Economy Today 14th Edition Schiller Test Bank 1

Economy Today 14th Edition by Schiller
Gebharbt ISBN 0078021863 9780078021862

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Chapter 20 Test Bank

Student: ___________________________________________________________________________
1. Price elasticity of demand shows how

A. To compute the slope of the demand curve.
B. Responsive the quantity demanded is to a change in price.
C. Responsive the quantity demanded is to a change in the price of related goods.
D. Responsive the price is to a change in demand.
2. Price elasticity of demand refers to

A. How responsive producers are to a change in the cost of production.
B. How sensitive buyers are to a change in price.
C. How buyers respond to a change in income.
D. How buyers react to a change in the price of a substitute good.
3. Price elasticity looks at

A. The law of demand.
B. How much quantity demanded changes after a change in price.
C. The degree to which price changes with a change in quantity demanded.
D. Why the law of demand is untrue.
4. The basic formula for price elasticity is

A. The percentage change in price divided by the percentage change in quantity demanded.
B. The change in quantity demanded divided by the change in price.
C. The percentage change in income divided by the percentage change in price.
D. The percentage change in quantity demanded divided by the percentage change in price.
5. Technically the elasticity number is negative because

A. When price falls quantity demanded will rise, but for simplicity economists take the absolute value of the
elasticity number.
B. When price falls quantity demanded will fall, but for simplicity economists take the absolute value of the elasticity
number.
C. When price rises quantity demanded will rise, but for simplicity economists take the absolute value of the
elasticity number.
D. The demand curve is upward-sloping.
6. To find the average percentage change in quantity demanded,

A. The change in price is divided by the percentage change in quantity demanded.
B. The change in quantity demanded is divided by the change in price.
C. The change in quantity demanded is divided by the average quantity.
D. The change in price is divided by the average price.
7. To find the average percentage change in price,

A. The change in price is divided by the average price.
B. The change in quantity is divided by the average quantity.
C. The change in quantity is divided by the change in price.
D. The percentage change in quantity demanded is divided by the percentage change in price.
8. If the price increases by 10 percent, and the quantity demanded falls by 5 percent, the absolute value of the price
elasticity will be
A. 0.5.
B. 5.0.
C. 50.
D. -5.0.
9. Assume the price elasticity of demand for U.S. Frisbee Co. Frisbees is 0.5. If the company increases the price of
each Frisbee from $12 to $16, the number of Frisbees demanded will
A. Decrease by 14.3 percent.
B. Decrease by 33.3 percent.
C. Increase by 20.0 percent.
D. Increase by 7.0 percent.
10. If the elasticity of demand is 3, and the price rises by 15 percent, then
A. The quantity demanded will increase by 5 percent.
B. The quantity demanded will fall by 45 percent.
C. The quantity demanded will rise by 4.5 percent.
D. The percentage change in quantity demanded will fall as income rises.
11. If the price of sandals increases by 10 percent and the quantity demanded falls by 20 percent, then the price
elasticity of demand in absolute value is
A. .2.
B. 2.
C. 20 percent.
D. 2 percent.
12. If the price of cell phones increases by 5 percent and the quantity demanded falls by 2 percent, the absolute value
of the price elasticity of demand is
A. 5.0.
B. 0.4.
C. 2.1.
D. 5 percent.
13. Assume the price elasticity of demand for JT Chip Co. chips is 4.0. If the company decreases the price of each bag
of chips from $1.89 to $1.49, the number of bags sold will
A. Decrease by 78 percent.
B. Increase by 95 percent.
C. Increase by 48 percent.
D. Increase by 78 percent.
14. If the price elasticity of demand is 0.6, then a 10 percent increase in the price of the good will lead to a ________ in
the quantity demanded.
A. 6 percent increase
B. 6 percent decrease
C. 0.6 percent increase
D. 0.6 percent decrease
15. For product XYZ, the price elasticity of demand has an absolute value of 3.5. This means that quantity demanded
will increase by
A. 1 percent for each 3.5 percent decrease in price, ceteris paribus.
B. 1 unit for each $3.50 decrease in price, ceteris paribus.
C. 3.5 percent for each 1 percent decrease in price, ceteris paribus.
D. 3.5 units for each $1 decrease in price, ceteris paribus.
16. Suppose the quantity demanded of ski boats falls from 4.0 million to 3.0 million as a result of an average price
increase from $20,000 to $25,000 per boat. The absolute value of the price elasticity of demand is closest to
A. 0.20.
B. 1.29.
C. 0.78.
D. 0.29.
17. Suppose a university raises its tuition by 6 percent and as a result the enrollment of students decreases by 3
percent. The absolute value of the price elasticity of demand is
A. 0.5.
B. 2.0.
C. 8.0.
D. 6.0.
18. If the price of the iPod falls by 3 percent and the price elasticity of demand for iPods is 2.0, then quantity demanded
will fall by what percentage?
A. 5 percent.
B. 6 percent.
C. 0.6 percent.
D. 60 percent.
19. If demand is price-elastic, then

A. The elasticity number E is greater than 1.
B. The elasticity number E is less than 1.
C. The elasticity number E is equal to 1.
D. The elasticity number E is 0.
20. When demand is elastic, the absolute number for price elasticity will be
A. Greater than 0.
B. Less than 1.
C. Greater than 1.
D. Equal to 1.
21. If the demand for a product is elastic, then

A. The percentage change in quantity demanded is greater than the percentage in price.
B. The percentage change in price is greater than the percentage change in quantity demanded.
C. The change in the quantity demanded is greater than the change in income.
D. Buyers are not very sensitive to a change in price.
22. A demand curve that is perfectly inelastic is

A. Horizontal.
B. Vertical.
C. Upward-sloping.
D. Downward-sloping.
23. When demand is inelastic

A. The percentage change in price is greater than the percentage change in quantity demanded.
B. Buyers are very sensitive to changes in price.
C. The product in demand has many substitute goods.
D. The percentage change in quantity demanded is greater than the percentage change in price.
24. If demand is perfectly elastic,

A. The demand curve is vertical.
B. The demand curve is very steep.
C. The demand curve is horizontal.
D. The demand curve has a zero slope.
25. If demand is very inelastic,

A. The demand curve will be very flat.
B. The demand curve will be horizontal.
C. The demand curve will be very steep.
26. The price elasticity of demand is equal to

A. The percentage change in quantity demanded times the percentage change in price.
B. The unit change in price divided by the unit change in quantity demanded.
C. The percentage change in quantity demanded divided by the percentage change in price.
D. The unit change in quantity demanded times the unit change in price.
27. When the percentage change in quantity demanded is less than the percentage change in price, ceteris
paribus,
A. Demand is elastic.
B. Demand is inelastic.
C. Demand is unitary elastic.
D. Elasticity is impossible to calculate.
28. If the price elasticity of demand for cigarettes is 0.4,

A. The demand is very elastic.
B. A 10 percent increase in price will cause quantity demanded to fall by 40 percent.
C. The demand is very inelastic.
D. A 5 percent decrease in price will cause quantity demanded to rise by 10 percent.
29. Which of the following products will have more inelastic demand?
A. New cars.
B. Fresh flowers.
C. Fast food.
D. Medicines.
30. Which of the following products will have elastic demand?

A. Gasoline.
B. Cigarettes.
C. European travel.
D. Alcohol.
31. A demand curve that is completely elastic is
A. Horizontal.
B. Vertical.
C. Upward-sloping.
32. Which of the following would most likely have a price elasticity coefficient greater than 1?
A. Cigarettes.
B. Gasoline in the short run.
C. Electricity.
D. Airline travel in the long run.
33. The demand will be _______________ if the consumer has _________ substitute goods to choose from
A. elastic; less
B. inelastic; more
C. elastic; more
D. elastic; no
34. Which of the following is not a determinant of the price elasticity of demand?
A. The number of substitute goods available.
B. The share of a consumer's budget.
C. The amount of income the consumer has.
D. The time frame-whether it is in the short run or long run.
35. Which of the following does not influence the price elasticity of demand?
A. The availability of substitutes.
B. The price of the item relative to the consumer's budget.
C. Costs of production.
D. The length of time.
36. Which of the following would most likely have a price elasticity coefficient less than 1?
A. Coffee.
B. Televisions.
C. Fresh fish.
D. New cars.
37. Which of the following is likely to have the most inelastic price elasticity of demand?
A. Automobiles.
B. Pickup trucks.
C. Hondas.
D. The Hondas one Honda dealer sells.
38. Ceteris paribus, as the number of substitutes for a good increases, the
A. Price elasticity of demand should become smaller.
B. Price elasticity of demand should become larger.
C. Cross-price elasticity of demand should become negative.
D. Income elasticity of demand should become negative.
39. Which of the following causes demand to be more elastic with respect to price?
A. Shorter periods of time to adjust to a change in price.
B. A steeper demand curve for a given price and quantity.
C. Fewer substitutes.
D. A high ratio of price to income.
40. Ceteris paribus, the longer the time period, the

A. Smaller the income elasticity for the good.
B. Less elastic the demand for the good.
C. More unitary elastic the demand for the good.
D. More elastic the demand for the good.
41. The demand is more price-elastic

A. In the long run.
B. If the product is a necessity.
C. If the product is a small part of the consumer's budget.
D. If the product has very few substitutes.
42. If the price elasticity of demand is equal to 2, the good has _____ demand.
A. elastic
B. inelastic
C. unitary elastic
D. restrictive
43. Total revenue is

A. Price times income.
B. Quantity sold times price.
C. Equal to total profit.
D. Equal to costs of production.
44. Total revenue is equal to

A. The income from sales.
B. Profit.
C. Cost of production.
D. Total revenue minus total cost.
45. If demand is elastic, then

A. An increase in price will reduce total revenue.
B. An increase in price will increase total revenue.
C. A decrease in price will reduce total revenue.
D. A decrease in price will have no effect on total revenue.
46. A price change will have no effect on total revenue if demand is

A. Elastic.
B. Unitary.
C. Inelastic.
D. Perfectly elastic.
47. Higher prices will increase total revenue if

B. Demand is unitary elastic.
C. Demand is inelastic.
D. The price elasticity of demand is zero.
48. Sam owns a taco restaurant, and he conducted a consumer survey that indicates that the price elasticity of
demand for his restaurant is 3.5. You would advise Sam to
A. Raise his price to increase revenues.
B. Keep his price the same to maximize revenues.
C. Lower his price to increase revenue.
D. Offer more high-priced products.
49. If the elasticity of demand for cigarettes is 0.4, a seller should

A. Increase price to increase total revenue.
B. Decrease price to increase total revenue.
C. Reduce price to maximize profits.
D. Increase price because the percentage change in quantity demanded will be greater than the price effect.
50. The total revenue effect of a movement along a demand curve can best be predicted using the
A. Law of diminishing marginal utility.
B. Price elasticity of demand.
C. Utility-maximizing rule.
D. Law of demand.
51. The local baseball team owner hires you to help maximize the team's profits. You are told that costs are constant
because enough help is always hired for a full stadium, so assume your task is to maximize revenues from ticket
sales. Your advice to the owner should be to
A. Set the ticket price in the inelastic region of the demand curve in order to increase revenues.
B. Raise the price as high as possible until the number of tickets sold begins to fall.
C. Set the price as low as possible to make sure the stadium is always full.
D. Set the price of tickets at the unitary elasticity price.
52. Assume a good has a downward-sloping, linear demand curve. Starting at a price of zero, as the price of the good
increases, total revenue
A. Increases indefinitely.
B. Decreases indefinitely because the quantity sold will decrease.
C. Is constant.
D. Increases, then decreases.
53. If the price elasticity of demand is 1.0, and a firm raises its price by 10 percent, the total revenue will
A. Rise by 10 percent.
B. Fall by 10 percent.
C. Not change.
D. Rise by 100 percent.
54. If Carmen's Coffee Company wants to increase total revenue and the price elasticity of demand is 0.43, the
company should
A. Increase the price of its coffee.
B. Decrease the price of its coffee.
C. Keep the price constant since a price increase or decrease will cause total revenue to fall.
D. Advertise since this is the only option that will increase total revenue.
55. Carter has budgeted $40 per month for candy bars. No matter how the price of candy bars changes, he spends
exactly $40 per month. Carter's price elasticity of demand for candy bars must
A. Equal zero.
B. Be unitary.
C. Be very inelastic since the amount he spends is not responsive to a price change.
D. Be very elastic since the quantity he demands will change significantly if the price changes.
56. If the demand for cigarettes is inelastic,

