LTRUE OR FALSE 1. Ifa product has price elasticity of demand greater than 1 then a rise in the price of the good will lead to a rise in total revenue received. o Tre @ False 2. An inferior good is one for which demand increases as income increases. o True @ False 3. Goods A and B are complementary if a rise in the price of good A leads to a fallin the demand for good B. @ True © False 4, Price elasticity of supply refers to how supply for a good respond to a change in the goods price, © True o False 5. The incidence ofa tax refers to the relative tax burden on the consumer and producer. © True o False 6. Perfectly clastic demand refers to a situation in which any price change for the good in westion, no matter how small, will produce an "infinite" change in quantity demanded. © True o False 7. When the seller increases the price charged for a good with an elastic demand, the seller's revenues will go up. © True © False . Elasticity is the santé as the slope of the demand curve. © True © False 9, Income elasticity of demand is always expressed as a positive number (absolute value). © True © False 10.When the income elasticity of demand is positive but less than 1, demand is called "income elastic." © True # False teLL. You notice that whenever inomes rise by 5 percent, people buy 3 percent more of Good A. This suggests that Good A has a negative income elasticity of demand. o True @ False 12. If changes in demand cause significant changes in equilibrium price, then supply must be quite inelastic, @ Tme o False 13. You notice that whenever incomes rise by 5 percent, people buy 3 percent more of Good A. This suggests that Good A has a negative income elasticity of demand. o Tre @ False 14, When demand is price-elastic, an increase in price will lead to increased total consumer spending for the product. © Tine o False 15. If the demand curve is more elastic than the supply curve, tax is paid more by the consumers. o True @ False 16. If the quantity demanded for good A increases from 40 to 60 when price decreases from 89 to $7, price elasticity of demand in this price range is 1.6. o True @ False 17. An income elasticity coefficient of —1.8 means the product is a luxury good. o Tme @ False 18. Demand is elastic if the consumer has only a few substitutes to choose from. o True o False TL MULTIPLE CHOICE 1. The concept used to reveal the responsiveness of demand for a product to a change in the price of that product is termed: a) price elasticity of supply price elasticity of demand ¢) cross elasticity of demand d) income elasticity of demand ¢) none of the above.2. Ifa small percentage drop in the price of a good leads to a large percentage increase in the quantity of that good demanded then: a) demand is inelastic b) demand is elastic c) demand is unit elasticity demand is perfectly inelastic Jdemand is perfectly elastic. 3. Ifa 10% increase in price leads to a 4% reduction in the quantity of a good demanded then the price elasticity of demand is: 4. Ifa demand curve is horizontal it indicates that: a) income elasticity of demand is zero price elasticity of demand is infinity ¢) price elasticity of demand is zero d) price elasticity of demand is between zero and one ¢) none of the above. 5. The revenue obtained from the sale of a good will fall if a) income inereases and the good is a normal good b) price increases and demand is inelastic price increases and demand is clastic d) price falls and demand is elastie ¢) income falls and the good is an inferior good. 6. A rise in the price of product Y from $50 to $54 has resulted in the demand for produet X increasing from 100 to 104 units per month. The cross elasticity of demand is: a) 0.2 05 ©) 1.0 420 247. If the cross elasticity of demand between two goods X and Y is positive then: the two goods are substitutes }) the two goods are complements ¢) the demand for the two goods is price inelastic d) the demand for the two goods is price inelastic ©) none of the above. 8. A 5% increase in income leads to an increase in the quantity demanded from 24 units per week to 27 units per week. The income elasticity of demand is: a) 1.0 bs ¢) 2.0 (25 ©) 3.0 9, If the demand curve for a product is perfectly inelastic then the incidence of a tax on that product falls: a) totally on the supplier ) equally on the buyer and seller totally on the buyer d) mostly on the supplier e) none of the above. 