Principles of Microeconomics, Chapter 5: Elasticity Assignment

This document provides solutions to a microeconomics assignment focusing on the concept of elasticity. The assignment covers various aspects of elasticity, including price elasticity of demand, perfectly elastic and inelastic demand, and unit elastic demand. It includes multiple-choice questions and calculations using the midpoint formula to determine elasticity values. The questions assess the understanding of how changes in price affect quantity demanded and total revenue. The document also explores concepts such as the law of demand, and the relationship between elasticity and the shape of the demand curve. The solutions provide detailed explanations and calculations to aid in understanding the core principles of microeconomics and elasticity. Furthermore, the assignment includes questions on calculating elasticity using the midpoint formula and interpreting the results, reinforcing the analytical skills needed for economic analysis. This assignment is ideal for students studying microeconomics and seeking to improve their understanding of elasticity and related concepts.

Principles of Microeconomics, 11e - TB2 (Case/Fair/Oster)
Chapter 5 Elasticity
5.1 Price Elasticity of Demand
Refer to the information provided in Figure 5.1 below to answer the questions that follow.
Figure 5.1
1) Refer to Figure 5.1. The demand for tickets is
A) perfectly price inelastic.
B) perfectly price elastic.
C) unit price elastic.
D) perfectly income inelastic.
Answer A – With the change in percentage of quantity demanded, it is always 0, irrespective of
the change in price, then the demand is said to be perfectly price inelastic.
Diff: 1
Topic: Price Elasticity of Demand
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-6
2) Demand determines ________ entirely when ________ is perfectly inelastic.
A) quantity; supply
B) price and quantity; supply
C) price; supply
D) price and quantity; demand
Answer : C
Inelastic supply means the goods are necessities and that the with the change
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Diff: 2
Topic: Price Elasticity of Demand
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-6
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3) A perfectly price inelastic demand curve will be a ________ line.
A) horizontal
B) vertical
C) positively sloped
D) negatively sloped
Answer B – The quantity demanded will be same irrespective of the price.
Diff: 1
Topic: Price Elasticity of Demand
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-6
4) A ________ line is a perfectly price elastic demand curve.
A) horizontal
B) vertical
C) positively sloped
D) negatively sloped
Answer A) Horizontal because with the rise in price, the units demanded will be zero
Diff: 1
Topic: Price Elasticity of Demand
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-6
5) When the price of radios increases 15%, quantity demanded decreases 15%. The price
elasticity of demand for radios is ________, and total revenue from radio sales will ________.
A) elastic; decrease
B) elastic; increase
C) inelastic; decrease
D) unit elastic; not change
Answer – D – A unit elastic demand is when a price change is followed by the consumer and
they have close substitutes for meeting their needs. The increase in price will not have any
increase or influence on the revenue.
Diff: 2
Topic: Price Elasticity of Demand
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Micro-6
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6) When the price of oysters decreases 25%, quantity demanded increases 25%. The price
elasticity of demand for oysters is ________, and total revenue from oyster sales will ________.
A) inelastic; increase
B) inelastic; decrease
C) elastic; decrease
D) unit elastic; not change
The answer is D because with every same unit increase in the price of oyesters, the quantity
demanded unit increases with the same proportion, hence this elasticity is known as a unit elastic
demand and for this the revenue does not change.
Diff: 2
Topic: Price Elasticity of Demand
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Micro-6
7) When the price of oysters decreases 25%, quantity demanded is unchanged. The price
elasticity of demand for oysters is
A) perfectly inelastic.
B) elastic.
C) inelastic.
D) unitary elastic.
The answer is A because there is no change in the demand for a product with a change in the
price.
Diff: 2
Topic: Price Elasticity of Demand
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Micro-6
8) When the price of tea increases 7%, quantity demanded decreases 12%. The price elasticity of
demand for tea is ________, and total revenue from tea sales will ________.
A) inelastic; increase
B) inelastic; decrease
C) elastic; increase
D) elastic; decrease
The answer is D because the increase in price causes the consumers to reduce their preference for
this particular product and hence the increase in price has a large impact on the quantity
demanded which indicates that the total revenue will decrease.
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Diff: 2
Topic: Price Elasticity of Demand
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Micro-6
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9) The All Smiles Greeting Card Company wants to increase the quantity of greeting cards it
sells by 10%. If the price elasticity of demand is -2.5, the company must
A) increase price by 4.0%.
B) decrease price by 4.0%.
C) increase price by 0.25%.
D) decrease price by 0.25%.