A. Total revenue will rise if the price of cigarettes rises.
B. No matter how high the price goes, the quantity demanded will not fall.
C. Total revenue will fall if the price of cigarettes rises.
D. A price reduction will actually cause the quantity demanded to fall.
57. Assume the price elasticity of demand for MC Pretzel Co. pretzels is 0.8. If the company increases the price of
each bag of pretzels, total revenue will
A. Decrease because fewer bags will be sold.
B. Increase because demand is elastic and revenue will rise.
C. Increase because the percentage increase in price is greater than the percentage change in quantity
demanded.
D. Be impossible to predict because the percentage change in price is not known.
58. When demand is price-inelastic, ceteris paribus, an increase in

A. Price leads to lower total revenue.
B. Total revenue means quantity rises.
C. Total revenue indicates a reduction in price.
D. Price leads to greater total revenue.
59. A price decrease will cause total revenue to fall if

D. The price elasticity of demand is less than zero.
60. If the price of Good X falls and total revenue rises, then
A. Demand for Good X is inelastic.
B. Demand for Good X is unitary elastic.
C. Demand for Good X is elastic.
D. The price elasticity of demand for Good X is equal to 1.
61.
Maximum total revenue occurs when
A. The absolute value of the price elasticity of demand is 1.0.

B. Price multiplied by quantity is 1.0.
C. The absolute value of the price elasticity of demand is 100.
62. On a demand curve, demand is more elastic

A. At higher prices.
B. At lower prices.
C. When demand is unitary.
D. At the middle price.
63.
In Figure 20.1, total revenue is maximized at the unit price of
A. $50.
B. $60.
C. $80.
D. $100.
64.
In Figure 20.1, at what price is the elasticity of demand unitary?
A. $40.
B. $100.
C. $160.
D. $200.
65.
In the $80 to $40 price range in Figure 20.1, demand is
A. Perfectly price-elastic.
B. Price-inelastic.
C. Unitary elastic.
D. Price-elastic.
66.
In the $160 to $180 price range in Figure 20.1, the absolute value of the price elasticity of demand is closest to
A. 9.0.
B. 1.0.
C. 5.7.
D. 0.175.
67.
If the price is reduced from $100 to $80 in Figure 20.1, ceteris paribus,
A. Total revenue will decrease.

B. Demand will increase.
C. Quantity demanded will decrease.
D. Total revenue will increase.
68.
Over the price range from $180 to $120 in Figure 20.1, ceteris paribus,
B. Total revenue is maximized.
C. Demand is increasing.
D. Utility is maximized.
69. A grocery store put salt on sale but found that total revenues fell. This can be explained by which of the following?
A. The demand for salt is very elastic.

B. The demand curve for salt is vertical.
C. The demand for salt is inelastic.
D. The demand for salt is unitary elastic.
70.
Refer to Figure 20.2. If the area 0P1AB is less than the area 0P2CD, we can conclude that the price elasticity
of demand between point A and point C is
A. Elastic.
B. Inelastic.
C. Unitary elastic.
D. Impossible to determine. It depends on whether the price has increased or decreased.
71.
Refer to Figure 20.2. Suppose the areas 0P1AB and 0P2CD are equal. We can conclude that the price elasticity
A. Elastic.
B. Inelastic.
C. Unitary elastic.
72.
Refer to Figure 20.2. Comparing the price elasticity of demand at points A and C, we can say that
A. The elasticities are the same because the points are on the same demand curve.
B. Point A has a greater price elasticity of demand.
C. Point C has a greater price elasticity of demand.
D. Demand elasticity is indeterminate because specific price data are not given.
73. If the price of a good rises by 10 percent and quantity demanded falls by 20 percent, we can predict that
A. The company's total revenue will increase.
B. The company's total profit will rise.
C. The company's total revenue will decrease.
D. The company's total revenue will remain the same.
74. Cross-price elasticity refers to

A. How responsive consumers are to a change in price.
B. How responsive consumers are to a change in income.
C. How responsive consumers of one good are to a change in the price of another good.
D. How responsive consumers are to a change in quantity demanded.
75. The formula for cross-price elasticity is

A. The percentage change in the quantity demanded for one good divided by the percentage change in income.
B. The percentage change in the quantity demanded for one good divided by the percentage change in the price of
another good.
C. The percentage change in the price of one good divided by the percentage change in the quantity demanded of
another good.
D. The percentage change in the quantity demanded divided by the average change in price.
76. Suppose computer prices at an office supply store fall from $1,000 to $900 and as a result the quantity demanded
of typewriters decreases from 40 to 20 per month. The cross-price elasticity of demand is closest to
A. 0.16.
B. 0.2.
C. 5.0.
D. 6.3.
77. Assume apples and oranges are substitutes. Suppose apple growers launch a successful advertising campaign
that convinces consumers apples are a better product. As a result the cross-price elasticity of apples and oranges
will become
A. Less negative (move closer to zero).
B. More negative.
C. Less positive (move closer to zero).
D. More positive.
78. MP3 players and MP3 files are complementary goods. The cross-price elasticity of demand between MP3 players
and MP3 files is expected to be
A. Positive.
B. Negative.
C. Equal to zero.
D. Undefined.
79. When the prices of postage stamps rise, the demand for Internet service increases, ceteris paribus. Postage
stamps and Internet service are therefore
A. Elastic.
B. Inelastic.
C. Complements.
D. Substitutes.
80. Suppose the price of video games falls from $40 to $20 and as a result the quantity demanded of scooters falls
from 40,000 to 10,000 per year. The value of the cross-price elasticity of demand is
A. 1.80.
B. 1.00.
C. 0.83.
D. 0.56.
81. Suppose the price of soccer shoes decreases by 7 percent and as a result, there is a 12 percent rise in the quantity
of shin guards demanded. The value of the cross-price elasticity of demand is
A.
B. -0.58.
C. 1.71.
D. 0.58.
82. If DVD players and DVDs are complementary goods, an increase in the price of DVDs will, ceteris paribus,
A. Increase the quantity demanded of DVDs.
B. Increase the quantity demanded of DVD players.
C. Reduce the demand for DVD players.
D. Reduce the demand for DVDs.
83. If the cross-price elasticity of demand for SUVs with respect to the price of gasoline is -0.10, and gasoline prices
rise by 18 percent, then SUV sales should, ceteris paribus,
A. Fall by 1.8 percent.
C. Rise by 1.8 percent.
84. If two goods are complementary goods, then

A. The cross-price elasticity sign will be negative.
B. The cross-price elasticity sign is not important.
C. The cross-price elasticity sign will be positive.
D. The cross-price elasticity will be greater than 1.
85. If two goods are substitute goods,
A. The percentage change in quantity demanded for good X will fall if there is a reduction in price of good Y.
B. The percentage change in quantity demanded for good X will stay the same if there is an increase in the price of
good Y.
C. If the price of good X increases, the demand for good Y falls.
D. The percentage change in quantity demanded for good X will rise if there is a reduction in the price of good Y.
86. If the price of Coke rises by 5 percent and the sales of Pepsi go up by 10 percent, we can conclude that
A. The sign on the cross-price elasticity will be negative.
B. Both goods are normal goods.
C. Both goods are substitute goods because the cross-price elasticity is +0.5.
D. Both goods are substitute goods because the cross-price elasticity is +2.
87. Income elasticity measures the

A. Responsiveness of quantity demanded for one good to a percentage change in price of another good.
B. Responsiveness of quantity demanded to a percentage change in income.
C. Way in which consumers switch from one product to another when price rises.
D. Percentage change in quantity demanded given a percentage change in wealth.
88. Which of the following is the best measure of the effects of a recession?
A. Income elasticity of demand.
C. Cross-price elasticity of demand.
D. Utility-maximizing rule.
89. A good is normal if the sign on the income elasticity formula is

A. Positive.
B. Greater than 1.
C. Less than 1.
D. Negative.
90.
When income falls, the demand for an inferior goods
A. Increases.
B. Decreases.
C. Has a smaller change than the income change.
D. Stays the same.
91. Suppose the income elasticity of demand for used jet skis is 3.5. If the level of income decreases by 1 percent, the
number of used jet skis sold will, ceteris paribus,
A. Rise by 0.29 percent.
B. Rise by 3.5 percent.
C. Fall by 0.29 percent.
D. Fall by 3.5 percent.
92. If income falls 4 percent for a year and as a result the quantity of new homes demanded falls from 23 million to 20
million units for the year, the value of the income elasticity of demand for new homes is closest to
A. 0.6.
B. 1.8.
C. 2.9.
D. 3.5.
93. Suppose income falls 5 percent in a year, and as a result, housing construction falls from 10 million to 5 million
units annually. Based on this information, housing starts are
A. An inferior good.
B. A normal good.
C. Price-elastic.
D. Price-inelastic.
94. Ceteris paribus, if income increases and as a result, the demand for good X increases and the demand for good Y
falls,
A. Good X is an inferior good and good Y is a normal good.
B. Good X is a normal good and good Y is an inferior good.
C. Goods X and Y are substitute goods.
D. Goods X and Y are complementary goods.
95. The demand for normal goods

A. Rises when incomes fall.
B. Rises when incomes rise.
C. Falls when incomes rise.
D. Shifts to the right when incomes fall.
96. If incomes fall by 5 percent and the quantity demanded for new cars falls by 10 percent,
A. New cars are a normal good, and the income elasticity is +.5.
B. New cars are an inferior good, and the income elasticity is +2.0.
C. New cars are a normal good, and the income elasticity is +2.0.
D. New cars are an inferior good, and the income elasticity is +0.5.
97. If a good is normal, its

A. Price elasticity of demand is positive.
B. Income elasticity of demand is negative.
C. Income elasticity of demand is positive.
D. Cross-price elasticity is positive.
98. If a good is inferior, its

A. Cross-price elasticity is negative.
B. Price elasticity of demand is negative.
D. Income elasticity of demand is negative.
99. If income rises by 10 percent and the quantity sold of a particular vehicle falls by 7 percent, then this particular type
of vehicle is
A. A normal good.
B. An inferior good.
C. An irregular good.
D. A substandard good.
100. Which of the following is most likely an inferior good?