10. A company supplies 20 units of a particular product per month at a price of $ 24. If the price elasticity of supply is 4 then how many units would the company supply at a price of $30? a)5 b) 10 15 4) 20 0 fake sells hot dogs at an outdoor stand, There are several other hot dog stands in the vicinity. All the hot dog sellers are price takers. Which of the following statements is true about the demand for Jake’s hot dogs? Demand for Jake’s hot dogs is perfectly inelastic. Demand for Jake’s hot dogs is perfectly elastic. ©) Demand for Jake’s hot dogs can be represented as a vertical line. 4) Demand for Jake’s hot dogs can be represented as a downward sloping line. ©) None of the above,12.Suppose that the price elasticity of supply for toothpaste is 0.2. If the price of toothpaste increases by 30%, what would we expect to happen to the quantity of toothpaste supplied? a) increase by 3% b) decrease by 5% ¢) increase by 60% d) decrease by 15% increase by 6% 13.Suppose a grocery store normally sells 100 cartons of milk per day and the price elasticity of demand for milk is 1.7. If the store lowers the price of milk by 10%, about how many tons of milk will it then sell per week? 6 117 ) 83 ¢) 88 4) 100 e) 101.7 14, The price of milk doubles, but the quantity demanded changes very little. Which of the following would nor be a likely explanation for this phenomenon? a) There isn'ta good substitute for milk. b) People feel they need milk, rather than just wanting it. Demand for milk is highly price elastic. ) Milk is not a very big part of most people's budget. 2) All of the above are likely explanations for this phenomenon. 15. Suppose a study finds that as people's incomes rise, they tend to buy fewer subway tokens because they are more likely to have a car. This would mean that subway tokens are: normal goods 0 inferior goods ©) price elastic goods 4) price taker goods e) supply elastic goods Shoes are a normal good. Shoes are an inferior good. ¢) Demand for shoes is highly price elastic. 4d) Demand for shoes has an elasticity between 0 and 1 ¢) All of the above. er more money people make, the more pairs of shoes they buy. We can conclude that ) > Questions #17 and #18 refer to the following scenario.A. 4% increase in the price of tomatoes leads to a 1% reduction in the quantity of tomatoes demanded. 17. The price elasticity of demand for tomatoes is: a) 05 b) 0.6 @ 025 d) 1.25 e) 4.0 18. Which of the following statements about the market in tomatoes is false? a) Demand for tomatoes is price inelastic. b) A price increase will lead to a revenue increase. Demand for tomatoes is unit elastic. )) Price elasticity of demand equals percent change in quantity demanded, divided by percent change in price. e) All of the above are true. 19. 5 a ¢ z = z T 9° ° ‘Quantity Demanded of Y The diagram suggests that: a) Xand Y are both inferior goods. b) Xand Y are both normal goods. c) Xand Y are substitute goods. @ X and Y are independent goods 20.Suppose the areas OP] AB and 0P2CD are equal. We can conclude that the price elasticity of demand between point A and point C is: a) Elastic. b) Inelastic. Unitary elastic. d) Impossible to determine. It depends on whether the price has increased or decreased. 21. In the article "Afier iPhone Price Cut, Sales Are Up by 200 Percent," a) The demand for iPhones is inelastic. b) The survey of quantity demanded after a price change for the iPhones showed that iPhones are an inferior good. The demand for iPhones is highly elastic. d)_ There was no way to calculate the price elasticity of demand. 22. The supply curve for the product X is vertical. Government sets a floor price, 1 above the equilibrium price. The surplus of product X will be greater if the price elasticity of demand for product X is: a) -0.25 b) -1 1. What is the main difference between the law of demand and the price elasticity of demand? 2. The Metropolitan Transit System recently announced a 50% increase in the price of a transit ticket. The administrators said that they needed an increase in revenue to cover their rising costs. Explain the economic rationale for this decision. o . Ford Motor Company announced a major rebate program for its cars and trucks. The rebate program amounts to a simple reduction in price. The company executives hope to increase revenue as a result of this rebate program. What economic explanation would justify this decision? > A marketing firm has done a study of market demand for DVDs of three different movies. Calculate the total revenue for each movie in columns 3, 5, and 7.(1) (2) (3) (4) 8) (8) @ Qs Qe Qo Price $10 100 S__ 100 S__ 100 $__ 9 mt tt 8 15 120 7 43 am 180 6 7 mt 5 200 360 150 Without calculating the price elasticity of demand, indicate whether demand for each movie is elastic, inelastic or unit-elastic. For which movie would a reduction in price produce the greatest increase in revenue? 5. Based on the determinants of elasticity as discussed in the text, explain what the price elasticity of demand of the following products would be: (a) ballpoint pens; (b) Crest toothpaste; (c) diamond rings; (d) sugar; and (e) refrigerators. 6. Explain why the following situations would occur in terms of the factors that affect elasticity. a) Demand for cellular service is inelastic in the short run, but more elastic in the long run. b) Demand for a bakery’s bread is elastic, while demand for bread is inelastic. c) Demand for personal computers is elastic. 