Question 1

Moving downward on a downward sloping linear demand curve, the absolute value of the price elasticity of demand

Accepted Answer

On a downward sloping linear demand curve, the price elasticity of demand decreases as we move down the curve, because as the price decreases, the percentage change in quantity demanded becomes smaller and smaller, resulting in a smaller price elasticity of demand. Therefore, the absolute value of the price elasticity of demand decreases continuously.

Question 2

If the slope of a demand curve is constant, then we know that

Accepted Answer

The slope of a demand curve tells us how much the quantity demanded changes in response to a change in price. The elasticity of demand, on the other hand, tells us how responsive quantity demanded is to a change in price. If the slope of the demand curve is constant, then we know that the change in quantity demanded is proportional to the change in price, but we do not know how responsive quantity demanded is overall. Therefore, elasticity of demand varies along the demand curve.

Question 3

Within the range of prices around the midpoint on a straight-line demand curve, demand is

Accepted Answer

Within the range of prices around the midpoint on a straight-line demand curve, demand is unit-elastic. This means that a change in price will result in an equal proportional change in quantity demanded.

Question 4

If total revenues decline when the market clearing price increases, then we know that

Accepted Answer

When total revenues decline with an increase in the market clearing price, it means that the demand for the product is sensitive to price changes, which indicates elastic demand. Therefore, the correct answer is B.

Question 5

Suppose that the demand for movie tickets is price inelastic for the range of prices between $10 and $12. If a movie theater raises the price of tickets from $10 to $12, what will happen to total revenues?

Accepted Answer

The demand for movie tickets is price inelastic, which means that a change in price will not have a significant effect on the quantity demanded. Therefore, if the theater raises the price of tickets from $10 to $12, the increase in price will result in a smaller decrease in the quantity demanded than the increase in price, leading to an increase in total revenues.

Question 6

If the bus fare of a city increases from $1.00 to $1.10 per ride and as a result total revenue increases, then we know that

Accepted Answer

If the total revenue increases after the fare increase, it means that the increase in revenue due to the higher fare is greater than the decrease in revenue due to fewer people taking the bus. This implies that the percentage change in fare is greater than the percentage change in number of rides.

Question 7

Over the inelastic range of a demand curve, there is

Accepted Answer

In the inelastic range, a price increase leads to higher total revenue because the percentage drop in quantity demanded is smaller than the percentage increase in price.

Question 8

If total revenues rise when the market price increases, then we know that

Accepted Answer

When total revenues increase as the market price increases, it indicates that the quantity demanded does not decrease proportionately, which is characteristic of inelastic demand.

Question 9

Total revenues reach a maximum when

Accepted Answer

Total revenues will reach a maximum when demand is unit-elastic. In this situation, a change in price will be exactly offset by the resulting change in quantity demanded, resulting in no net change in total revenues. If demand is inelastic, a price increase will lead to an increase in total revenues, but this effect will diminish as prices continue to rise. If demand is elastic, an increase in price will result in a decrease in total revenues. Therefore, the point of unit elasticity represents the price at which total revenues are maximized.

Question 10

A local transit authority charges $1 for a bus ride. An economics study suggests that in the price range from $0.50 to $1.50, the elasticity of demand for bus trips is 1.2. To increase its revenue, the transit authority should

Accepted Answer

Based on the given information, the elasticity of demand for bus trips is 1.2, which means that a 1% increase in fares will result in a 1.2% decrease in quantity demanded. Therefore, to increase revenue, the transit authority should lower the fare, as the increase in quantity demanded resulting from a lower fare will offset the decrease in revenue from the lower fare. A lower fare will also attract more customers, thus increasing revenue further. Therefore, lowering the fare from $1 to slightly below $1 would result in an increase in revenue for the transit authority. Option C is the only choice that follows this logic.

Question 11

-Consider the above figure. Which of the following statements is correct?

Accepted Answer

At the crossing point, the demand curve with the steeper slope (D1) is less elastic than the flatter demand curve (D2), meaning D1 has greater elasticity.