A. Rolex watches.
B. Nike running shoes.
C. Generic canned food.
D. A custom-built mansion.
101. Assume that store brand cereal is an inferior good. If income rises, then the price of store brand cereal will
________ and the quantity sold of store brand cereal will _______.
A. rise; rise
B. rise; fall
C. fall; fall
D. fall; rise
102. Elasticity of supply looks at

A. How responsive producers are to a change in quantity demanded.
B. How much quantity demanded changes with a change in price.
C. The responsiveness of sellers to a change in consumer's incomes.
D. How responsive sellers are to a change in price.
103. The formula for the elasticity of supply is

A. The percentage change in quantity supplied divided by the percentage change in price.
B. The percentage change in price divided by the percentage change in quantity supplied.
C. The percentage change in quantity supplied divided by the percentage change in income.
D. The percentage change in price divided by the percentage change in quantity demanded.
104. Elasticity of supply tells us
A. How much sellers will increase production in response to a change in price.
B. How much sellers will change their price as their quantity supplied changes.
C. How much producers will increase production with changes in consumers'income.
D. How much supply responds to a change in quantity demanded.
105. Supply is very elastic when

A. The quantity supplied does not change much when price rises.
B. The quantity supplied has a large increase in response to an increase in price.
C. The quantity supply does not respond to an increase in price.
D. The quantity demanded causes the quantity supplied to increase.
106. Supply is very inelastic when

A. The quantity supplied changes little when the price increases.
B. The quantity supplied changes a lot when price increases.
C. The quantity supplied does not change at all when price increases.
D. The quantity supplied changes only when demand changes.
107. Oil and alternative sources of energy such as wind and solar are
A. Complementary goods.
B. Substitute goods.
C. Inferior goods.
D. Income-elastic goods.
108. Policy proposals to make the United States energy-independent

A. Have arisen only recently because of the high price of oil.
B. Were originally for national security reasons.
C. Have never been proposed because the United States cannot become energy-independent.
D. Have been proposed recently because the price of wind and solar power has fallen.
109. For the United States to become less dependent on foreign sources of oil,
A. The cross-price elasticity for alternative energy sources is negative.
B. The price of alternative energy sources such as wind and solar has to rise.
C. Incomes in the United States must increase.
D. The price of oil and gasoline must increase to shift businesses and consumers over to alternative energy
sources.
110. In the article "After 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.
C. The demand for iPhones is highly elastic.
D. There was no way to calculate the price elasticity of demand.
111. The In The News article "Play Station 3 Sales More Than Double after Price Cut" indicated that
A. The percentage change in price was greater than the percentage change in quantity demanded.
B. The percentage change in quantity demanded was greater than the percentage change in price.
C. The demand for the Play Station 3 consoles was inelastic.
D. The percentage change in price was the same magnitude as the percentage change in quantity demanded.
112. Nobel Prize-winning economist Gary Becker corrected President Clinton's elasticity estimate for cigarette smoking
by
A. Showing that cigarettes were actually price-elastic.
B. Showing that the long-run response to a price increase in cigarettes was likely to be more elastic than the
president had estimated.
C. Showing that the demand for cigarettes in the short run was more inelastic than the president calculated.
D. Correcting the president's math.
113. The In The News article "Recession Eats into Gator Market" states that
A. The demand for alligator skins was inelastic.
B. The quantity demanded for alligator skins fell when income dropped, indicating that the skins were an inferior
good.
C. The demand for alligator skins fell when income dropped, indicating that the skins were a normal good.
D. The demand fell for alligator skins because the price was too high.
114. The article "Samsung Stung by Apple Moves" related to the price cuts for the iPhone indicates that
A. The cross-price elasticity for iPhones and other cell phones produced by Samsung was negative.
B. Apple lowered the price for the iPhone because the cross-price elasticity between it and the other competitors
was positive.
C.The percentage change in the quantity demanded for the substitute cell phones was increasing less than the
percentage change in the price.
D. The demand for the iPhone was inelastic.
115. The article "SUV Sales Drop with Gasoline Price Rise" states
A. That gasoline and SUV sales have a cross-price elasticity that is negative.
B. That gasoline and SUVs are substitute goods.
C. That the cross-price elasticity for SUVs and gasoline is positive.
D. That a drop in the price of gasoline will have little impact on SUV sales.
116. In the article on SUV sales titled "SUV Sales Drop with Gasoline Price Rise" suggests that
A. SUV sales are very responsive to gasoline, which is a substitute good to SUVs.
B. SUV sales did not respond all that much to a rise in gasoline prices, indicating that demand is inelastic for SUVs.
C. Gasoline and SUVs are complementary goods, and when the price of gasoline rose, the demand for SUVs fell.
D. The sign on the cross-price elasticity formula will be positive for SUVs and gasoline.
117. The World View "High Gold Price Swells Ranks of Illegal Miners"related to gold prices and gold mining
suggests
A. As the price of gold rises, the quantity supplied falls.
B. As the price of gold increases, there is an increase in quantity supplied, indicating that supply is elastic.
C. Miners around the world have had difficulty finding additional sources of gold, indicating that the elasticity of
supply is inelastic.
D. Miners have found new supplies of gold, indicating that the demand for gold is inelastic.
118. The World View article on the rise in gold prices indicates that
A. The quantity supplied falls when the price of gold rises.
B. The law of supply is true: as the price of gold rises, miners around the world search for new deposits of gold.
C. The law of supply is true because as the price of gold rises, the quantity supplied of gold actually falls.
D. The law of supply is not really relevant to the article.
119. The price elasticity of demand is calculated by dividing the percentage change in quantity demanded by the
percentage change in price.
True False
120. Demand is elastic if the consumer has only a few substitutes to choose from.
True False
121. Demand is more inelastic for luxury goods.

True False
122. The price elasticity number for necessities will be greater than 1.
True False
123. Demand is more inelastic in the long run.

True False
124. Along a linear or straight-line demand curve, demand is more elastic at higher prices.
True False
125. If the elasticity of demand is 3, then a 10 percent increase in price will cause quantity demanded to fall by 3
percent.
True False
126. If the price elasticity of demand is 0.4, a 5 percent increase in price will quantity demanded to fall by 2 percent.
True False
127. If the elasticity number (E) is less than 1, a price increase will cause total revenue to fall.
True False
128. If demand is elastic, a price reduction will lead to an increase in total revenue.
True False
129. If demand is inelastic, a reduction in price will lead to a drop in total revenue.
True False
130. The cross-price elasticity sign for substitute goods is negative.

True False
131. Cross-price elasticity looks at the impact that income changes have on sales.
True False
132. If the price of gasoline rises by 10 percent and new car sales fall by 5 percent, this indicates that these two goods
are complementary.
True False
133. If two goods are complementary, it means that when the price of one good increases, the demand for the other
rises.
True False
134. During a recession the sales of autos fall, and the best measure of this is to use cross-price elasticity.
True False
135. For inferior goods, when incomes rise the demand for these goods falls.
True False
136. The sign on the income elasticity formula will be positive for inferior goods and negative for normal goods.
True False
137. Most goods are normal goods, and their demand shifts to the left when income rises.
True False
138. Supply is very inelastic if the quantity supplied cannot respond quickly to an increase in price.
True False
139. The formula for the elasticity of supply is the percentage change in quantity supplied divided by the percentage
change in price.
True False
140. The price elasticity of supply will always be a negative number.

True False
141. To increase U.S. energy independence, prices must be lowered on gasoline and electricity.
True False
142. To reduce our dependence on foreign oil, policy makers must realize that the cross-price elasticity sign for gasoline
and fossil fuel-burning cars is negative.
True False
143. Explain why it is so important for a business to understand the concept of price elasticity and be able to measure
this for its products.
144. Explain why the concept of price elasticity of demand is important to government when deciding which goods to tax
in order to raise government tax revenues
145. You own your business, and your research indicates that the price elasticity of demand for your product is 3.5.
What pricing strategies should you follow, and why?
146. How does advertising influence the demand for goods and the shape of the demand curve?
147. Discuss how the concepts of cross-price elasticity of demand and income elasticity of demand can help businesses
plan production and pricing.
148. Explain under what conditions supply is very inelastic and elastic.
Chapter 20 Test Bank Key
1. Price elasticity of demand shows how
A. To compute the slope of the demand curve.
B. Responsive the quantity demanded is to a change in price.
C. Responsive the quantity demanded is to a change in the price of related goods.
D. Responsive the price is to a change in demand.
The response of consumers to a change in price is measured by the price elasticity of demand. Specifically,
the price elasticity of demand refers to the percentage change in quantity demanded divided by the percentage
change in price.
AACSB: Reflective Thinking

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 02 Medium
Learning Objective: 20-01 How to compute price elasticity of demand.
Topic: PRICE ELASTICITY
2. Price elasticity of demand refers to
A. How responsive producers are to a change in the cost of production.
B. How sensitive buyers are to a change in price.
C. How buyers respond to a change in income.
D. How buyers react to a change in the price of a substitute good.
The price elasticity of demand looks at how responsive buyers are to a change in price. It looks at the ratio of
the percentage change in quantity demanded to a percentage change in price.

Blooms: Remember
Difficulty: 01 Easy
3. Price elasticity looks at
A. The law of demand.
B. How much quantity demanded changes after a change in price.
C. The degree to which price changes with a change in quantity demanded.
D. Why the law of demand is untrue.
The law of demand states that if a price rises, there is a decrease in quantity demanded. Price elasticity
of demand looks at how much quantity demanded drops.

Blooms: Understand
4. The basic formula for price elasticity is
A. The percentage change in price divided by the percentage change in quantity demanded.
B. The change in quantity demanded divided by the change in price.
C. The percentage change in income divided by the percentage change in price.
D. The percentage change in quantity demanded divided by the percentage change in price.
The formula for price elasticity of demand is the percentage change in quantity demanded divided by the

Blooms: Remember
Difficulty: 01 Easy
5. Technically the elasticity number is negative because
A. When price falls quantity demanded will rise, but for simplicity economists take the absolute value of the
elasticity number.
B. When price falls quantity demanded will fall, but for simplicity economists take the absolute value of the
elasticity number.
C. When price rises quantity demanded will rise, but for simplicity economists take the absolute value of the
elasticity number.
If there is a percentage change increase in price, the percentage change in quantity demanded will fall, so the
elasticity number is always negative. For simplicity, economists take the absolute value of the elasticity
number (they drop the negative sign).

Blooms: Understand
6. To find the average percentage change in quantity demanded,
A. The change in price is divided by the percentage change in quantity demanded.
B. The change in quantity demanded is divided by the change in price.
C. The change in quantity demanded is divided by the average quantity.
D. The change in price is divided by the average price.
The longer midpoint formula for price elasticity of demand takes raw numbers and turns them into average
percentage changes for both the percentage change in quantity demanded and the percentage change for
price. The average percentage change in quantity demanded is found by dividing the change in quantity
demanded by the average quantity.

Blooms: Understand
7. To find the average percentage change in price,
A. The change in price is divided by the average price.
B. The change in quantity is divided by the average quantity.
C. The change in quantity is divided by the change in price.
D. The percentage change in quantity demanded is divided by the percentage change in price.
To find the average percentage change in price, you divide the change in price by the average price. The
average price is equal to the sum of the two prices divided by 2.

