaghetti and spaghetti sauce is most likely negative because they are complementary goods. When the price of spaghetti increases, the demand for spaghetti sauce decreases, and vice versa, indicating a negative cross-price elasticity.

Question 10

If the quantity demanded of restaurant meals increases by 20% when income increases by 10%, the demand for restaurant meals is
A) price sensitive.
B) income-inelastic.
C) income-elastic.
D) price insensitive.

Accepted Answer

If the percentage change in quantity demanded is greater than the percentage change in income, then the good is said to be income-elastic. In this scenario, since the quantity demanded of restaurant meals increases by 20% when income increases by 10%, the demand for restaurant meals is said to be income-elastic. This means that an increase in income causes a more than proportionate increase in the demand for restaurant meals, indicating that they are a luxury good.

Question 11

A good is said to be "normal" if
A) it is of high quality.
B) consumers buy more of it at a high price.
C) it has few substitutes.
D) it has a positive income elasticity of demand.

Accepted Answer

A "normal" good is one for which as income rises, the quantity demanded also rises. This means that the income elasticity of demand for a normal good is positive.

Question 12

A good is said to be "inferior" if
A) it is of low quality.
B) consumers buy less of it at a high price.
C) it has a negative income elasticity of demand.
D) it has many substitutes.

Accepted Answer

An inferior good is a good for which demand decreases as consumer income increases. In other words, its income elasticity of demand is negative. This means that as people's income increases, they switch to higher-quality substitutes, reducing their demand for the inferior good.

Question 13

The demand for a particular good depends on variables such as
A) consumer income.
B) price of substitutes.
C) price of complements.
D) all of the above.

Accepted Answer

The demand for a particular good depends on various factors, including consumer income, price of substitutes, and price of complements. Consumer income influences their ability to buy the good, the price of substitutes affects the willingness to purchase the good over similar goods, and the price of complements influences the demand for related goods that are consumed together. Therefore, the correct answer is D, all of the above.

Question 14

Suppose that the income elasticity of demand for good X is positive but less than 1. Other things being equal, which of the following statements is INCORRECT?
A) Good X is a normal good.
B) The quantity demanded of good X decreases as a consumer's income declines.
C) A consumer buys more X as income rises, but the share of income spent on good X falls.
D) A consumer buys more X as income rises and the share of income spent on good X also rises.

Accepted Answer

A positive income elasticity of demand means that as income increases, the quantity demanded of good X also increases. But since the income elasticity is less than 1, the increase in quantity demanded is proportionally less than the increase in income. Therefore, the share of income spent on good X falls as income rises, making statement D incorrect. Statement C is correct because the share of income spent on good X falls. Statement A is also correct because good X is a normal good, as income and quantity demanded are positively related. Statement B is also correct because the quantity demanded of good X decreases as a consumer's income declines.

Question 15

Suppose that the income elasticity of demand for good X is greater than 1. Other things being equal, which of the following statements is INCORRECT?
A) Good X is a normal good.
B) The quantity demanded of good X decreases as a consumer's income declines.
C) A consumer buys more X as income rises, but the share of income spent on good X falls.
D) A consumer buys more X as income rises and the share of income spent on good X also rises.

Accepted Answer

If the income elasticity of demand for good X is greater than 1, it means that it is a luxury good, not a normal good (as stated in option A). Option B is also incorrect as the quantity demanded of good X increases as a consumer's income increases. Option C is partially correct, as a consumer may buy more X as income rises, but the share of income spent on it may or may not fall, depending on the degree of income elasticity. Option D is the incorrect statement, as a consumer may buy more X as income rises, but the share of income spent on it may or may not rise, depending on the degree of income elasticity.

Question 16

If quantity demanded of a good falls by 2% when income falls by 10%, the good's demand is
A) price sensitive.
B) income-inelastic.
C) income-elastic.
D) price insensitive.

Accepted Answer

The good's demand is considered income-inelastic because the percentage change in quantity demanded (2%) is less than the percentage change in income (10%), indicating that demand does not significantly change with income changes.

Question 17

If the income elasticity of a good is greater than one, we say that its demand is
A) price sensitive.
B) income-inelastic.
C) income-elastic.
D) price insensitive.

Accepted Answer

If the income elasticity of a good is greater than one, it means that the quantity demanded of that good is highly responsive to changes in the consumer's income. This is known as income-elastic.

Question 18

The income elasticity of demand is
A) the percentage change in quantity demanded divided by the percentage change in price.
B) the percentage change in quantity demanded divided by the percentage change in income.
C) the percentage change in income divided by the percentage change quantity demanded.
D) the percentage change in price divided by the percentage change in income.

Accepted Answer

The income elasticity of demand measures the responsiveness of demand for a good or service to a change in income of consumers. It is calculated as the percentage change in quantity demanded divided by the percentage change in income. Therefore, the correct option is B. Option A is the formula for price elasticity of demand, while options C and D are incorrect statements.

Question 19

The cross-price elasticity of demand measures
A) the relationship between the demand for one good and the supply of another.
B) the relationship between the demand for one good and the price of another.
C) the relationship between the demand and supply of one good at the intersection of the curves.
D) the elasticity of demand at the intersection of the supply and demand curves.

Accepted Answer

The cross-price elasticity of demand measures the responsiveness of the demand for one good to changes in the price of another good. Therefore, it measures the relationship between the demand for one good and the price of another.

Question 20

The cross-price elasticity of demand between telephones and ramen noodles is most likely
A) positive.
B) negative.
C) zero.
D) greater than one.

Accepted Answer

Telephones and ramen noodles are unrelated goods, so the cross-price elasticity of demand is likely zero.

Quiz 4: Elasticity: A Measure of Responsiveness

Suppose that the income elasticity of demand for new clothes is positive. Other things being equal, which of the following statements is CORRECT?

The cross-price elasticity of demand between bananas and apples is most likely

If the quantity demanded of peanut butter falls by 12% when income rises by 10%, then peanut butter is

Suppose that the income elasticity of demand for frozen dinners is negative. Other things being equal, which of the following statements is INCORRECT?

What happens to total revenue associated with a linear demand curve as price falls?

The percentage change in the quantity of peanut butter demanded divided by the percentage change in price of jelly measures

The percentage change in the quantity of bread demanded divided by the percentage change in price of jelly measures

Explain why the price elasticity varies even when a firm faces a linear demand curve.

The cross-price elasticity of demand between spaghetti and spaghetti sauce is most likely

If the quantity demanded of restaurant meals increases by 20% when income increases by 10%, the demand for restaurant meals is

A good is said to be "normal" if

A good is said to be "inferior" if

The demand for a particular good depends on variables such as

Suppose that the income elasticity of demand for good X is positive but less than 1. Other things being equal, which of the following statements is INCORRECT?

Suppose that the income elasticity of demand for good X is greater than 1. Other things being equal, which of the following statements is INCORRECT?

If quantity demanded of a good falls by 2% when income falls by 10%, the good's demand is

If the income elasticity of a good is greater than one, we say that its demand is

The income elasticity of demand is

The cross-price elasticity of demand measures

The cross-price elasticity of demand between telephones and ramen noodles is most likely