Question 12

A movie theater raises ticket prices from $8 to $10 in order to raise revenues. The theater's management is assuming the absolute value of the price elasticity of demand for tickets is

Accepted Answer

If the absolute value of the price elasticity of demand is less than 1, then a price increase will result in a less than proportional decrease in the quantity demanded. In other words, the increase in price will not deter enough customers from attending the movie theater to offset the increase in revenue from the price hike. Therefore, the theater's management is assuming that demand is relatively inelastic, and a price increase will lead to an increase in revenue.

Question 13

Moving upward along a downward sloping straight-line demand curve, as the price of the product goes up

Accepted Answer

Moving upward along a downward sloping straight-line demand curve means that we are increasing the price of the product. As the price increases, the quantity demanded decreases. The price elasticity of demand measures the responsiveness of quantity demanded to changes in price.

When we start at a low price, the demand is generally elastic (i.e., price elastic). This means that a small change in price leads to a relatively larger change in quantity demanded. As we move up the demand curve, the price elasticity of demand decreases, meaning that quantity demanded becomes less responsive to changes in price.

Therefore, as we move upward along a downward sloping straight-line demand curve, the price elasticity of demand goes from being elastic to being inelastic. So, option C is incorrect. When we move upward along a downward sloping straight-line demand curve, the price elasticity of demand does change, so option A is incorrect. The price elasticity of demand is always negative (as price and quantity demanded move in opposite directions), so option D is incorrect. Thus, the correct answer is B.

Question 14

If demand is perfectly elastic everywhere along the demand curve, then

Accepted Answer

When demand is perfectly elastic, the demand curve is horizontal, indicating that consumers are willing to buy any quantity at a specific price, but no quantity at a price even slightly higher.

Question 15

If the price of a good increases and the total revenue also increases, the good has a(n)

Accepted Answer

If the price of a good increases and the total revenue also increases, it means that the demand for the good is relatively unaffected by changes in price, indicating an inelastic demand. Inelastic demand means that consumers are not very responsive to changes in price and will continue to buy the good even if the price increases.

Question 16

Which of the following is FALSE regarding inelastic demand?

Accepted Answer

Inelastic demand means that the quantity demanded is not very responsive to changes in price. This implies that the price elasticity of demand is less than 1 (Ep < 1), as stated in option A. Option B is false because inelastic demand means that if a firm raises price, total revenues will not necessarily go up, since the increase in revenue from each unit sold may not offset the decrease in the quantity sold. Similarly, option D is false because if a firm lowers price, total revenues may not necessarily fall, since the increase in the quantity sold may more than offset the decrease in revenue from each unit sold. Therefore, the only false statement is Option C, which mistakenly suggests that inelastic demand means price elasticity of demand is greater than 1 (Ep > 1).

Question 17

-In the above figure, along which range would total revenue remain unchanged by raising prices?

Accepted Answer

Total revenue remains unchanged along the range where the demand curve is unit elastic, which is typically represented by a straight line segment on a demand curve. This is because, in this range, the percentage change in quantity demanded is exactly offset by the percentage change in price, leaving total revenue (Price x Quantity) unchanged. Without seeing the actual figure, the correct answer typically involves a specific range on the demand curve (like between two points) where this condition is met. Assuming the question implies a standard demand curve scenario, the choice mentioning a specific range (between point c and point d) would be a logical answer, as it suggests a specific segment where this unit elasticity might occur.

Question 18

A university raises annual tuition by 2 percent. No other events have occurred, and the university's revenues have increased. It must be TRUE that

Accepted Answer

If the university's revenues increased after raising tuition by 2 percent, it implies that the decrease in quantity demanded (if any) due to the price increase was not large enough to offset the revenue gained from the higher price. This means the change in quantity demanded was smaller than the percentage increase in price, allowing total revenue to increase.

Question 19

Suppose 1000 units of a good are sold at $10 a unit. If its price increases to $20 and total revenue increases to $20,000 and increases by $1000 for every dollar increase in price after that, we know that

Accepted Answer

The answer of Suppose 1000 units of a good are...

Question 20

If demand is unit-elastic throughout the demand curve, then total revenues are

Accepted Answer

When demand is unit-elastic, the percentage change in quantity demanded is equal to the percentage change in price, meaning total revenue (price times quantity) remains constant regardless of the price.

Quiz 19: Demand and Supply Elasticity