Blooms: Understand
8. If the price increases by 10 percent, and the quantity demanded falls by 5 percent, the absolute value of the
price elasticity will be
A. 0.5.
B. 5.0.
C. 50.
D. -5.0.
The price elasticity formula is the percentage change in quantity demanded divided by the percentage
change in price. In this case X=.10/.05=0.5.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
9. Assume the price elasticity of demand for U.S. Frisbee Co. Frisbees is 0.5. If the company increases the price
of each Frisbee from $12 to $16, the number of Frisbees demanded will
A. Decrease by 14.3 percent.
B. Decrease by 33.3 percent.
C. Increase by 20.0 percent.
D. Increase by 7.0 percent.
Price elasticity of demand is equal to the percentage change in quantity demanded divided by the percentage
change in price. From that, one can manipulate the formula to compute the percentage change in quantity
demanded by multiplying the price elasticity of demand by the percentage change in price. Therefore the
percentage change in quantity is equal to 0.5 ×28.6% - percentage change in price using the midpoint formula
((16 - 12)/((16 + 12)/2)).
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
10. If the elasticity of demand is 3, and the price rises by 15 percent, then
A. The quantity demanded will increase by 5 percent.
B. The quantity demanded will fall by 45 percent.
C. The quantity demanded will rise by 4.5 percent.
D. The percentage change in quantity demanded will fall as income rises.
The basic formula for price elasticity is the price elasticity of demand number = the percentage change in
quantity demanded divided by the percentage change in price. 3 = x/.15 =.45, so quantity demanded falls by 45
percent.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
11. If the price of sandals increases by 10 percent and the quantity demanded falls by 20 percent, then the price
elasticity of demand in absolute value is
A. .2.
B. 2.
C. 20 percent.
D. 2 percent.
The formula for the price elasticity of demand is the absolute value (drop the negative sign) of the percentage
change in quantity demanded divided by the percentage change in price. 20%/10%=2.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
12. If the price of cell phones increases by 5 percent and the quantity demanded falls by 2 percent, the absolute
value of the price elasticity of demand is
A. 5.0.
B. 0.4.
C. 2.1.
D. 5 percent.
The price of elasticity formula is the percentage change in quantity demanded divided by the percentage
change in price. Here it is 2%/5%=.4 (dropping the negative sign).
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
13. Assume the price elasticity of demand for JT Chip Co. chips is 4.0. If the company decreases the price of each
bag of chips from $1.89 to $1.49, the number of bags sold will
A. Decrease by 78 percent.
B. Increase by 95 percent.
C. Increase by 48 percent.
D. Increase by 78 percent.
The price elasticity of demand is equal to the percentage change in quantity demanded divided by the
percentage change in price. From that, one can manipulate the formula to compute the percentage change in
quantity demanded by multiplying the price elasticity of demand by the percentage change in price.
Therefore the percentage change in quantity is equal to 4 ×24% - the percentage change in price using the
midpoint formula ((1.49 - 1.89)/((1.49 + 1.89)/2)).
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
14. If the price elasticity of demand is 0.6, then a 10 percent increase in the price of the good will lead to a
________ in the quantity demanded.
A. 6 percent increase
B. 6 percent decrease
C. 0.6 percent increase
D. 0.6 percent decrease
percentage change in price. From that, one can manipulate the formula to compute the percentage change in
quantity demanded by multiplying the price elasticity of demand by the percentage change in price.
Therefore the percentage change in quantity is equal to 0.6 ×10.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
Learning Objective: 20-02 The relationships between price changes; price elasticity; and total revenue.
15. For product XYZ, the price elasticity of demand has an absolute value of 3.5. This means that quantity
demanded will increase by
A. 1 percent for each 3.5 percent decrease in price, ceteris paribus.
B. 1 unit for each $3.50 decrease in price, ceteris paribus.
C. 3.5 percent for each 1 percent decrease in price, ceteris paribus.
D. 3.5 units for each $1 decrease in price, ceteris paribus.
percentage change in price. Therefore a 1 percent decrease in price will cause a 3.5 percent increase in
quantity demanded.

Blooms: Understand
16. Suppose the quantity demanded of ski boats falls from 4.0 million to 3.0 million as a result of an average price
increase from $20,000 to $25,000 per boat. The absolute value of the price elasticity of demand is closest
to
A. 0.20.
B. 1.29.
C. 0.78.
D. 0.29.
percentage change in price. Therefore the price elasticity of demand is equal to ((4-3)/((4+3)/2))/((25,000-
20,000)/((25,000+20,000)/2)) or 1.29.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
17. Suppose a university raises its tuition by 6 percent and as a result the enrollment of students decreases by 3
percent. The absolute value of the price elasticity of demand is
A. 0.5.
B. 2.0.
C. 8.0.
D. 6.0.
percentage change in price. Therefore the price elasticity of demand is equal to 3/6 or 0.5.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
18. If the price of the iPod falls by 3 percent and the price elasticity of demand for iPods is 2.0, then quantity
demanded will fall by what percentage?
A. 5 percent.
B. 6 percent.
C. 0.6 percent.
D. 60 percent.
The basic formula for price elasticity is the percentage change in quantity demanded divided by the percentage
change in price. Substituting 2 for the price elasticity number (E), you have 2 = x/.03 =.06 or 6 percent.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
19. If demand is price-elastic, then
A. The elasticity number E is greater than 1.
B. The elasticity number E is less than 1.
C. The elasticity number E is equal to 1.
D. The elasticity number E is 0.
Quantity demanded will be greater than the percentage change in price, so the elasticity number E will
be greater than 1 if demand is elastic.

Blooms: Understand
20. When demand is elastic, the absolute number for price elasticity will be
A. Greater than 0.
B. Less than 1.
C. Greater than 1.
D. Equal to 1.
The price elasticity formula is the percentage change in quantity demanded divided by the percentage change
in price. When demand is price-elastic, the percentage change in quantity demanded will be greater than the
percentage change in price, so the absolute number will always be greater than 1. For example, foreign
airline travel tests out to = 3.5.

Blooms: Understand
21. If the demand for a product is elastic, then
A. The percentage change in quantity demanded is greater than the percentage in price.
B. The percentage change in price is greater than the percentage change in quantity demanded.
C. The change in the quantity demanded is greater than the change in income.
D. Buyers are not very sensitive to a change in price.
When demand for a product is elastic, the percentage change in quantity demanded is greater than the

Blooms: Understand
22. A demand curve that is perfectly inelastic is
A. Horizontal.
B. Vertical.
C. Upward-sloping.
A vertical demand curve implies that an increase in price won't affect the quantity demanded. In this
situation of completely inelastic demand, consumers are willing to pay any price to get a particular quantity.

Blooms: Remember
Difficulty: 01 Easy
23. When demand is inelastic
A. The percentage change in price is greater than the percentage change in quantity demanded.
B. Buyers are very sensitive to changes in price.
C. The product in demand has many substitute goods.
D. The percentage change in quantity demanded is greater than the percentage change in price.
When demand is inelastic, the percentage change in price is greater than the percentage change in quantity
demanded.

Blooms: Understand
24. If demand is perfectly elastic,
A. The demand curve is vertical.
B. The demand curve is very steep.
C. The demand curve is horizontal.
D. The demand curve has a zero slope.
A perfectly elastic demand curve is horizontal, which means that any increase in price causes quantity
demanded to fall to zero.

Blooms: Understand
25. If demand is very inelastic,
A. The demand curve will be very flat.
B. The demand curve will be horizontal.
C. The demand curve will be very steep.
When demand is inelastic, a percentage change in price (moving along the vertical axis of a demand graph) will
cause a very small change in quantity demanded (a slight movement along the horizontal axis of the demand
graph). The result is a very steep demand curve if demand is inelastic.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
26. The price elasticity of demand is equal to
A. The percentage change in quantity demanded times the percentage change in price.
B. The unit change in price divided by the unit change in quantity demanded.
C. The percentage change in quantity demanded divided by the percentage change in price.
D. The unit change in quantity demanded times the unit change in price.
The response of consumers to a change in price is measured by the price elasticity of demand. Specifically,
the price elasticity of demand refers to the percentage change in quantity demanded divided by the percentage
change in price.

Blooms: Remember
Difficulty: 01 Easy
27. When the percentage change in quantity demanded is less than the percentage change in price, ceteris
paribus,
D. Elasticity is impossible to calculate.
If price elasticity is less than 1, we say that demand is inelastic and that consumers are not very responsive to
price changes.

Blooms: Remember
Difficulty: 01 Easy
28. If the price elasticity of demand for cigarettes is 0.4,
A. The demand is very elastic.
B. A 10 percent increase in price will cause quantity demanded to fall by 40 percent.
C. The demand is very inelastic.
D. A 5 percent decrease in price will cause quantity demanded to rise by 10 percent.
The basic elasticity of demand formula is the percentage change in quantity divided by the percentage change
in price. An absolute value of 0.4 indicates that demand is inelastic (less than 1) and that a 10 percent change
in price will cause the quantity demanded to fall by just 4 percent. 0.4 = x/.10.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
29. Which of the following products will have more inelastic demand?
A. New cars.
B. Fresh flowers.
C. Fast food.
D. Medicines.
Demand is more inelastic if there are fewer substitute goods; medicines are necessities and will have more
inelastic demand.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
30. Which of the following products will have elastic demand?
A. Gasoline.
B. Cigarettes.
C. European travel.
D. Alcohol.
Products that have elastic demand have a lot of substitutes for consumers and take a larger percentage of their
income. European travel has a very high elasticity of demand.

Blooms: Understand
31. A demand curve that is completely elastic is
A. Horizontal.
B. Vertical.
C. Upward-sloping.
If demand were perfectly elastic, the demand curve would be horizontal. In that case, any increase in price
would cause quantity demanded to fall to zero.

Blooms: Remember
Difficulty: 01 Easy
32. Which of the following would most likely have a price elasticity coefficient greater than 1?
A. Cigarettes.
B. Gasoline in the short run.
C. Electricity.
D. Airline travel in the long run.
The long-run price elasticity of demand is higher than the short-run elasticity because consumers have more
time to adjust and find alternative products. While demand for necessities is relatively inelastic, which goods
are necessities is influenced by the availability of substitute goods. Consumers of cigarettes and gasoline
would argue that very few if any substitutes exist to cigarettes and gasoline.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
33. The demand will be _______________ if the consumer has _________ substitute goods to choose from
A. elastic; less
B. inelastic; more
C. elastic; more
D. elastic; no
The more substitutes available to the consumer, the more elastic the demand. This means if the price of one
good goes up, the consumer does not have to keep purchasing that good and switches to another good.

Blooms: Understand
34. Which of the following is not a determinant of the price elasticity of demand?
A. The number of substitute goods available.
B. The share of a consumer's budget.
C. The amount of income the consumer has.
D. The time frame-whether it is in the short run or long run.
The determinants of price elasticity of demand are the number of substitutes, whether the product is a
necessity or luxury, the time frame, and the weight of the product in terms of the consumer's budget.

Blooms: Understand
35. Which of the following does not influence the price elasticity of demand?
A. The availability of substitutes.
B. The price of the item relative to the consumer's budget.
C. Costs of production.
D. The length of time.
The price elasticity of demand is influenced by all the determinants of demand. The costs of production are a
determinant of supply.

Blooms: Understand
36. Which of the following would most likely have a price elasticity coefficient less than 1?
A. Coffee.
B. Televisions.
C. Fresh fish.
D. New cars.
The greater the availability of substitutes, the higher the price elasticity of demand. Most bleary-eyed coffee
drinkers can't imagine any other product that could substitute for a cup of coffee. As a consequence, when
coffee prices rise, consumers don't reduce their purchases much.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
37. Which of the following is likely to have the most inelastic price elasticity of demand?
A. Automobiles.
B. Pickup trucks.
C. Hondas.
D. The Hondas one Honda dealer sells.
The greater the availability of substitutes, the higher the price elasticity of demand. Automobiles are a broad
market that would have fewer available substitutes than a Honda or a pickup truck, which are more narrowly
defined and therefore have more substitutes.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
38. Ceteris paribus, as the number of substitutes for a good increases, the
A. Price elasticity of demand should become smaller.
B. Price elasticity of demand should become larger.
C. Cross-price elasticity of demand should become negative.
D. Income elasticity of demand should become negative.
The greater the availability of substitutes, the higher the price elasticity of demand. For example, the high
elasticity of demand for fish reflects the fact that consumers can always eat chicken, beef, or pork if fish prices
rise.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
39. Which of the following causes demand to be more elastic with respect to price?
A. Shorter periods of time to adjust to a change in price.
B. A steeper demand curve for a given price and quantity.
C. Fewer substitutes.
D. A high ratio of price to income.
Price elasticity of demand tends to be higher for goods with a relative high price, when the availability of
substitutes is high, and over a long period of time.