Increase the quantity/price elasticity of demand = 10/-2.5 = -4%
The answer is B
Diff: 2
Topic: Price Elasticity of Demand
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Micro-6
10) A government wants to reduce electricity consumption by 20%. The price elasticity of
demand for electricity is -5. The government must ________ the price of electricity by
________.
A) raise; 4.0%
B) raise; 0.25%
C) raise; 1.25%
D) lower; 0.25%
-20/-5 = 4.0% Increase by 4% the answer is A
Diff: 2
Topic: Price Elasticity of Demand
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Micro-6
11) A government wants to reduce electricity consumption by 5%. The price elasticity of
demand for electricity is -0.05. The government must ________ the price of electricity by
-5/-0.05 = 100% raise by 100%
The answer is A
________.
A) raise; 100.0%
B) raise; 10.0%
C) raise; 1.0%
D) lower; 20%
Diff: 2
Topic: Price Elasticity of Demand
Skill: Analytical
AACSB: Analytic Skills
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Learning Outcome: Micro-6
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12) The price elasticity of demand for bottled water in New York is -3, and the price elasticity of
demand for bottled water in Florida is -0.6. In other words, demand in New York is ________,
and demand in Florida is ________.
A) elastic; inelastic
B) inelastic; elastic
C) elastic; unit elastic
D) inelastic; unit inelastic
Demand in New York is elastic since it is relatively responsive while demand in Florida is
inelastic due to lack of response in demand when price changes. Hence the answer is A
Diff: 2
Topic: Price Elasticity of Demand
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-6
13) An increase in quantity demand caused no change in the equilibrium price. Thus, demand
must be
A) perfectly inelastic.
B) inelastic.
C) elastic.
D) perfectly elastic.
The answer is D because when the demand is perfectly elastic, the demand curve is a horizontal
line which means that the demand is infinite and that the consumers are ready to buy as much as
they want without any affect on the equilibrium price.
Diff: 2
Topic: Other Important Elasticities
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-6
14) The price elasticity of demand for heart transplants is perfectly inelastic. Thus, the price
elasticity demand for heart transplants is
A) 1.0.
B) 0.0.
C) -1.0.
D) -100.0.
The answer is B which means that the price elasticity demand for heart transplants is zero
because the change in price do not have any influence on the quantity demanded for the good.
Diff: 2
Topic: Price Elasticity of Demand
Skill: Analytical
AACSB: Analytic Skills
8
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Learning Outcome: Micro-6
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15) If the supply of oranges is unit elastic, the price elasticity of supply of oranges is
A) 1.0.
B) 0.0.
C) -1.0.
D) -100.0.
Diff: 2
Topic: Other Important Elasticities
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Micro-6
The answer is A. When the proportionate change in supply is equal to the proportionate change
in price. In this case the PES value will be equal to 1.
16) Price elasticity of demand is calculated as the change in price divided by the change in
quantity demanded.
Answer: FALSE
Diff: 1
Topic: Price Elasticity of Demand
Skill: Definition
Learning Outcome: Micro-6
17) The price elasticity of demand is generally positive to reflect the direct relationship between
the quantity demanded of a good and its price.
Answer: FALSE
Diff: 2
Topic: Price Elasticity of Demand
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-6
18) Perfectly elastic demand is represented as a vertical line.
Answer: FALSE
Diff: 1
Topic: Price Elasticity of Demand
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-6
19) Perfectly inelastic demand is represented as a horizontal line.
Answer: FALSE
Diff: 1
Topic: Price Elasticity of Demand
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Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-6
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5.2 Calculating Elasticities
Refer to the information provided in Figure 5.2 below to answer the questions that follow.
Figure 5.2
1) Refer to Figure 5.2. If the price of a hamburger decreases from $10 to $8, the price elasticity
of demand equals ________. Use the midpoint formula.
A) -0.33
B) -3.0
C) -30.
D) -300
Initial Price (PI) = 10, New Price (PN) = 8,
Initial Quantity (QI) = 1, New Quantity (QN) = 2.
PED = ( (QN − QI) / (QN + QI) / 2 ) / ( (PN - PI) / (PN + PI) / 2 )
PED = ( (2 − 1) / (2 + 1) / 2) / ( (8 - 10) / (8 + 10) / 2)
PED = 0.1667 / -0.0556
PED = -3
Since |PED| > 1 ⇒ demand is elastic.
The answer is B
Diff: 2
Topic: Calculating Elasticities
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Micro-2
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2) Refer to Figure 5.2. If the price of a hamburger decreases from $8 to $6, the price elasticity of
demand equals ________. Use the midpoint formula.
A) -0.24
B) -1.0
C) -1.4
D) -2.0
Diff: 2
Topic: Calculating Elasticities
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Micro-2
Initial Price (PI) = 8, New Price (PN) = 6,
Initial Quantity (QI) = 2, New Quantity (QN) = 3.
PED = ( (QN − QI) / (QN + QI) / 2 ) / ( (PN - PI) / (PN + PI) / 2 )
PED = ( (3 − 2) / (3 + 2) / 2) / ( (6 - 8) / (6 + 8) / 2)
PED = 0.1 / -0.0714
PED = -1.4
Since |PED| > 1 ⇒ demand is elastic.
The answer is C
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3) Refer to Figure 5.2. If the price of a hamburger decreases from $4 to $2, the price elasticity of
demand equals ________. Use the midpoint formula.