7. Which of the pair of goods would be considered to have more elastic demand? Why? a) Laundry detergent or Bounty brand paper towels 'b) Groceries or meals at a fancy restaurant c) A pack of gu 4) An iPad today or an iPad two years from now. 8. A gasoline station very near a professional football stadium parks car on its lot to make money on game days. Last year it charged $4.00 per car and parked 1000 cars. This year it raised the parking price to $5.00 and parked 850 cars. Did the station owner make a good economic decision in raising the parking prices from one year to the next? Explain 9. Use the information in the table below to identify the type of cross elasticity relationship between products X and Y in each of the following five cases, A to E.hi Percent change in. Gross elasticity Gases __inprice of _quantity demanded of x "type A 5 7 8 2 6 © 5 “ > 3 o E 2 10 10. For the following three cases, use a midpoints formula to calculate the coefficient for the cross elasticity of demand and identify the type of relationship between the two products. a) The quantity demanded for product A increases from 30 to 40 as the prige of product B increases from $0.10 to $0.20. CoefticienO.4 Relationship substaudes b) The quantity demanded for produet A decreases from 3000 to 1500 as the price of good B increases from $5 to $10. . Coetficient: Retain Oppel Ormel\ 4s c) The quantity demanded for product A remains 400 units as the price of product increases from $25 to $30. : Coefficient: Relationship: wadepend of} 11. If the government places a $500 tax on luxury cars, will the price paid by consumers rise by more than $500, Jess than $500, or exactly $500? Explain. 12. Beachfront resorts have an inelastic supply, and automobiles have an elastic supply. Suppose that a rise in population doubles the demand for both products (that is, the quantity demanded at each price is twice what it was). a) What happens to the equilibrium price and quantity in each market? b) Which product experiences a larger change in price? ©) Which product experiences a larger change in quantity? 4) What happens to total consumer spending on each product? 13. Congress and the president decide that the United States should reduce air pollution by reducing its use of gasoline. They impose a $0.50 tax for each gallon of gasoline sold. a) Explain carefully the situation using a supply-and demand diagram. b) If the demand for gasoline were more elastic, would this tax be more effective or less effective in reducing the quantity of gasoline consumed? Explain with both words and a diagram. ¢) Are consumers of gasoline helped or hurt by this tax? Why? 4) Are workers in the oil industry helped or hurt by this tax? Why?14, Nile.com, the online bookseller, wants to increase its total revenue. One strategy is to offer a 10% discount on every book it sells. Nile.com knows that its customers ean be divided into two distinct groups according to their likely response to the discount. The accompanying table shows how the two groups respond to the discount. Group A GroupB (sales per week) | (sales per week) Volume of sales before the 10% discount 1.55 million 1.50 million Volume of sales after the 10% discount 1.65 million 1.70 million a) Using the midpoint method, calculate the price elasticities of demand for group A and group B. b) Explain how the discount will affect total revenue from each group. c) Suppose Nile.com knows which group each customer belongs to when he or she logs on and can choose whether or not to offer the 10% discount. If Nile.com wants to increase its total revenue, should discounts be offered to group A or to group B, to neither group, or to both groups. 15. You possess the following information about the demand for IPATH. The price elasticity of demand for IPATH is -2.5; The cross price elasticity of demand for IPATH with respect to Laptops is 0.50; the income elasticity for IPATH is 3.0. Evaluate the following questions based on the supplied information. a) If the price of I PATH were increased by 2%, by what percentage would sales of IPATH change? b) A 4% increase in the price of IPATH would increase the demand for laptops by 2% c) Supose that the price of IPATH increases by 2%,at the same time the price of laptops falls by 3% and income elasticity increases by 2%. What combined effect of these changes is expected with respect to sales of PATH 16. Suppose that business travelers and vacationers have the following demand for airline tickets from New York to Boston: Quantity Demanpep — Quantity DeMaNDED_ Price (BUSINESS TRAVELERS) (vacaTIONERS) $150 2,100 1,000 200 2,000 800 250 1,900 600 300 1,800 400 a. As the price of tickets rises from $200 to $250, what is the price elasticity of demand for (i) business travelers and (fi) vacationers? (Use the midpoint method in your calculations.) b. Why might vacationers have a different elasticity than business travelers? 1017. The table shows the supply and demand for good X P 2 4 6 8 10 2 Qd 6 3 4 3 2 1 Qs 1 3 4 3 6 10 a) Draw the demand and supply curve for good X. Determine the equilibrium price and equilibrium quantity. What is the total consumer surplus obtained by the consumer? b) Suppose the government sets a ceiling price of 48. What will happen to consumer surplus? Why? What about the price of X? c) Suppose the government imposes a 2$ tax! unit. Will the tax affect the shifting of demand, supply or both curves? How will the tax burden be shared between producers and consumers? Does this always happen? 1