Blooms: Understand
40. Ceteris paribus, the longer the time period, the
A. Smaller the income elasticity for the good.
B. Less elastic the demand for the good.
C. More unitary elastic the demand for the good.
D. More elastic the demand for the good.
The long-run price elasticity of demand is higher than the short-run elasticity.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
41. The demand is more price-elastic
A. In the long run.
B. If the product is a necessity.
C. If the product is a small part of the consumer's budget.
D. If the product has very few substitutes.
In the long run consumers can usually find other substitutes. For example, you may own a gas-guzzling car
right now and not be able to afford to switch to an electric or hybrid car. But if gasoline prices rise, in the long
run you will switch to a more fuel-efficient car.

Blooms: Understand
42. If the price elasticity of demand is equal to 2, the good has _____ demand.
A. elastic
B. inelastic
C. unitary elastic
D. restrictive
If the price elasticity of demand is greater than 1, demand is elastic. Consumer response is large relative to
the change in price.

Blooms: Remember
Difficulty: 01 Easy
43. Total revenue is
A. Price times income.
B. Quantity sold times price.
C. Equal to total profit.
D. Equal to costs of production.
A firm's total revenue is equal to price times quantity sold. It is the company's income from sales. Total profit is
equal to total revenue minus cost of production.

Blooms: Understand
Topic: PRICE ELASTICITY AND TOTAL REVENUE
44. Total revenue is equal to
A. The income from sales.
B. Profit.
C. Cost of production.
D. Total revenue minus total cost.
Total revenue is equal to price times quantity sold and is also a company's income from sales.

Blooms: Remember
Difficulty: 01 Easy
45. If demand is elastic, then
A. An increase in price will reduce total revenue.
B. An increase in price will increase total revenue.
C. A decrease in price will reduce total revenue.
D. A decrease in price will have no effect on total revenue.
Total revenue equals price times quantity. With elastic demand, an increase in price will cause a large fall in
quantity demanded that is greater than the price increase. The result is that total revenue will fall as the price
rises if demand is elastic.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
46. A price change will have no effect on total revenue if demand is
A. Elastic.
B. Unitary.
C. Inelastic.
D. Perfectly elastic.
A price hike has no effect on total revenue if the price elasticity of demand is equal to 1.

Blooms: Understand
47. Higher prices will increase total revenue if
B. Demand is unitary elastic.
C. Demand is inelastic.
D. The price elasticity of demand is zero.
When demand is inelastic, this means that the quantity demanded does not fall by much when the price
increases. So total revenue will increase with higher prices when demand is inelastic. A few buyers will
refuse to pay the higher price, but most of them will continue to purchase the good.

Blooms: Understand
50. Sam owns a taco restaurant, and he conducted a consumer survey that indicates that the price elasticity of
demand for his restaurant is 3.5. You would advise Sam to
Raise his price to increase revenues.
Keep his price the same to maximize revenues.
C. Lower his price to increase revenue.
D. Offer more high-priced products.
If the elasticity of demand is 3.5 (in absolute value), it indicates that demand is very elastic. Consumers have a
lot of substitutes available. Therefore Sam should lower his price to increase total revenue because the
quantity demanded will increase.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
49. If the elasticity of demand for cigarettes is 0.4, a seller should
A. Increase price to increase total revenue.
B. Decrease price to increase total revenue.
C. Reduce price to maximize profits.
D. Increase price because the percentage change in quantity demanded will be greater than the price effect.
If price elasticity of demand is 0.4, then demand is very inelastic. That means the seller can increase price and
increase total revenue.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
51. The total revenue effect of a movement along a demand curve can best be predicted using the
A. Law of diminishing marginal utility.
C. Utility-maximizing rule.
D. Law of demand.
Once the price elasticity of demand is known, one can predict how consumers will respond to changing prices.
It can also be predicted what will happen to the seller's total revenue when price is increased or reduced.

Blooms: Understand
51. The local baseball team owner hires you to help maximize the team's profits. You are told that costs are
constant because enough help is always hired for a full stadium, so assume your task is to maximize
revenues from ticket sales. Your advice to the owner should be to
A. Set the ticket price in the inelastic region of the demand curve in order to increase revenues.
B. Raise the price as high as possible until the number of tickets sold begins to fall.
C. Set the price as low as possible to make sure the stadium is always full.
D. Set the price of tickets at the unitary elasticity price.
The impact of higher prices on total revenue depends on the price elasticity of demand. Higher prices result
in higher total revenue only if demand is inelastic. If demand is elastic, lower prices result in higher revenues.
Therefore to maximize revenue, a firm should charge the price at the point where elasticity goes from elastic to
inelastic-in other words is equal to 1.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
52. Assume a good has a downward-sloping, linear demand curve. Starting at a price of zero, as the price of the
good increases, total revenue
A. Increases indefinitely.
B. Decreases indefinitely because the quantity sold will decrease.
C. Is constant.
D. Increases, then decreases.
The price elasticity of demand depends on where one is on the demand curve. At low prices, the demand for
goods is relatively inelastic-higher prices result in higher total revenue. At higher prices, the demand for a
good is relatively elastic. Higher prices result in lower revenues. Therefore, starting at a price of zero, as the
price of the good increases, total revenue will increase, and then decrease.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
53. If the price elasticity of demand is 1.0, and a firm raises its price by 10 percent, the total revenue will
A. Rise by 10 percent.
C. Not change.
If price elasticity of demand is unitary elastic, higher prices result in no change in total revenue.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
54. If Carmen's Coffee Company wants to increase total revenue and the price elasticity of demand is 0.43, the
company should
A. Increase the price of its coffee.
B. Decrease the price of its coffee.
C. Keep the price constant since a price increase or decrease will cause total revenue to fall.
D. Advertise since this is the only option that will increase total revenue.
Higher prices result in higher total revenue only if the price elasticity of demand is inelastic (price elasticity is
less than 1).
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
55. Carter has budgeted $40 per month for candy bars. No matter how the price of candy bars changes, he spends
exactly $40 per month. Carter's price elasticity of demand for candy bars must
A. Equal zero.
B. Be unitary.
C. Be very inelastic since the amount he spends is not responsive to a price change.
D. Be very elastic since the quantity he demands will change significantly if the price changes.
Prices changes will not cause the total amount spent on a good (revenue) to change if the demand is unitary
elastic.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
56. If the demand for cigarettes is inelastic,
A. Total revenue will rise if the price of cigarettes rises.
B. No matter how high the price goes, the quantity demanded will not fall.
C. Total revenue will fall if the price of cigarettes rises.
D. A price reduction will actually cause the quantity demanded to fall.
If demand is inelastic, as it is for cigarettes, an increase in price will cause an increase in total revenues for
the company.

Blooms: Understand
57. Assume the price elasticity of demand for MC Pretzel Co. pretzels is 0.8. If the company increases the price of
each bag of pretzels, total revenue will
A. Decrease because fewer bags will be sold.
B. Increase because demand is elastic and revenue will rise.
C. Increase because the percentage increase in price is greater than the percentage change in quantity
demanded.
D. Be impossible to predict because the percentage change in price is not known.
less than 1).
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
58. When demand is price-inelastic, ceteris paribus, an increase in
A. Price leads to lower total revenue.
B. Total revenue means quantity rises.
C. Total revenue indicates a reduction in price.
D. Price leads to greater total revenue.
less than 1).

Blooms: Remember
Difficulty: 01 Easy
59. A price decrease will cause total revenue to fall if
D. The price elasticity of demand is less than zero.
Lower prices result in lower total revenue only if price elasticity of demand is inelastic (price elasticity is less
than 1).
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
60. If the price of Good X falls and total revenue rises, then
A. Demand for Good X is inelastic.
B. Demand for Good X is unitary elastic.
C. Demand for Good X is elastic.
D. The price elasticity of demand for Good X is equal to 1.
Lower prices result in higher total revenue only if price elasticity of demand is elastic (price elasticity is greater
than 1).
AACSB: Analytic Accessibility:

Keyboard Navigation Blooms:
Analyze Difficulty: 03 Hard
Learning Objective: 20-02 The relationships between price changes; price elasticity; and total revenue. Topic:
PRICE ELASTICITY AND TOTAL REVENUE
61.
Maximum total revenue occurs when
A. The absolute value of the price elasticity of demand is 1.0.

B. Price multiplied by quantity is 1.0.
C. The absolute value of the price elasticity of demand is 100.
Higher prices result in higher total revenue only if demand is inelastic. If demand is elastic, lower prices result
in higher revenues. Therefore, to maximize revenue, a firm should charge the price at the point where elasticity
goes from elastic to inelastic-in other words is equal to 1.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
62. On a demand curve, demand is more elastic
A. At higher prices.
B. At lower prices.
C. When demand is unitary.
D. At the middle price.
At higher prices demand is more elastic along a linear or straight demand curve. Note that the price elasticity of
demand changes along a straight-line demand curve and is more elastic at higher prices, and more inelastic at
lower prices.

Blooms: Understand
63.
In Figure 20.1, total revenue is maximized at the unit price of
A. $50.
B. $60.
C. $80.
D. $100.
Revenue is equal to price times quantity. Revenue is $10,000 at a price of $100.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
64.
In Figure 20.1, at what price is the elasticity of demand unitary?
A. $40.
B. $100.
C. $160.
D. $200.
At a price levels less than $100, a decrease in the price causes revenue to decrease, which implies that
demand is inelastic. At price levels greater than $100, a decrease in the price causes revenue to increase,
which implies that demand is elastic. Therefore, demand must be unitary elastic at a price of $100.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
65.
In the $80 to $40 price range in Figure 20.1, demand is
A. Perfectly price-elastic.
B. Price-inelastic.
C. Unitary elastic.
D. Price-elastic.
At price levels less than $100, a decrease in the price causes revenue to decrease, which implies that demand
is inelastic.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
66.
In the $160 to $180 price range in Figure 20.1, the absolute value of the price elasticity of demand is closest to
A. 9.0.
B. 1.0.
C. 5.7.
D. 0.175.
percentage change in price. Therefore, the price elasticity of demand is equal to the absolute value of ((20-
40)/ ((20+40)/2))/((180-160)/((180+160)/2)) or 5.7.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
67.
If the price is reduced from $100 to $80 in Figure 20.1, ceteris paribus,
A. Total revenue will decrease.

B. Demand will increase.
C. Quantity demanded will decrease.
D. Total revenue will increase.
Revenue is equal to price times quantity. Revenue is $10,000 at a price of $100 and $9,600 at a price of $800.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
68.
Over the price range from $180 to $120 in Figure 20.1, ceteris paribus,
B. Total revenue is maximized.
C. Demand is increasing.
D. Utility is maximized.
At price levels greater than $100, a decrease in the price causes revenue to increase, which implies
that demand is elastic.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
69. A grocery store put salt on sale but found that total revenues fell. This can be explained by which of the
following?
A. The demand for salt is very elastic.
B. The demand curve for salt is vertical.
C. The demand for salt is inelastic.
D. The demand for salt is unitary elastic.
When demand is inelastic, consumers do not respond to a sale in a big way. So the quantity demanded does
not increase much to a price decrease. This means that demand is inelastic for salt.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
70.
Refer to Figure 20.2. If the area 0P1AB is less than the area 0P2CD, we can conclude that the price elasticity
A. Elastic.
B. Inelastic.
C. Unitary elastic.
Lower prices result in higher total revenue (price times quantity) only if demand is elastic.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
71.
Refer to Figure 20.2. Suppose the areas 0P1AB and 0P2CD are equal. We can conclude that the price
elasticity of demand between point A and point C is
A. Elastic.
B. Inelastic.
C. Unitary elastic.
When demand is unitary elastic, a change in price will not cause the revenue to change.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
72.
Refer to Figure 20.2. Comparing the price elasticity of demand at points A and C, we can say that
A. The elasticities are the same because the points are on the same demand curve.
B. Point A has a greater price elasticity of demand.
C. Point C has a greater price elasticity of demand.
D. Demand elasticity is indeterminate because specific price data are not given.
As a rule, the price elasticity of demand declines as price moves down the demand curve.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
73. If the price of a good rises by 10 percent and quantity demanded falls by 20 percent, we can predict that
A. The company's total revenue will increase.
B. The company's total profit will rise.
C. The company's total revenue will decrease.
D. The company's total revenue will remain the same.
The price elasticity in this case is 20%/10% = 2 (in absolute value). This means that demand is elastic.
When demand is elastic, an increase in price will decrease a firm's total revenue.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
74. Cross-price elasticity refers to
A. How responsive consumers are to a change in price.
B. How responsive consumers are to a change in income.
C. How responsive consumers of one good are to a change in the price of another good.
D. How responsive consumers are to a change in quantity demanded.
Cross-price elasticity looks at how responsive consumers of one good, say Pepsi, are to a change in the price
of another good-Coke.