A) -0.33
B) -2.0
C) -3.0
D) -5.0
We have:
Initial Price (PI) = 4, New Price (PN) = 2,
Initial Quantity (QI) = 4, New Quantity (QN) = 5.
PED = ( (QN − QI) / (QN + QI) / 2 ) / ( (PN - PI) / (PN + PI) / 2 )
PED = ( (5 − 4) / (5 + 4) / 2) / ( (2 - 4) / (2 + 4) / 2)
PED = 0.0556 / -0.1667
PED = -0.3333
Since |PED| < 1 ⇒ demand is inelastic.
The answer is A
Diff: 2
Topic: Calculating Elasticities
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Micro-2
4) Refer to Figure 5.2. At Point C the price elasticity of demand is -1. Along line segment
________ of the demand curve, the demand is inelastic.
A) AC
B) BE
C) CF
D) AF
The answer is C i.e. CF.
We have:
Initial Price (PI) = 6, New Price (PN) = 2,
Initial Quantity (QI) = 3, New Quantity (QN) = 5.
PED = ( (QN − QI) / (QN + QI) / 2 ) / ( (PN - PI) / (PN + PI) / 2 )
PED = ( (5 − 3) / (5 + 3) / 2) / ( (2 - 6) / (2 + 6) / 2)
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PED = 0.125 / -0.25
PED = -0.5
Since |PED| < 1 ⇒ demand is inelastic.
Diff: 2
Topic: Calculating Elasticities
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Micro-2
5) Refer to Figure 5.2. At Point C the price elasticity of demand is -1. Along line segment
________ of the demand curve, the demand is elastic.
A) AC
B) BE
C) CF
D) AF
The answer is A i.e. AC.
We have:
Initial Price (PI) = 10, New Price (PN) = 6,
Initial Quantity (QI) = 1, New Quantity (QN) = 3.
PED = ( (QN − QI) / (QN + QI) / 2 ) / ( (PN - PI) / (PN + PI) / 2 )
PED = ( (3 − 1) / (3 + 1) / 2) / ( (6 - 10) / (6 + 10) / 2)
PED = 0.25 / -0.125
PED = -2
Since |PED| > 1 ⇒ demand is elastic.
Diff: 2
Topic: Calculating Elasticities
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Micro-2
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Refer to the information provided in Figure 5.3 below to answer the questions that follow.
Figure 5.3
6) Refer to Figure 5.3. Use the midpoint formula. If the price of a gardenburger decreases from
$10 to $8, the price elasticity of demand equals ________ and demand is ________.
A) 4.5; elastic
B) -0.5; inelastic
C) -4.5; elastic
D) -9.0; inelastic
We have:
Initial Price (PI) = 10, New Price (PN) = 8,
Initial Quantity (QI) = 1, New Quantity (QN) = 3.
PED = ( (QN − QI) / (QN + QI) / 2 ) / ( (PN - PI) / (PN + PI) / 2 )
PED = ( (3 − 1) / (3 + 1) / 2) / ( (8 - 10) / (8 + 10) / 2)
PED = 0.25 / -0.0556
PED = -4.5
Since |PED| > 1 ⇒ demand is elastic.
The answer is C
Diff: 2
Topic: Calculating Elasticities
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Micro-2
7) Refer to Figure 5.3. Use the midpoint formula. If the price of a gardenburger decreases from
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$8 to $6, the price elasticity of demand equals ________, and demand is ________.
A) -0.57; inelastic
B) -1.75; elastic
C) -1.9; inelastic
D) -2.0; elastic
We have:
Initial Price (PI) = 8, New Price (PN) = 6,
Initial Quantity (QI) = 3, New Quantity (QN) = 5.
PED = ( (QN − QI) / (QN + QI) / 2 ) / ( (PN - PI) / (PN + PI) / 2 )
PED = ( (5 − 3) / (5 + 3) / 2) / ( (6 - 8) / (6 + 8) / 2)
PED = 0.125 / -0.0714
PED = -1.75
Since |PED| > 1 ⇒ demand is elastic.
The answer is B
Diff: 2
Topic: Calculating Elasticities
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Micro-2
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8) Refer to Figure 5.3. Using the midpoint formula, if the price of a gardenburger increases from
$6 to $7, the price elasticity of demand equals ________, and the increase results in a(n)
________ in total revenue.
A) -.13; increase
B) -.69; decrease
C) -1.44; decrease
D) -13; decrease
We have:
Initial Price (PI) = 6, New Price (PN) = 7,
Initial Quantity (QI) = 5, New Quantity (QN) = 4.
PED = ( (QN − QI) / (QN + QI) / 2 ) / ( (PN - PI) / (PN + PI) / 2 )
PED = ( (4 − 5) / (4 + 5) / 2) / ( (7 - 6) / (7 + 6) / 2)
PED = -0.0556 / 0.0385
PED = -1.4444
Since |PED| > 1 ⇒ demand is elastic.
