Micro Chapter 18 Practice Problems #2 Key

1. Suppose you are given the following data on demand for a product. The price elasticity of demand when
price decreases from $9 to $7 is:

Price Quantity demanded

$10 30
9 40
8 50
7 60
6 70

A) .63. B) 1.16. C) 1.60. D) 2.27.

Answer: C

2. When the demand for a good is price-elastic at a given output level, it is also known that:
A) total revenue is negative.
B) total revenue for the good will increase if its price decreases.
C) an increase in price will lead to an increase in total revenue for firms selling the good.
D) a large change in price will result in a relatively small change in the quantity demanded.
Answer: B

3. Assuming pizza and hamburgers are substitutes, when the price of pizza increases, what must always happen?
A) Total revenue received by pizza sellers increases.
B) Total revenue received by pizza sellers decreases.
C) Total revenue received by hamburger sellers increases.
D) Total revenue received by hamburger sellers decreases.
Answer: C

Price

P4
A
P3
E Demand
B
P2
C F H
P1
D G I J
Q1 Q2 Q3 Q4 Quantity
0
demanded

4. Refer to the above graph. If the price is P3, then the total revenue is represented by areas:
A) B + C + D. B) E + F + G. C) B + C + D + E + F + G. D) A + B + C + D + E + F + G.
Answer: C
5. If a business decreased the price of its product from $10 to $9 when the price elasticity of demand was inelastic,
then total revenues would:
A) decrease. B) increase. C) remain unchanged. D) be perfectly inelastic.
Answer: A

6. You are the sales manager for a software company and have been informed that the price elasticity of demand for
your most popular software is less than 1. To increase total revenues, you should:
A) increase the price of the software. C) hold the price of the software constant.
B) decrease the price of the software. D) increase the supply of the software.
Answer: A

7. In some markets consumers may buy many different brands of a product. Which of the statements below best
represents a situation where demand for a particular brand would be very elastic?
A) "The different brands are almost identical. I always buy the cheapest."
B) "I use so little of that product that when I do buy it, I don't pay much attention to the price."
C) "The brand I buy is so superior to other available brands that I hardly consider the others."
D) "I pinch pennies in buying other products, but like most people I feel I owe it to myself to get the best
brand of this product."
Answer: A

8. What is the most likely effect of the development of television, videocassette players, and rental movies on the
movie theater industry?
A) decreased costs of producing movies
B) increased demand for movie theater tickets
C) movie theater tickets become an inferior good
D) increased price elasticity of demand for movie theater tickets
Answer: D

9. If in the short run the demand for mass transit is inelastic and in the long run the demand is elastic, then a price:
A) increase will decrease total revenue in the short run but increase total revenue in the long run.
B) increase will increase total revenue in the short run but decrease total revenue in the long run.
C) decrease will increase total revenue in the short run but decrease total revenue in the long run.
D) decrease will decrease total revenue in the short run and decrease total revenue in the long run.
Answer: B

Price Quantity supplied

($ per unit) (units/week)
5 100
10 200
15 250
20 300
25 350
30 500

10. Over which price range is the elasticity of supply greater than 1?
A) $10 to $15 B) $15 to $20 C) $20 to $25 D) $25 to $30
Answer: D
11. At a price of $4 per unit, Gadgets Inc. is willing to supply 20,000 gadgets, while United Gadgets is willing to
supply 10,000 gadgets. If the price were to rise to $8 per unit, their respective quantities supplied would
rise to 45,000 and 25,000. If these are the only two firms supplying gadgets, what is the elasticity of supply
in the market for gadgets?
A) 1.2 B) 1.0 C) .833 D) .80
Answer: A

12. At a price of $20 per unit, 140 units of good W are demanded and 100 units are supplied. When the price is
raised to $30 per unit, 100 units are demanded and 140 units are supplied. The price elasticity of supply in
this range is:
A) 1.0. B) .833. C) .417. D) 1.20.
Answer: B

13. A price increase from $43 to $49 results in an increase in quantity supplied from 220 units to 240 units. The
price elasticity of supply in this price range is:
A) .3. B) .67. C) 1.50. D) 3.33.
Answer: B

P
S

$6
5

Q
0 40 50 60

14. Over the $5-$6 range, supply is:

A) one. B) zero. C) elastic. D) inelastic.
Answer: C

15. Over the $5-$6 range, the elasticity of supply using the mid-points formula is:
A) .22. B) .88. C) 1.00. D) 1.22.
Answer: D

16. A state government wants to increase the taxes on cigarettes to increase tax revenue. This tax would only be
effective in raising new tax revenues if the price elasticity of demand is:
A) unity. B) elastic. C) inelastic. D) perfectly elastic.
Answer: C
17. If a union argues that a price cut will boost revenues of the firm and management argues that the opposite is true,
then the price elasticity of demand is:
A) unit-elastic from the union's perspective and unit-inelastic from management's perspective.
B) perfectly inelastic from the union's perspective and perfectly elastic from management's perspective.
C) elastic from the union's perspective; inelastic from management's perspective.
D) inelastic from the union's perspective; elastic from management's perspective.
Answer: C

18. Tickets to a university football game always sell out. In this case, the:
A) demand for tickets is highly inelastic. C) supply of tickets is highly inelastic.
B) demand for tickets is highly elastic. D) supply of tickets is highly elastic.
Answer: C