Blooms: Understand
Learning Objective: 20-03 What the cross-price elasticity of demand measures.
Topic: CROSS-PRICE ELASTICITY
75. The formula for cross-price elasticity is
A. The percentage change in the quantity demanded for one good divided by the percentage change in
income.
B. The percentage change in the quantity demanded for one good divided by the percentage change in the
price of another good.
C. The percentage change in the price of one good divided by the percentage change in the quantity
demanded of another good.
D. The percentage change in the quantity demanded divided by the average change in price.
The basic cross-price elasticity formula is the percentage change in the quantity demanded for good A divided
by the percentage change in the price of good B.

Blooms: Remember
Difficulty: 01 Easy
76. Suppose computer prices at an office supply store fall from $1,000 to $900 and as a result the quantity
demanded of typewriters decreases from 40 to 20 per month. The cross-price elasticity of demand is closest
to
A. 0.16.
B. 0.2.
C. 5.0.
D. 6.3.
The cross-price elasticity of demand is equal to the percentage change in the quantity demanded of typewriters
divided by the percentage change in the price of computers. Because a 10.5 percent decrease in computer
prices caused a 66.7 percent decrease in the demand for typewriters, the cross-price elasticity of demand is
equal to 6.3.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
77. Assume apples and oranges are substitutes. Suppose apple growers launch a successful advertising campaign
that convinces consumers apples are a better product. As a result the cross-price elasticity of apples and
oranges will become
A. Less negative (move closer to zero).
B. More negative.
C. Less positive (move closer to zero).
D. More positive.
If two goods are substitutes, the cross-price elasticity is positive. However, if the successful advertising
campaign convinces consumers apples are a better product, a change in the price of oranges will not have
much impact on the demand for apples.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
78. MP3 players and MP3 files are complementary goods. The cross-price elasticity of demand between MP3
players and MP3 files is expected to be
A. Positive.
B. Negative.
C. Equal to zero.
D. Undefined.
The cross-price elasticity of demand is equal to the percentage change in the quantity demanded of one good
divided by the percentage change in the price of another good. The cross-price elasticity of demand will be
negative for complements because a decrease in the price of MP3 players will cause an increase in demand
for MP3 files.

Blooms: Understand
79. When the prices of postage stamps rise, the demand for Internet service increases, ceteris paribus. Postage
stamps and Internet service are therefore
A. Elastic.
B. Inelastic.
C. Complements.
D. Substitutes.
If the cross-price elasticity of demand is positive, an increase in the price of postage causes an increase in
demand for Internet service, and the goods must be substitutes.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
80. Suppose the price of video games falls from $40 to $20 and as a result the quantity demanded of scooters falls
from 40,000 to 10,000 per year. The value of the cross-price elasticity of demand is
A. 1.80.
B. 1.00.
C. 0.83.
D. 0.56.
divided by the percentage change in the price of another good. When the price of video games falls 66.7 percent
and the demand for scooters falls 120 percent, the cross-price elasticity of demand must be 1.80.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
81. Suppose the price of soccer shoes decreases by 7 percent and as a result, there is a 12 percent rise in the
quantity of shin guards demanded. The value of the cross-price elasticity of demand is
A.
B. -0.58.
C. 1.71.
D. 0.58.
divided by the percentage change in the price of another good. Therefore the cross-price elasticity of demand
is -1.71 (12 ÷ -7).
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
82. If DVD players and DVDs are complementary goods, an increase in the price of DVDs will, ceteris paribus,
A. Increase the quantity demanded of DVDs.
B. Increase the quantity demanded of DVD players.
C. Reduce the demand for DVD players.
D. Reduce the demand for DVDs.
Complementary goods are frequently consumed in combination; when the price of DVDs rises, fewer will be
purchased and therefore the demand for DVD players will fall.

Blooms: Understand
83. If the cross-price elasticity of demand for SUVs with respect to the price of gasoline is -0.10, and gasoline
prices rise by 18 percent, then SUV sales should, ceteris paribus,
A. Fall by 1.8 percent.
C. Rise by 1.8 percent.
To determine the percentage change in SUV sales, multiply the percentage change in gasoline prices
by the cross-price elasticity of demand. SUV sales should fall by 1.8 percent (-0.10 ×18 percent).
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
84. If two goods are complementary goods, then
A. The cross-price elasticity sign will be negative.
B. The cross-price elasticity sign is not important.
C. The cross-price elasticity sign will be positive.
D. The cross-price elasticity will be greater than 1.
If two goods are complementary goods, then the sign on the cross-price elasticity will be negative. For
example, if the price of gasoline rises by 10 percent, the quantity demanded for gas-guzzling trucks may
fall by 20 percent. Notice that this is a positive divided by a negative, and the cross-price elasticity is -2.

Blooms: Understand
85. If two goods are substitute goods,
A. The percentage change in quantity demanded for good X will fall if there is a reduction in price of good Y.
B. The percentage change in quantity demanded for good X will stay the same if there is an increase in the
price of good Y.
C. If the price of good X increases, the demand for good Y falls.
D. The percentage change in quantity demanded for good X will rise if there is a reduction in the price of good
Y.
When two goods are substitutes, like Coke and Pepsi, if there is a percentage reduction in the price of
Coke, the percentage change in quantity demanded of Pepsi will fall.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
86. If the price of Coke rises by 5 percent and the sales of Pepsi go up by 10 percent, we can conclude that
A. The sign on the cross-price elasticity will be negative.
B. Both goods are normal goods.
C. Both goods are substitute goods because the cross-price elasticity is +0.5.
D. Both goods are substitute goods because the cross-price elasticity is +2.
The formula for cross-price elasticity is the percentage change in the quantity demanded for Pepsi, divided by
the percentage change in the price of Coke. So +10%/+5% = +2, and the two goods are substitutes.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
87. Income elasticity measures the
A. Responsiveness of quantity demanded for one good to a percentage change in price of another good.
B. Responsiveness of quantity demanded to a percentage change in income.
C. Way in which consumers switch from one product to another when price rises.
D. Percentage change in quantity demanded given a percentage change in wealth.
Income elasticity measures how responsive quantity demanded is to a change in incomes.

Blooms: Understand
Learning Objective: 20-04 What the income elasticity of demand tells us.
Topic: INCOME ELASTICITY
88. Which of the following is the best measure of the effects of a recession?
A. Income elasticity of demand.
C. Cross-price elasticity of demand.
D. Utility-maximizing rule.
The income elasticity of demand measures the response of demand to a change in income, which
changes significantly during a recession.

Blooms: Understand
89. A good is normal if the sign on the income elasticity formula is
A. Positive.
B. Greater than 1.
C. Less than 1.
D. Negative.
The income elasticity formula is the percentage change in quantity demanded for good X, divided by the
percentage change in income. For normal goods, as income rises (+), the quantity demanded for good X
will rise (+). The sign on the formula then will be positive for normal goods.

Blooms: Understand
90.
When income falls, the demand for an inferior goods
A. Increases.
B. Decreases.
C. Has a smaller change than the income change.
D. Stays the same.
Inferior goods'demand rises when incomes fall, as in a recession. Consumers switch to cheaper alternatives,
and these may be inferior goods such as bus travel, generic goods, and the like.

Blooms: Understand
91. Suppose the income elasticity of demand for used jet skis is 3.5. If the level of income decreases by 1 percent,
the number of used jet skis sold will, ceteris paribus,
A. Rise by 0.29 percent.
B. Rise by 3.5 percent.
C. Fall by 0.29 percent.
D. Fall by 3.5 percent.
The income elasticity of demand is equal to the percentage change in quantity demanded divided by the
percentage change in income. If income falls by 1 percent and income elasticity of demand is equal to 3.5, the
demand will fall 3.5 percent.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
92. If income falls 4 percent for a year and as a result the quantity of new homes demanded falls from 23 million to
20 million units for the year, the value of the income elasticity of demand for new homes is closest to
A. 0.6.
B. 1.8.
C. 2.9.
D. 3.5.
The income elasticity of demand is equal to the percentage change in quantity demanded divided by the
percentage change in income. When demand falls from 23 million to 20 million or 14 percent using the midpoint
formula, the income elasticity of demand is roughly 14/4 or 3.5.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
93. Suppose income falls 5 percent in a year, and as a result, housing construction falls from 10 million to 5 million
units annually. Based on this information, housing starts are
A. An inferior good.
B. A normal good.
C. Price-elastic.
D. Price-inelastic.
A normal good is a good for which demand increases when income rises.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
94. Ceteris paribus, if income increases and as a result, the demand for good X increases and the demand for
good Y falls,
A. Good X is an inferior good and good Y is a normal good.
B. Good X is a normal good and good Y is an inferior good.
C. Goods X and Y are substitute goods.
D. Goods X and Y are complementary goods.
A normal good is a good for which demand increases when income rises, while an inferior good is a good for
which demand falls when income rises.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
95. The demand for normal goods
A. Rises when incomes fall.
B. Rises when incomes rise.
C. Falls when incomes rise.
D. Shifts to the right when incomes fall.
The demand for normal goods rises when incomes rise. Examples of products that are very sensitive to
changes in income are autos, foreign travel, and luxury clothing.

Blooms: Remember
Difficulty: 01 Easy
96. If incomes fall by 5 percent and the quantity demanded for new cars falls by 10 percent,
A. New cars are a normal good, and the income elasticity is +.5.
B. New cars are an inferior good, and the income elasticity is +2.0.
C. New cars are a normal good, and the income elasticity is +2.0.
D. New cars are an inferior good, and the income elasticity is +0.5.
The formula for income elasticity is the percentage change in quantity demanded for new cars divided by the
percentage change in income. So 10%/5%= +2, which indicates that new cars are a normal good; the demand
for them rises when incomes increase.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
97. If a good is normal, its
A. Price elasticity of demand is positive.
B. Income elasticity of demand is negative.
D. Cross-price elasticity is positive.
For a normal good demand increases when income rises; therefore the ratio of the percentage change in
quantity demanded divided by the percentage change in income will always be positive.

Blooms: Understand
98. If a good is inferior, its
A. Cross-price elasticity is negative.
B. Price elasticity of demand is negative.
D. Income elasticity of demand is negative.
For an inferior good demand increases when income falls; therefore the ratio of the percentage change in
quantity demanded divided by the percentage change in income will always be negative.

Blooms: Understand
99. If income rises by 10 percent and the quantity sold of a particular vehicle falls by 7 percent, then this particular
type of vehicle is
A. A normal good.
B. An inferior good.
C. An irregular good.
D. A substandard good.
If sales of a particular vehicle fall when incomes increase, the vehicle is an inferior good.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
112. Which of the following is most likely an inferior good?
A. Rolex watches.
B. Nike running shoes.
C. Generic canned food.
D. A custom-built mansion.
With low incomes, people buy discount clothes, used textbooks, and generic brand items, and they eat at
home.