The answer is C
Diff: 2
Topic: Calculating Elasticities
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Micro-2
9) The owner of a local pretzel cart has estimated that if he lowers the price of pretzels from
$4.00 to $3.00, he will increase sales from 800 to 1,000 pretzels per day. Using the midpoint
formula, the demand for pretzels is
A) elastic.
B) inelastic.
C) unit elastic.
D) perfectly elastic.
Initial Price (PI) = 4, New Price (PN) = 3,
Initial Quantity (QI) = 800, New Quantity (QN) = 1000.
PED = ( (QN − QI) / (QN + QI) / 2 ) / ( (PN - PI) / (PN + PI) / 2 )
PED = ( (1000 − 800) / (1000 + 800) / 2) / ( (3 - 4) / (3 + 4) / 2)
PED = 0.0556 / -0.0714
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PED = -0.7778
Since |PED| < 1 ⇒ demand is inelastic.
The answer is B
Diff: 2
Topic: Calculating Elasticities
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Micro-6
10) At a price of $7, quantity demanded is 50; and at a price of $5, quantity demanded is 70.
Since total revenue ________ by the price decrease, demand must be ________.
A) is increased; elastic
B) is decreased; inelastic
C) is unchanged; unit elastic
D) is unchanged; elastic
Initial Price (PI) = 7, New Price (PN) = 5,
Initial Quantity (QI) = 50, New Quantity (QN) = 70.
PED = ( (QN − QI) / (QN + QI) / 2 ) / ( (PN - PI) / (PN + PI) / 2 )
PED = ( (70 − 50) / (70 + 50) / 2) / ( (5 - 7) / (5 + 7) / 2)
PED = 0.0833 / -0.0833
PED = -1
Since |PED| = 1 ⇒ demand is unitary elastic.
The answer is C
Diff: 2
Topic: Calculating Elasticities
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Micro-6
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11) At a price of $40, a store can sell 35 toasters a day. At a price of $37 the store can sell 38
toasters a day. Since total revenue ________ by the price decrease, demand must be ________.
A) is increased; elastic
B) is increased; inelastic
C) is increased; unit elastic
D) is decreased; elastic
We have:
Initial Price (PI) = 40, New Price (PN) = 37,
Initial Quantity (QI) = 35, New Quantity (QN) = 38.
PED = ( (QN − QI) / (QN + QI) / 2 ) / ( (PN - PI) / (PN + PI) / 2 )
PED = ( (38 − 35) / (38 + 35) / 2) / ( (37 - 40) / (37 + 40) / 2)
PED = 0.0205 / -0.0195
PED = -1.0548
Since |PED| > 1 ⇒ demand is elastic.
The answer is A
Diff: 2
Topic: Calculating Elasticities
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Micro-6
12) Price and total revenue move in the same direction when demand is
A) price elastic.
B) price inelastic.
C) unit price elastic.
D) perfectly price elastic.
The answer is A
When the demand is found to be inelastic, the change in price brings about the same directional
change in total revenue.
Diff: 1
Topic: Calculating Elasticities
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-6
13) Price and total revenue are inversely related when demand is
A) price elastic.
B) price inelastic.
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C) unit price elastic.
D) perfectly price inelastic.
The answer is A. When the demand is elastic, the directional change in price brings an opposite
directional change in total revenue. Hence when the price rises, revenue falls.
Diff: 1
Topic: Calculating Elasticities
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-6
21
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14) Total revenue decreases if price ________ and demand is ________.
A) falls; elastic
B) falls; unit elastic
C) rises; inelastic
D) rises; elastic
D
Same as explanation above
Diff: 1
Topic: Calculating Elasticities
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-6
15) Total revenue increases if price ________ and demand is ________.
A) falls; inelastic
B) falls; unit elastic
C) rises; elastic
D) rises; inelastic
D
Same as explanation above due to the laws of price elastic and inelastic demand.
Diff: 1
Topic: Calculating Elasticities
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-6
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Refer to the information provided in Figure 5.4 below to answer the questions that follow.
Figure 5.4
16) Refer to Figure 5.4. The demand for milkshakes is unit elastic at Point C. If a store increases
the price of a milkshake from P4 to P3, its total revenue will
A) increase.
B) decrease.
C) remain constant.
D) either increase or decrease.
If p4 is 10 and p3 is 20, at p3 the quantity is 3 and at p4 the quantity is 4, then the total revenue
is:
R at (p3xq3) = 20 x 3 = 60
R at (p4 x q4) = 4 x 10 = 40
The revenue decreases.
The answer is B
Diff: 2
Topic: Calculating Elasticities
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Micro-2
17) Refer to Figure 5.4. The demand for milkshakes is unit elastic at Point C. If the milkshake
price rises from P2 to P1, total revenue will
A) increase.
B) decrease.
C) remain constant.
D) either increase or decrease.
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If p1 is 40 and p2 30, at p1 q1 is 10 and at p2 q2 is 20, then the revenue will be as:
At p1 R = 400
At p2 R = 600
The revenue decreases, the answer is B
Diff: 1
Topic: Calculating Elasticities
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Micro-2
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18) Refer to Figure 5.4. Along the given demand curve, which of the following is true?
A) Demand is less elastic along the segment AC than the segment CF.
B) Demand is less elastic along the segment CF than the segment AC.
C) Since the demand curve is linear, the price elasticity of demand between each of the points is
the same.
D) All of the above are true.
The answer is B. Demand is less elastic along the segment CF than the segment AC.
Diff: 2
Topic: Calculating Elasticities
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Micro-2
19) A firm is currently producing in the inelastic portion of its demand curve. What course of
action do you recommend for it, assuming it wants to raise revenue?
A) Continue producing at the current output level, because it maximizes its total revenue by
producing in the inelastic portion of its demand curve.
B) Reduce price, because if it reduces price and demand is inelastic, total revenue will increase.
C) Increase price, because if it increases price and demand is inelastic, total revenue will
increase.
D) Continue selling at the same price, but increase the amount it produces.
The action could be to have a raise in the price because with the demand being inelastic and the
product is a necessity, then the total revenue will move in the same direction and it will increase
too. Hence, the answer is C.
Diff: 3
Topic: Calculating Elasticities
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-6
20) A firm is currently producing in the elastic portion of its demand curve. What course of
action do you recommend for it, assuming it wants to raise revenue?
A) Continue producing at the current output level, because it maximizes its total revenue by
producing in the elastic portion of its demand curve.
B) Reduce price, because if it reduces price and demand is elastic, total revenue will increase.
C) Increase price, because if it increases price and demand is elastic, total revenue will increase.
D) Continue selling at the same price, but increase the amount it produces.
The price reduction with the demand being elastic will increase the revenue because if the
demand is price elastic, the quantity will decrease and price increases, the total revenue will
increase ultimately. The answer is C
Diff: 3
Topic: Calculating Elasticities
Skill: Conceptual
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AACSB: Reflective Thinking
Learning Outcome: Micro-6
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21) When the slope of a demand curve is constant, price elasticity of demand can vary.
Answer: TRUE
Diff: 1
Topic: Calculating Elasticities
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-6
22) A demand curve with continuously changing slope over all quantity values will always have
a price elasticity of demand equal to infinity.
Answer: FALSE
Diff: 2
Topic: Calculating Elasticities
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-6
23) A demand curve with constant slope over all quantity values will always have a price
elasticity of demand equal to -1.
Answer: FALSE
Diff: 2
Topic: Calculating Elasticities
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-6
24) A tax on a good whose demand is perfectly price inelastic will be effective in discouraging
consumption of that good.
Answer: FALSE
Diff: 1
Topic: Calculating Elasticities
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-6
25) If government officials are mainly interested in generating tax revenue, then they should tax
goods for which demand is price inelastic.
Answer: TRUE
Diff: 1
Topic: Calculating Elasticities
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-6
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26) How total revenue changes when a price changes can be predicted using price elasticity of
demand.
Answer: TRUE
Diff: 2
Topic: Calculating Elasticities
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-6
27) When demand is elastic, an increase in price will result in a decrease in total revenue.
Answer: TRUE
Diff: 1
Topic: Calculating Elasticities
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-6
28) When demand is elastic, a decrease in price will result in an increase in total revenue.
Answer: TRUE
Diff: 1
Topic: Calculating Elasticities
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-6
29) When demand is inelastic, a decrease in price will result in a decrease in total revenue.
Answer: TRUE
Diff: 1
Topic: Calculating Elasticities
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-6
30) When demand is elastic, an increase in price will result in an increase in total revenue.
Answer: FALSE
Diff: 1
Topic: Calculating Elasticities
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-6
28
Copyright © 2014 Pearson Education, Inc.

31) When demand is unit elastic, a decrease in price will result in a decrease in total revenue.
Answer: FALSE
Diff: 1
Topic: Calculating Elasticities
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-6
32) When demand is unit elastic, an increase in price will result in no change in total revenue.
Answer: TRUE
Diff: 1
Topic: Calculating Elasticities
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-6
5.3 The Determinants of Demand Elasticity
1) When there are fewer substitutes for a product, the ________ for the product is ________.
A) demand; less price elastic
B) demand; more price elastic
C) income elasticity; greater
D) income elasticity; smaller
When there are few or less substitutes available, the demand for the product is more price
inelastic since that product is a necessity. The answer is A.
Diff: 1
Topic: The Determinants of Demand Elasticity
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-6
2) The less time that elapses, the
A) less price elastic is the demand for the product.
B) more price elastic is the demand for the product.
C) greater the income elasticity of demand for a product.
D) smaller the income elasticity of demand for the product.
The answer is A
Diff: 1
Topic: The Determinants of Demand Elasticity
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-6
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Copyright © 2014 Pearson Education, Inc.

3) The determinants of elasticity include
A) availability of substitutes.
B) price relative to income.
C) time.
D) all of the above
As per the law of elasticity, the answer is D.
Diff: 2
Topic: The Determinants of Demand Elasticity
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-6
4) Related to the Economics in Practice on page 108: Which of the following, if true, would
most effectively back the argument that raising cigarette taxes reduces the number of people who
smoke cigarettes?
A) The demand for cigarettes is relatively inelastic.
B) The demand for cigarettes is relatively elastic.
C) The supply for cigarettes is relatively inelastic.
D) The supply for cigarettes is relatively elastic.
The correct answer is B. Cigarette is not a necessity
The
Diff: 3
Topic: Determinants of Demand Elasticity: Economics in Practice
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-6
5) Related to the Economics in Practice on page 108: If the demand for cigarettes is more
________ for underage smokers as compared to that of adult smokers, then compared to adults, a
tax on cigarettes would have ________ impact on the demand for cigarettes for teenagers.
A) elastic; more
B) elastic; less
C) inelastic; more
D) inelastic; an equal
The answer is B. This is also explained above.
Diff: 3
Topic: Determinants of Demand Elasticity: Economics in Practice
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-6
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Copyright © 2014 Pearson Education, Inc.

6) Related to the Economics in Practice on page 109: Which of the following best explains why
demand is often less elastic in the short run than it is in the long run?
A) When demand is elastic, price increases reduce revenue because a small price increase will
lead to a large decrease in quantity demanded.
B) In the short run, consumers have less access to substitutes.
C) Consumers tend to postpone making purchasing decisions as long as possible.
D) In the short run, prices can change rapidly, but in the long run they are more stable.
The answer is B, this is because in the long run the consumers will have better access to the
substitutes.
Diff: 3
Topic: Determinants of Demand Elasticity: Economics in Practice
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Micro-6
7) Related to the Economics in Practice on page 109: Harriet runs a corner delicatessen and one
day decides to raise her prices by 20 percent. Total revenue is likely to ________ at the end of
the first month of the higher prices since demand is relatively ________ in the long term.
A) rise; inelastic
B) fall; inelastic
C) rise; elastic
D) fall; elastic
The answer is D. For elastic demands, and higher prices, the revenues are bound to fall.
Diff: 2
Topic: Determinants of Demand Elasticity: Economics in Practice
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-6
8) Demand is more inelastic for an item for which few substitutes are available.
Answer: TRUE
Diff: 1
Topic: The Determinants of Demand Elasticity
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-6
9) Demand is more inelastic for an item which represents a relatively large part of a person's total
budget.
Answer: FALSE
Diff: 1
Topic: The Determinants of Demand Elasticity
Skill: Conceptual
AACSB: Reflective Thinking
31
Copyright © 2014 Pearson Education, Inc.

Learning Outcome: Micro-6
32
Copyright © 2014 Pearson Education, Inc.

5.4 Other Important Elasticities
1) The income elasticity of demand
A) measures the change in income necessary for a given change in quantity demanded.
B) measures the responsiveness of income to changes in quantity demanded.
C) measures the responsiveness of quantity demanded to changes in income.
D) is the ratio of the percentage change in income to the percentage change in quantity
demanded.
As per the definition of income elasticity of demand, the answer is C
Diff: 1
Topic: Other Important Elasticities
Skill: Definition
Learning Outcome: Micro-6
2) If income decreases by 20% and, in response, the quantity of housing demanded decreases by
14%, then the income elasticity of demand for housing is
A) -1.
B) -0.7.
C) 0.7.
D) 1.43.
% change in demand/% change in income = 14%/20% = 0.7 The answer is C
Diff: 2
Topic: Other Important Elasticities
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Micro-6
3) The income elasticity of demand for education is 3.5. Thus, a 6% decrease in income will
A) decrease the quantity of education demanded by 3.5%.
B) decrease the quantity of education demanded by 21%.
C) increase the quantity of education demanded by 6%.
D) increase the quantity of education demanded by 21%.
The answer is B. -6% x 3.5 = 21%
Diff: 2
Topic: Other Important Elasticities
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Micro-6
33
Copyright © 2014 Pearson Education, Inc.

4) The income elasticity of demand for low-quality beef is -2. Thus, an 5% decrease in the
quantity of low-quality beef demanded
A) is the result of a decrease in income of 2.5%.
B) is the result of an increase in income of 10%.
C) is the result of an increase in income of 2.5%.
D) is unrelated to any change in income.
The answer is C. -5%/-2 = 2.5%
Diff: 2
Topic: Other Important Elasticities
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Micro-6
5) Assume you earn $20,000 a year and your favorite sports magazine costs you $100 a year.
Your demand for the sports magazine is likely to be
A) elastic.
B) inelastic.
C) perfectly elastic.
D) perfectly inelastic.
The demand would be elastic because with such a high price, the quantity demanded will be low
due to its price demand being elastic in nature
Diff: 1
Topic: Other Important Elasticities
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-6
6) Assume you earn $75,000 a year and your favorite entertainment magazine costs you $25 a
year. Your demand for the entertainment magazine is likely to be
A) elastic.
B) inelastic.
C) perfectly elastic.
D) perfectly inelastic.
The demand for entertainment magazine is inelastic. Answer B
Diff: 1
Topic: Other Important Elasticities
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-6
34
Copyright © 2014 Pearson Education, Inc.

7) The Acme Motorcycle Company spends a lot of money for advertising designed to convince
you that their motorcycles are superior to all other motorcycles. If Acme is successful, the
demand for Acme motorcycles
A) and the demand for other firmsʹ motorcycles will become less price elastic.
B) and the demand for other firmsʹ motorcycles will become more price elastic.
C) will become more price elastic, but the demand for other firmsʹ motorcycles will become less
price elastic.
D) will become less price elastic, but the demand for other firmsʹ motorcycles will become more
price elastic.
The answer is D, since the customers will realize the features being offered by ACME computers
that can prove to be competitive to the competitors and hence, with the two options, the
motorcycles having a higher cost other than ACME will prove to be more price elastic.
Diff: 3
Topic: Other Important Elasticities
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-6
8) A government is considering levying a tobacco tax to raise revenue to finance health care
benefits. People for the tax argue that tobacco demand is price inelastic. Which of the following
statements is true?
A) The tobacco tax may not raise as much revenue as anticipated in the years to come because
tobacco demand is likely to become more elastic over time.
B) This is a very good way to raise revenue both in the short term and in the long term because
there are no close substitutes for tobacco.
C) This tax will not raise much revenue either in the short term or the long term because demand
is price inelastic.
D) No tax revenue can be raised in this way because tobacco sellers will just lower their price by
the amount of the tax, and therefore the consumer price of tobacco will not change.
The answer is A.
Diff: 3
Topic: Other Important Elasticities
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-6
35
Copyright © 2014 Pearson Education, Inc.

9) In order to discourage consumers from consuming sugary soft drinks, the government is
considering placing a tax on sugary soft drink sales. Which of the following statements is true?
A) Given the numerous alternatives, consumers' demand for sugary soft drinks is relatively
elastic, and the tax will likely work to discourage sugary soft drink consumption.
B) The tax on sugary soft drinks will likely raise considerable revenue, but it will be unlikely to
reduce the consumption of sugary soft drinks by consumers.
C) The tax on sugary soft drinks will likely increase the demand for sugar-free soft drinks.
D) Both A and C are true.
The answer is D. Tax will discourage the consumption and even increase the demand for suger
free drinks.
Diff: 3
Topic: Other Important Elasticities
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-6
10) Suppose an increase of 7% in the price of lobster reduces the consumption of lobster by 18%.
Such a price rise will induce households to spend
A) less of their income on lobster.
B) more of their income on lobster.
C) the same amount on lobster as before.
D) more on products that are complementary with lobster.
The answer is A, with the increase in price, the consumption reduces and hence, the income is
not much spend on highly priced products.
Diff: 2
Topic: Other Important Elasticities
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-6
11) Cross-price elasticity of demand measures the response in the
A) price of a good to a change in the quantity of another good demanded.
B) income of consumers to the change in the price of goods.
C) quantity of one good demanded when the quantity demanded of another good changes.
D) quantity of one good demanded to a change in the price of another good.
The answer is D as per the definition.
Diff: 1
Topic: Other Important Elasticities
Skill: Definition
Learning Outcome: Micro-6
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12) If the quantity of coffee demanded increases by 4% when the price of tea increases by 12%,
the cross-price elasticity of demand between coffee and tea is
A) -3.
B) 0.33.
C) 3.
D) 48.
The cross price elasticity of demand is 4%/12% = 0.33
Diff: 2
Topic: Other Important Elasticities
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Micro-6
13) If the quantity of bagels demanded increases by 9% when the price of croissants increases by
18%, the cross-price elasticity of demand between bagels and croissants is
A) -5.
B) -2.
C) 0.5.
D) 2.
Diff: 2
Topic: Other Important Elasticities
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Micro-6
14) If the quantity of peanut butter demanded decreases by 14% when the price of jelly increases
by 7%, the cross-price elasticity of demand between peanut butter and jelly is
A) -14.
B) -2.
C) -0.5.
D) 7.
The answer is B
Diff: 2
Topic: Other Important Elasticities
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Micro-6
37
Copyright © 2014 Pearson Education, Inc.

15) If the cross-price elasticity of demand between shrimp and oysters is 4, then a 2% increase in
the price of shrimp will result in a ________ in the quantity of oysters demanded.
A) 0.5% increase
B) 8% increase
C) 4% increase
D) 2% decrease
Answer B 2% x 4 = 8%
Diff: 2
Topic: Other Important Elasticities
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Micro-6
16) The cross-price elasticity of demand between good X and good Y is -2.4. Given this
information, which of the following statements is true?
A) The demand for goods X and Y is elastic.
B) Goods X and Y are substitutes.
C) Goods X and Y are complements.
D) The demand for goods X and Y is income elastic.
Answer C.
Diff: 2
Topic: Other Important Elasticities
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-6
17) The cross-price elasticity of demand between good X and good Y is 0.75. Given this
information, which of the following statements is true?
A) The demand for goods X and Y is inelastic.
B) Goods X and Y are substitutes.
C) Goods X and Y are complements.
D) The demand for goods X and Y is income inelastic.
Answer B
Diff: 2
Topic: Other Important Elasticities
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-6
38
Copyright © 2014 Pearson Education, Inc.

Refer to the information provided in Figure 5.5 below to answer the question that follows.
Figure 5.5
18) Refer to Figure 5.5. As the price of good W decreased, the demand for good Y shifted from
D1 to D2. The cross-price elasticity of demand between W and Y is
A) positive.
B) negative.
C) zero.
D) indeterminate from this information.
The answer is A. Demand for one good increases when the price for substitute good increases.
Diff: 2
Topic: Other Important Elasticities
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Micro-2
19) In output markets, the elasticity of supply tends to be
A) negative.
B) zero.
C) positive.
D) decreasing at an increasing rate.
The answer is C.
Diff: 1
Topic: Other Important Elasticities
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-6
39
Copyright © 2014 Pearson Education, Inc.

20) If the elasticity of labor supply is negative, the labor supply curve would be
A) horizontal.
B) vertical.
C) downward sloping.
D) upward sloping.
The answer is D.
Diff: 1
Topic: Other Important Elasticities
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-6
Refer to the information provided in Figure 5.6 below to answer the question that follows.
Figure 5.6
21) Refer to Figure 5.6. The market is initially in equilibrium at Point A and supply shifts from
S1 to S2. Which of the following statements is true?
A) Price will still serve as a rationing device causing quantity supplied to exceed 12 pizzas.
B) There is no need for price to serve as a rationing device in this case because the new
equilibrium quantity exceeds the original equilibrium quantity.
C) Price will still serve as a rationing device causing quantity demanded to fall from 12 to 10
pizzas.
D) The market cannot move to a new equilibrium until there is also a change in supply.
The answer is C.
Diff: 1
Topic: Other Important Elasticities
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Micro-2
40
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22) At a price of $8, quantity supplied is 200; and at a price of $12, quantity supplied is 240.
Using the midpoint formula, the price elasticity of supply is ________ and supply is ________.
A) 0.1; inelastic
B) 0.45; inelastic
C) 2.2; elastic
D) 10; elastic
Explanation – 240-200/(240+200)/2 = 0.18
12-8/(12+8)/2 x 100 = 0.4
0.18/0.4 = 0.45
Answer B PES<1
Diff: 2
Topic: Other Important Elasticities
Skill: Analytical
AACSB: Analytic Skills
Learning Outcome: Micro-6
23) A mass transit authority charges subway fares of $2.50 during morning rush hours but only
$1.50 during late morning non-rush hours. Economists explain the fare difference by the fact that
the demand for subway rides during the morning rush hours is ________, but during the late
morning it is ________.
A) more elastic; more inelastic
B) perfectly elastic; perfectly inelastic
C) more inelastic; more elastic
D) unit elastic; relatively inelastic
The answer is C.
Diff: 3
Topic: Other Important Elasticities
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-6
24) A negative cross-price elasticity between two goods implies that the two goods are
substitutes.
Answer: FALSE
Diff: 1
Topic: Other Important Elasticities
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-6
Explanation given in 25th mcq
25) A negative cross-price elasticity between two goods implies that the two goods are
compliments.
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Answer: TRUE
Diff: 1
Topic: Other Important Elasticities
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-6
If two products are found to be complements, the increase in demand for one product will be
followed by the increase in the quantity demanded for another. An example could be the increase
in demand for cars that can result in an increase in demand for the fuel. If there is a fall in the
price of complement, there will be an increase in the quantity demanded of other goods. Hence,
the cross price elasticity will be negative.
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26) Inferior goods will experience decreasing demand when incomes increase.
Answer: TRUE
Diff: 2
Topic: Other Important Elasticities
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-6
Explanation: The demand decreases for inferior goods with the increase in income or with the
improvement in the economy. With this in mind, consumer will like to spend on substitutes that
are costly. Moreover, there is an increase in the demand for inferior goods when economy
contracts or income falls.
27) If a group has a negative elasticity of labor supply (above some income level), then
continued increases in wages will result in continued increases in the quantity of labor supplied.
Answer: FALSE
Diff: 2
Topic: Other Important Elasticities
Skill: Conceptual
AACSB: Reflective Thinking
Learning Outcome: Micro-6
43
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