Question 1

You are the manager of a theatre. At present the theatre 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 revenues. 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 theatre....

Question 2

Explain the relationship between price elasticity of demand and total revenue.

Accepted Answer

The answer of Explain the relationship between price elasticity of...

Question 3

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 the quantity demanded of one good to a change in the price of a different good. It is calculated as the percentage change in quantity demanded of one good divided by the percentage change in price of a different good. Therefore, option B is the correct answer.

Question 4

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 5

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

Accepted Answer

The income elasticity of demand for wine being 5 means that for every 1 per cent increase in income, wine consumption increases by 5 per cent. This suggests that wine is a luxury good, as the increase in income leads to a proportionally larger increase in demand for wine.

Question 6

If demand for a product is perfectly inelastic, a change in price will not change total revenue.

Accepted Answer

The answer of If demand for a product is perfectly...

Question 7

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 8

For people who live near a bus route, a subway station, or a commuter rail line, public transportation provides a substitute to driving their own cars. So, for these people, the cross-price elasticity of demand between petrol and public transportation is
A) positive.
B) negative.
C) zero.
D) infinity.

Accepted Answer

The cross-price elasticity of demand between petrol and public transportation is positive because as the price of petrol increases, people are more likely to use public transportation, indicating that these goods are substitutes.

Question 9

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

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

Question 10

Linesha, a university student working part-time, receives 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 university student working part-time, receives...

Question 11

When Audrina raised the price of her homemade cookies, her total revenue increased. This suggests that the demand for Audrina's cookies is elastic.

Accepted Answer

If Audrina raised the price of her cookies and her total revenue increased, it suggests that the demand for her cookies is inelastic. If the demand were elastic, then an increase in price would lead to a decrease in total revenue. In this case, however, customers are willing to pay the higher price indicating that the demand for the cookies is relatively insensitive to price changes.

Question 12

Suppose the cross-price elasticity of demand between grapefruit juice and orange juice is approximately 6. What does this mean?
A) A 1 per cent decrease in the price of grapefruit juice leads to a 6 per cent increase in orange juice consumption.
B) A 6 per cent increase in the price of grapefruit juice leads to a 1 per cent increase in orange juice consumption.
C) If the price of grapefruit juice rises by $1, 6 more cartons of orange juice will be purchased.
D) The demand for orange juice is 6 times more than the demand for grapefruit juice.

Accepted Answer

The answer of Suppose the cross-price elasticity of demand between...

Question 13

If the price elasticity of demand is unit-elastic, a 10 per cent increase in price will result in a 10 per cent increase in revenue.

Accepted Answer

If the price elasticity of demand is unit-elastic, a 10 per cent increase in price will lead to a 10 per cent decrease in quantity demanded. Therefore, revenue will remain unchanged.

Question 14

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

Accepted Answer

Income elasticity measures how a good's quantity demanded responds to change in buyers' incomes. It is calculated as the percentage change in quantity demanded divided by the percentage change in income.

Question 15

If you expect the economy is going to 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

Luxury goods are often associated with higher income levels and tend to have higher income elasticity of demand. Therefore, if average income rises and the economy booms, consumers are more likely to increase spending on luxury goods, leading to an increase in sales for firms that sell these products.

Question 16

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

Accepted Answer

Income elasticity of demand = percentage change in quantity demanded / percentage change in income
Using the given numbers:
Income elasticity of demand = 4% / 8% = 0.5
Therefore, the answer is B.

Question 17

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 18

Suppose the absolute value of the price elasticity of demand for basketball game tickets on your campus is greater than 1. Increasing ticket prices will increase the total revenue from ticket sales.

Accepted Answer

If the absolute value of the price elasticity of demand is greater than 1, this indicates that the demand for basketball game tickets is highly elastic, meaning that a price increase will result in a larger decrease in quantity demanded. Therefore, increasing ticket prices will actually decrease the total revenue from ticket sales, as the increase in price will not be enough to offset the decrease in quantity demanded.

Question 19

If a firm is in an antitrust court case being accused of monopolising a product, the firm would hire an economist to show
A) the cross-price elasticity of demand between the firm's good and another is negative.
B) the cross-price elasticity of demand between the firm's good and another is positive.
C) the price elasticity of demand for the firm's good is highly inelastic.
D) the income elasticity of the firm's good is inferior.

Accepted Answer

A positive cross-price elasticity of demand indicates that the firm's product has substitutes, suggesting that the firm does not have monopoly power over the market.

Question 20

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 necessity.

Accepted Answer

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

Quiz 4: Elasticity: The Responsiveness of Demand and Supply

Explain the relationship between price elasticity of demand and total revenue.

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 a negative cross-price elasticity?

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

If demand for a product is perfectly inelastic, a change in price will not change total revenue.

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.

For people who live near a bus route, a subway station, or a commuter rail line, public transportation provides a substitute to driving their own cars. So, for these people, the cross-price elasticity of demand between petrol and public transportation is

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?

Linesha, a university student working part-time, receives 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,

When Audrina raised the price of her homemade cookies, her total revenue increased. This suggests that the demand for Audrina's cookies is elastic.

Suppose the cross-price elasticity of demand between grapefruit juice and orange juice is approximately 6. What does this mean?

If the price elasticity of demand is unit-elastic, a 10 per cent increase in price will result in a 10 per cent increase in revenue.

Income elasticity measures

If you expect the economy is going to 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 per cent increase in income leads to a 4 per cent increase in quantity demanded for organic produce.

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

Suppose the absolute value of the price elasticity of demand for basketball game tickets on your campus is greater than 1. Increasing ticket prices will increase the total revenue from ticket sales.

If a firm is in an antitrust court case being accused of monopolising a product, the firm would hire an economist to show

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