Blooms: Understand
101. Assume that store brand cereal is an inferior good. If income rises, then the price of store brand cereal will
________ and the quantity sold of store brand cereal will _______.
A. rise; rise
B. rise; fall
C. fall; fall
D. fall; rise
When incomes rise, people demand fewer inferior goods such spaghetti, discount clothes, and generic
brand items. When demand for a good decreases, the price and equilibrium quantity will decrease.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
102. Elasticity of supply looks at
A. How responsive producers are to a change in quantity demanded.
B. How much quantity demanded changes with a change in price.
C. The responsiveness of sellers to a change in consumer's incomes.
D. How responsive sellers are to a change in price.
The elasticity of supply looks at the degree to which the quantity supplied changes as the price changes. The
focus here is on how steep or how flat the supply curve for a good is.

Blooms: Understand
Learning Objective: 20-05 What the elasticity of supply measures.
Topic: ELASTICITY OF SUPPLY
103. The formula for the elasticity of supply is
A. The percentage change in quantity supplied divided by the percentage change in price.
B. The percentage change in price divided by the percentage change in quantity supplied.
C. The percentage change in quantity supplied divided by the percentage change in income.
D. The percentage change in price divided by the percentage change in quantity demanded.
The basic formula for the price elasticity of supply is the percentage change in quantity supplied divided by the

Blooms: Understand
104. Elasticity of supply tells us
A. How much sellers will increase production in response to a change in price.
B. How much sellers will change their price as their quantity supplied changes.
C. How much producers will increase production with changes in consumers'income.
D. How much supply responds to a change in quantity demanded.
Elasticity of supply looks at how responsive suppliers are to changes in price. If price rises, can producers
increase supply easily or will it take a longer time to increase supply?

Blooms: Understand
105. Supply is very elastic when
A. The quantity supplied does not change much when price rises.
B. The quantity supplied has a large increase in response to an increase in price.
C. The quantity supply does not respond to an increase in price.
D. The quantity demanded causes the quantity supplied to increase.
Elasticity of supply looks at how responsive quantity supplied is to changes in price. If supply is very elastic,
it can change quickly in response to a change in price. For example, if the price of pizza is rising, pizza
restaurants can easily produce more. The supply curve is flatter and upward-sloping.

Blooms: Understand
106. Supply is very inelastic when
A. The quantity supplied changes little when the price increases.
B. The quantity supplied changes a lot when price increases.
C. The quantity supplied does not change at all when price increases.
D. The quantity supplied changes only when demand changes.
Inelastic supply means that the quantity supplied by producers will change little when the price increases.
For example, if natural gas prices rise, it may take producers a while to produce more if labor or equipment
is scarce.

Blooms: Understand
107. Oil and alternative sources of energy such as wind and solar are
A. Complementary goods.
B. Substitute goods.
C. Inferior goods.
D. Income-elastic goods.
Fossil fuels and alternative sources of energy, such as solar and wind, are substitute goods. If the
price of gasoline and oil increases dramatically, the demand for solar and wind power will increase.

Blooms: Understand
Topic: THE ECONOMY TOMORROW
108. Policy proposals to make the United States energy-independent
A. Have arisen only recently because of the high price of oil. B.
Were originally for national security reasons.
C. Have never been proposed because the United States cannot become energy-independent.
D. Have been proposed recently because the price of wind and solar power has fallen.
The original motivation for alternative energy sources to replace the United States'dependence on foreign oil
was for military or national security reasons.

Blooms: Understand
109. For the United States to become less dependent on foreign sources of oil,
A. The cross-price elasticity for alternative energy sources is negative.
B. The price of alternative energy sources such as wind and solar has to rise.
C. Incomes in the United States must increase.
D. The price of oil and gasoline must increase to shift businesses and consumers over to alternative energy
sources.
According to the text, an increase in the price of energy, such as higher prices for gasoline and electricity,
would give consumers and businesses the incentive to become more energy-efficient and reduce our
dependence on foreign oil.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
110. In the article "After 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.
C. The demand for iPhones is highly elastic.
D. There was no way to calculate the price elasticity of demand.
The quantity demanded for iPhones increased 200 percent after a price cut. Demand is price-elastic when the
percentage change in quantity demanded is larger than the percentage change in price.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
Topic: IN THE NEWS
111. The In The News article "Play Station 3 Sales More Than Double after Price Cut" indicated that
A. The percentage change in price was greater than the percentage change in quantity demanded.
B. The percentage change in quantity demanded was greater than the percentage change in price.
C. The demand for the Play Station 3 consoles was inelastic.
D. The percentage change in price was the same magnitude as the percentage change in quantity demanded.
There was a huge sales response to the price cut for the Play Station consoles, indicating that demand was
elastic. This indicates that the percentage change in quantity demanded was greater than the percentage
change in price.

Blooms: Understand
Topic: IN THE NEWS
113. Nobel Prize-winning economist Gary Becker corrected President Clinton's elasticity estimate for cigarette
smoking by
A. Showing that cigarettes were actually price-elastic.
B. Showing that the long-run response to a price increase in cigarettes was likely to be more elastic than
the president had estimated.
C. Showing that the demand for cigarettes in the short run was more inelastic than the president calculated.
D. Correcting the president's math.
The president's calculation for the price elasticity of demand for cigarettes ignored the longer-term impact of
an increase in the price of a pack of cigarettes. Demand is more elastic over the longer term when smokers
find ways to stop smoking. Dr. Becker's estimate of the longer-run elasticity was 0.8 rather than the president's
calculation of 0.4. While this is still inelastic, the demand for cigarettes is less inelastic in the long run.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
Topic: IN THE NEWS
113. The In The News article "Recession Eats into Gator Market" states that
A. The demand for alligator skins was inelastic.
B. The quantity demanded for alligator skins fell when income dropped, indicating that the skins were an
inferior good.
C. The demand for alligator skins fell when income dropped, indicating that the skins were a normal good.
D. The demand fell for alligator skins because the price was too high.
The demand for alligator skins fell during the recession when incomes fell. This occurred because the demand
for expensive women's purses dropped as incomes declined, indicating that alligator skins are a normal good.

Blooms: Understand
Topic: IN THE NEWS
114. The article "Samsung Stung by Apple Moves" related to the price cuts for the iPhone indicates that
A. The cross-price elasticity for iPhones and other cell phones produced by Samsung was negative.
B. Apple lowered the price for the iPhone because the cross-price elasticity between it and the other
competitors was positive.
C. The percentage change in the quantity demanded for the substitute cell phones was increasing less than the
percentage change in the price.
D. The demand for the iPhone was inelastic.
The other cell phones that were challenging Apple's iPhone were substitute goods, so the cross-price elasticity
was positive.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
Topic: IN THE NEWS
115. The article "SUV Sales Drop with Gasoline Price Rise" states
A. That gasoline and SUV sales have a cross-price elasticity that is negative.
B. That gasoline and SUVs are substitute goods.
C. That the cross-price elasticity for SUVs and gasoline is positive.
D. That a drop in the price of gasoline will have little impact on SUV sales.
SUVs and gasoline are complementary goods in that they are purchased together. For complementary
goods the cross-price elasticity is negative. If gasoline prices rise, the quantity demanded for SUVs will fall.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
Topic: IN THE NEWS
116. In the article on SUV sales titled "SUV Sales Drop with Gasoline Price Rise" suggests that
A. SUV sales are very responsive to gasoline, which is a substitute good to SUVs.
B. SUV sales did not respond all that much to a rise in gasoline prices, indicating that demand is inelastic for
SUVs.
C. Gasoline and SUVs are complementary goods, and when the price of gasoline rose, the demand for SUVs
fell.
D. The sign on the cross-price elasticity formula will be positive for SUVs and gasoline.
Gasoline and SUVs are complementary goods; they are purchased together. The sign on the cross-price elasticity for
complements is negative. A rise in the price of gasoline (+) will cause a fall in the sales of SUVs (-).

Blooms: Understand
Topic: IN THE NEWS
117. The World View "High Gold Price Swells Ranks of Illegal Miners"related to gold prices and gold mining
suggests
A. As the price of gold rises, the quantity supplied falls.
B. As the price of gold increases, there is an increase in quantity supplied, indicating that supply is elastic.
C. Miners around the world have had difficulty finding additional sources of gold, indicating that the elasticity of
supply is inelastic.
D. Miners have found new supplies of gold, indicating that the demand for gold is inelastic.
Miners all over the world are searching for new gold mines because the price of gold is increasing. This
indicates that the elasticity of supply for gold is high.

Blooms: Understand
Topic: WORLD VIEW
118. The World View article on the rise in gold prices indicates that
A. The quantity supplied falls when the price of gold rises.
B. The law of supply is true: as the price of gold rises, miners around the world search for new deposits of
gold.
C. The law of supply is true because as the price of gold rises, the quantity supplied of gold actually falls.
D. The law of supply is not really relevant to the article.
The law of supply states that, ceteris paribus, an increase in price will cause an increase in quantity supplied.
This is illustrated in the article on gold prices in the World View. As the price of gold has risen, miners around
the world have searched for more sources of gold.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
Topic: WORLD VIEW
119. The price elasticity of demand is calculated by dividing the percentage change in quantity demanded by the
TRUE
The formula for price elasticity is the percentage change in quantity demanded divided by the percentage
change in price. If the absolute value of the number is greater than 1.0, then demand is elastic. If the number
is less than 1.0, demand is inelastic.

Blooms: Remember
Difficulty: 01 Easy
120. Demand is elastic if the consumer has only a few substitutes to choose from.
FALSE
Demand is more elastic when there are many substitutes for the consumer to choose from. When a price
rises, many consumers with available substitutes will switch, and the quantity demanded will drop by a greater
percentage than the price increase.

Blooms: Understand
121. Demand is more inelastic for luxury goods.
FALSE
When demand is inelastic, consumers are not very responsive to price changes. Necessity goods like
medicines have very inelastic demand. Luxury goods have more elastic demand.

Blooms: Understand
122. The price elasticity number for necessities will be greater than 1.
FALSE
If a product is a necessity, then demand is inelastic and the elasticity number will below 1. For example, if the
price of cigarettes rises by 10 percent and quantity demanded falls by only 5 percent, then the elasticity number
is 0.5 > 1.0, indicating inelastic demand.

Blooms: Understand
123. Demand is more inelastic in the long run.
FALSE
Demand is actually more elastic in the long run when consumers have time to switch to substitute goods. For
example, you may own a gas-guzzling car now, and if the price of gasoline rises, you are stuck paying the
higher price. In the longer run, if gas prices stay high, you may switch to a hybrid or electric car so you do
not have to pay for so much expensive gasoline.

Blooms: Understand
124. Along a linear or straight-line demand curve, demand is more elastic at higher prices.
TRUE
Elasticity changes its value along a linear demand curve. At the top of the demand curve, a small change in
price will be result in an elastic response. Consumers are more sensitive to prices the higher they are, which
results in elastic demand. At lower prices, moving down a linear demand curve, because these purchases
are very cheap, consumers are not as sensitive to a price change.

Blooms: Understand
125. If the elasticity of demand is 3, then a 10 percent increase in price will cause quantity demanded to fall by 3
percent.
FALSE
The formula for price elasticity is the percentage change in quantity demanded divided by the percentage
change in price. So 3 = x/.10=.3 or 30 percent, not 3 percent.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
126. If the price elasticity of demand is 0.4, a 5 percent increase in price will quantity demanded to fall by 2 percent.
TRUE
The formula for the price elasticity of demand is the percentage change in quantity demanded divided by the
percentage change in price: .4 = x/.05 = .02 or 2 percent.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
127. If the elasticity number (E) is less than 1, a price increase will cause total revenue to fall.
FALSE
If the price elasticity is less than 1, demand is inelastic. Inelastic demand causes total revenue to rise when
price rises.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
128. If demand is elastic, a price reduction will lead to an increase in total revenue.
TRUE
If demand is elastic, a decrease in price will cause a larger increase in quantity demanded. Consumers respond
in a big way to sales if demand is elastic, increasing revenues for sellers.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
129. If demand is inelastic, a reduction in price will lead to a drop in total revenue.
TRUE
It is true that total revenue will fall when a company puts an item on sale and demand is inelastic. For example,
a grocery store can put salt on sale, but so few consumers will respond to the sale that the percentage change
in price outweighs the percentage change in quantity, pulling down revenues.

Blooms: Understand
130. The cross-price elasticity sign for substitute goods is negative.
FALSE
The sign on the cross-price elasticity for substitute goods is positive. For example, if the price of Coke falls, the
quantity demanded for Pepsi will fall. That is a negative change divided by a negative change, which equals
a positive number. The cross-price elasticity formula is the percentage change in the quantity demanded for
Pepsi divided by the percentage change in the price of Coke.

Blooms: Understand
131. Cross-price elasticity looks at the impact that income changes have on sales.
FALSE
Cross-price elasticity examines how the sales of one good are affected by the change in the price of another
good.

Blooms: Remember
Difficulty: 01 Easy
132. If the price of gasoline rises by 10 percent and new car sales fall by 5 percent, this indicates that these two
goods are complementary.
TRUE
The formula for cross-price elasticity is the percentage change in quantity demanded for new cars divided
by the percentage change in gasoline prices. For complementary goods, the sign on the cross-price
elasticity formula will be negative.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
133. If two goods are complementary, it means that when the price of one good increases, the demand for the other
rises.
FALSE
When two goods are complementary, like gasoline and cars, an increase in the price of one good will cause the
demand of the other good to fall. For example, if the price of gasoline rises, the demand for fossil fuel-burning
cars will fall.

Blooms: Understand
134. During a recession the sales of autos fall, and the best measure of this is to use cross-price elasticity.
FALSE
The best measure of how a drop in incomes (which occurs in recessions) affects auto sales is income
elasticity. Income elasticity measures the percentage change in the quantity demanded for autos divided by the
percentage change in income.

Blooms: Understand
135. For inferior goods, when incomes rise the demand for these goods falls.
TRUE
Inferior goods, like used cars or bus passes, are not as desirable when consumers earn more income.

Blooms: Understand
136. The sign on the income elasticity formula will be positive for inferior goods and negative for normal goods.
FALSE
The formula for income elasticity is the percentage change in quantity demanded divided by the percentage
change in income. Normal goods will have a positive sign because the demand for them rises with more
income, and inferior goods will have a negative sign because their demand falls when income rises.

Blooms: Understand
137. Most goods are normal goods, and their demand shifts to the left when income rises.
FALSE
Most goods are normal goods; as incomes rise, the demand for most goods will rise. However, the demand will
shift to the right.

Blooms: Understand
138. Supply is very inelastic if the quantity supplied cannot respond quickly to an increase in price.
TRUE
It is true that inelastic supply indicates that producers cannot quickly increase production after a price increase.
An inelastic supply curve is very steep. This means even though price is rising, quantity supplied increases
slightly.

Blooms: Understand
139. The formula for the elasticity of supply is the percentage change in quantity supplied divided by the percentage
change in price.
TRUE
This is true; the formula for the elasticity of supply is the percentage change in quantity supplied divided by the

Blooms: Remember
Difficulty: 01 Easy
140. The price elasticity of supply will always be a negative number.
FALSE
The law of supply states that, ceteris paribus, an increase in price will cause an increase in quantity supplied.
There is a direct relationship between price and quantity supplied. The formula for the elasticity of supply is the
percentage change in quantity supplied divided by the percentage change in price. This number will always be
positive.

Blooms: Understand
141. To increase U.S. energy independence, prices must be lowered on gasoline and electricity.
FALSE
Higher gasoline and electricity prices would give consumers and businesses incentives to be more efficient in
their energy usage, and thus would reduce U.S. dependence on foreign oil.

Blooms: Understand
142. To reduce our dependence on foreign oil, policy makers must realize that the cross-price elasticity sign for
gasoline and fossil fuel-burning cars is negative.
TRUE
If policy makers want to reduce our foreign energy dependence, they must realize that gasoline and fossil fuel-
burning cars are complementary goods. The sign on the cross-price elasticity for complementary goods is
negative.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
143. Explain why it is so important for a business to understand the concept of price elasticity and be able to
measure this for its products.
The choice of what prices will maximize revenues and profits is very important to businesses. Knowing what the
price elasticity of demand is for their products will help them choose the best prices. If demand is highly elastic,
total revenues will rise if price is reduced because consumers have many substitutes and they will respond in a
big way to a sale. If demand is very inelastic, they can increase revenues by increasing price because not all of
their customers will switch to substitutes.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
144. Explain why the concept of price elasticity of demand is important to government when deciding which goods to
tax in order to raise government tax revenues
Policy makers will choose which products will yield the greatest tax revenues by being aware of the price
elasticity of demand for various products. Putting an excise tax on goods for which there is more inelastic
demand will increase tax revenues. When demand for a good is inelastic, such as for gasoline in the short
run, many consumers will keep buying even though the price has gone up. Inelastic demand occurs where the
percentage increase in price is greater than the decrease in quantity demanded. While quantity demanded
falls a bit, many consumers still buy. This will yield the highest tax revenues to government. So products
that have inelastic demand, such as gasoline, cigarettes, and alcohol, are good choices for excise taxes.
AACSB: Analytic
Blooms: Apply
Difficulty: 03 Hard
145. You own your business, and your research indicates that the price elasticity of demand for your product is 3.5.
What pricing strategies should you follow, and why?
Price elasticity is the percentage change in quantity demanded divided by the percentage change in price.
Economists look at the absolute value of the elasticity number, and if the number is greater than 1.0 the
demand is classified as elastic; 3.5 price elasticity indicates that demand is very elastic. The best strategy for
this company is to reduce the price. If the price falls by 10 percent, for example, the increase in quantity
demanded will be larger than that percentage move and will increase total revenue. Demand is very elastic
when consumers have many substitute goods, so raising price in this case will reduce total revenues.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
146. How does advertising influence the demand for goods and the shape of the demand curve?
Advertising can increase the demand for a particular good, and price elasticity can make the shape of the demand
curve steeper. What that indicates is that demand can shift to the right and become steeper as well. If the demand
curve is steep, demand is more inelastic. Inelastic demand occurs when consumers have fewer
substitute goods and buyers are not as responsive to changes in price. If price rises, some consumers will stop
buying, but many will continue to purchase the good. Advertising creates brand loyalty, which is similar to the
concept of inelastic demand. If consumers are brand loyal, their demand becomes more inelastic because they
do not see substitutes available to them.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
147. Discuss how the concepts of cross-price elasticity of demand and income elasticity of demand can help
businesses plan production and pricing.
Cross-price elasticity measures how the sales of one good can change with a change in the price of a
substitute good or complementary goods. With substitute goods, like Coke and Pepsi, Coke Inc. will observe
the price changes that Pepsi is making. Estimating cross-price elasticity of these two goods will help it estimate
a change in the sales of Coke with a change in the price of Pepsi. With complementary goods, such as SUVs
and gasoline, producers will want to scale back production if gasoline prices stay high. Certain products are
particularly sensitive to changes in income, and income elasticity is relevant in that case. Income elasticity
measures the percentage change in quantity demanded for SUVs divided by a percentage change in income.
During a recession, incomes falls, and goods that have a high and positive income elasticity, such as cars,
luxury goods, and foreign vacations, will experience a steep decline in sales.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
148. Explain under what conditions supply is very inelastic and elastic.
Elasticity of supply measures the change in quantity supplied in response to a change in price. The law of
supply states that ceteris paribus, as the price of a good rises, producers will respond by producing or selling
more goods because the higher price gives them an incentive to do so. The question with elasticity of supply is
how much quantity supplied will go up. If supply is very inelastic, the supply curve is very steep, and quantity
supplied cannot increase much in response to a higher price. For example, Texas natural gas producers
cannot respond rapidly to a price increase if they do not immediately have the equipment or labor to increase
production. In contrast, if supply is elastic, producers can respond quickly to a change in price. If the price of
pizzas increases, a local pizza restaurant can easily produce more.
AACSB: Analytic
Blooms: Analyze
Difficulty: 03 Hard
Chapter 20 Test Bank Summary
Category # of Questions
AACSB: Analytic 74
AACSB: Reflective Thinking 74
Accessibility: Keyboard Navigation 133
Blooms: Analyze 50
Blooms: Apply 24
Blooms: Remember 14
Blooms: Understand 60
Difficulty: 01 Easy 14
Difficulty: 02 Medium 60
Difficulty: 03 Hard 74
Learning Objective: 20-01 How to compute price elasticity of demand. 61
Learning Objective: 20-02 The relationships between price changes; price elasticity; and total revenue. 31
Learning Objective: 20-03 What the cross-price elasticity of demand measures. 25
Learning Objective: 20-04 What the income elasticity of demand tells us. 18
Learning Objective: 20-05 What the elasticity of supply measures. 13
Topic: CROSS-PRICE ELASTICITY 18
Topic: ELASTICITY OF SUPPLY 9
Topic: IN THE NEWS 7
Topic: INCOME ELASTICITY 20
Topic: PRICE ELASTICITY 54
Topic: PRICE ELASTICITY AND TOTAL REVENUE 34
Topic: THE ECONOMY TOMORROW 5
Topic: WORLD VIEW 2

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Economy Today 14th Edition Schiller Test Bank 1

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Chapter 20 Test Bank

1. Price elasticity of demand shows how

2. Price elasticity of demand refers to

3. Price elasticity looks at

4. The basic formula for price elasticity is

5. Technically the elasticity number is negative because

6. To find the average percentage change in quantity demanded,

7. To find the average percentage change in price,

19. If demand is price-elastic, then

21. If the demand for a product is elastic, then

22. A demand curve that is perfectly inelastic is

23. When demand is inelastic

24. If demand is perfectly elastic,

25. If demand is very inelastic,

26. The price elasticity of demand is equal to

28. If the price elasticity of demand for cigarettes is 0.4,

30. Which of the following products will have elastic demand?

40. Ceteris paribus, the longer the time period, the

41. The demand is more price-elastic

43. Total revenue is

44. Total revenue is equal to

45. If demand is elastic, then

46. A price change will have no effect on total revenue if demand is

47. Higher prices will increase total revenue if

49. If the elasticity of demand for cigarettes is 0.4, a seller should

56. If the demand for cigarettes is inelastic,

58. When demand is price-inelastic, ceteris paribus, an increase in

59. A price decrease will cause total revenue to fall if

Maximum total revenue occurs when

A. The absolute value of the price elasticity of demand is 1.0.

62. On a demand curve, demand is more elastic

In Figure 20.1, total revenue is maximized at the unit price of

In Figure 20.1, at what price is the elasticity of demand unitary?

In the $80 to $40 price range in Figure 20.1, demand is

A. Total revenue will decrease.

A. The demand for salt is very elastic.

74. Cross-price elasticity refers to

75. The formula for cross-price elasticity is

84. If two goods are complementary goods, then

87. Income elasticity measures the

89. A good is normal if the sign on the income elasticity formula is

When income falls, the demand for an inferior goods

95. The demand for normal goods

97. If a good is normal, its

98. If a good is inferior, its

100. Which of the following is most likely an inferior good?

102. Elasticity of supply looks at

103. The formula for the elasticity of supply is

105. Supply is very elastic when

106. Supply is very inelastic when

108. Policy proposals to make the United States energy-independent

121. Demand is more inelastic for luxury goods.

123. Demand is more inelastic in the long run.

130. The cross-price elasticity sign for substitute goods is negative.

140. The price elasticity of supply will always be a negative number.

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking