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Multiple Choice Tutorial

Chapter 5
Elasticity of
Demand & Supply

1. In market economies, most production and


consumption decisions are guided by
a. government decree
b. foreign countries (imports and exports)
c. monopolists desires to maximize profits
d. individual choice under the price system

D. A business will only sell what consumers


want to buy.

2. In general, elasticity can measure


a. whether a price increase causes quantity
demanded to increase or decrease
b. the strength of an economys tendency to
recover from recession
c. the responsiveness of decision makers to
economic changes in prices
C. You can think of elasticity as a rubber
band. Elastic means it can stretch, the easier
it stretches the more elastic the rubber band.
When price changes for a good and the
quantity demanded changes a lot, the
demand curve is very elastic. When price
changes and the quantity demanded changes
a little, the demand curve is inelastic.
3

3. More elastic means


a. less desirable
b. less desirable
c. less responsive
d. more responsive

D. For example, in a perfectly competitive


market, if a firm (lets say a farmer) charges a
price higher than the market price its sales
will drop to zero. Why would anyone buy from
a higher priced firm if they can buy exactly
the same thing from a multitude of other
firms? In this case the responsiveness is
absolute, the demand curve is perfectly elastic.
4

4. Price elasticity of demand is calculated as


a. the percentage change in quantity
demanded divided by the percentage change
in price
b. the percentage change in price divided by
the percentage change in quantity
demanded
c. the absolute change in quantity demanded
divided by the absolute change in price
A. A percent change is measured by the
difference between the two numbers divided
by the original number. For example, what is
the percent increase from 3 to 5 units? 2
divided by 3. What is the percent decrease
from 5 to 3? 2 divided by 5.
5

5. Without making an adjustment such as


finding the absolute values of the percentage
changes, the price elasticity of demand would
be negative because
a. price and demand are directly related
b. price and demand are inversely related
c. price and quantity demanded are inversely
related
C. As the price of a good increases, the quantity
demanded decreases and vice versa. This may
not always be true, but in this course we
assume that it is always true. Because the
relationship is always negative, we normally
concentrate on the absolute values of numbers.
6

6. In calculating price elasticity of demand, we


use average price and average quantity as our
base value because
a. it reduces the complexity of the formula
and makes the calculation easier
b. the resulting measure is then not influenced
by whether price is rising or falling
c. we would get the same answer if we use the
initial price and quantity

B. Instead of measuring elasticity as the


difference between two numbers divided by
the original number, we take the difference
between the two numbers divided by the
average of the two numbers.
7

7. Price elasticity of demand is not influenced by


a. the number of substitutes available
b. the proportion of the consumers budget
spent on the good
c. the length of the time period under
consideration
d. the units of measurement used for price or
for quantity demanded

D. Whether we are dealing in American dollars


or European Euros or whether we are dealing
with cars or shoes, the formula for measuring
elasticity is the same.
8

8. Edith buys 9 magazines per week when the


price is $3. She buys 11 magazines per week
when their price is $2. Ediths price elasticity
of demand is
a. -1/2 = -0.5
b. -2/3 = -0.667
c. -1.0
A. The difference between 9 and 11 units is 2
and the average quantity is 10. The
difference between $3 and $2 is 1 and the
average price is 2.5.
2/10 / 1/2.5 = 2/10 x 2.5/1 = 5/10 = 1/2 = .5.
* most authors drop the negative sign,
McEachern does not in his book.
9

9. Matt bought 6 CDs last month, when the price


was $14. This month, when the price of CDs
increased to $16, Matt bought only 4 CDs.
Matts price elasticity of demand is
a. -1/3 = -0.333
b. -3/7 = -0.429
c. -7/3 = -2.333
d. -3
D. The difference between the quantities
demanded is 2 and the average quantity is 5.
The difference between the prices is 2 and the
average price is 15. So:
2/5 divided by 2/15 = 2/5 x 15/2 = 30/10 = 3
* Again, McEachern uses the negative sign.
10

10. If a 5% increase in price leads to an 8%


decrease in quantity demanded, demand is
a. perfectly elastic
b. elastic
c. unit elastic
d. inelastic

B. When price increases and a sellers total


revenue increases, the demand is inelastic.
When the price increases and the sellers total
revenue decreases, the demand is elastic. In
this case total revenue will decrease because
the quantity demanded is decreasing at a
greater percentage than the increase in price.
11

11. If price elasticity of demand is -0.5,


a. a 1% decrease in quantity demanded leads
to a 0.5% decrease in price
b. a 1% decrease in price leads to a 0.5%
increase in quantity demanded
c. a 50% decrease in price leads to a 1%
increase in quantity demanded
d. demand is elastic

B. The percent change in quantity divided by


the percent change in price is equal to the
price elasticity of demand. So in this case, the
percent change in quantity is equal to .5 and
the percent change in price is 1, so .5 / 1 = .5
12

12. Unit elastic demand occurs when


a. a one-unit increase in price leads to a oneunit decrease in quantity demanded
b. a 1% increase in price leads to a one-unit
decrease in quantity demanded
c. price elasticity of demand is positive
d. price elasticity of demand is exactly -1

D. The price elasticity of demand is unitary


elastic when the percent change in quantity
demanded divided by the percent change in
price is equal to one.
13

13. Knowledge of price elasticity of demand


a. is of no use to producers
b. tells producers what will happen to total
profit if they change product price
c. tells producers what will happen to quantity
supplied if they change product price
d. tells producers what will happen to total
revenue if they change product price

D. Lets say you own a business. Should you


raise your price? What will happen to your
total revenue if you do so? If you know the
price elasticity of demand for your product
you will know the answer before the fact.

14

14. In calculating price elasticity of demand,


which of the following is assumed to be held
constant?
a. the price of the product itself
b. the quantity demanded of the product
c. total revenue received from the sale of the
product
d. the prices of all other products

D. Anytime we change something and want to


know the result we always assume that
everything else stays the same. The Latin
term for this assumption is ceteris paribus.
15

15. Total revenue is defined as


a. the net profit after the opportunity cost of
all resources used has been deducted
b. the change in quantity sold divided by the
change in price
c. price elasticity of demand times quantity
sold
d. price times quantity sold

D. If you own a business and the price for your


product is $2 and you sell 3 units, your total
revenue is $6.
16

16. If a firm raises the price of its product, its


total revenue will
a. always increase
b. increase only if demand is price inelastic
c. increase only if demand is price elastic
d. remain constant, regardless of price
elasticity of demand

B. In this case total revenue increases because


the percent change in quantity sold is more
than the percent change in price.
17

17. If a price reduction leads to greater total


revenue, demand is
a. perfectly inelastic
b. inelastic
c. unit elastic
d. elastic
D. In this example price is decreasing instead
of increasing. If a firm lowers its price and its
total revenue increases as a result, this means
that the percent change in quantity
demanded is greater than the percent change
in the price. Because the quantity demanded
is changing more than the change in price,
the demand curve is elastic.
18

18. John spends exactly the same dollar amount


of candy bars each week, regardless of their
price. Johns demand curve for candy bars is
a. upward-sloping
b. backward-bending
c. perfectly inelastic
d. unit elastic

C. A perfectly inelastic demand curve is


perfectly vertical. This means that a change
in price has no effect on the quantity
demanded.
19

19. When demand is price inelastic, total


revenue is
a. directly related to quantity demanded
b. inversely related to quantity demanded
c. directly related to price
d. not related to either price or quantity
demanded

A. A direct relationship means that when there


is a change in one variable the other variable
changes in the same direction. For example,
if one goes up the other will increase as well.
In this case, an increase in price leads to an
increase in total revenue, which is the
definition of an inelastic demand curve. 20

20. Along a linear, downward-sloping demand


curve, price elasticity of demand
a. is impossible to calculate
b. is constant and is equal to the slope
c. is constant and is equal to the inverse of the
slope
d. becomes more elastic as price increases

D. Linear means a straight line. Consumers


will have a greater response to a change in
price at higher prices than they will at lower
prices.
21

21. A linear, downward-sloping demand curve


has
a. constant slope and constant elasticity
b. constant slope and varying elasticity
c. varying slope and constant elasticity
d. varying slope and varying elasticity

B. The slope all along a straight line is the


same. This is what makes a straight line a
straight line. Elasticity along this straight line
demand curve varies. The reason is the same
as explained in question 20.
22

22. When the demand curve is linear with the


typical downward slope, a firm can receive the
greatest total revenue by
a. charging the highest price possible
b. selling the most output possible
c. producing where demand is inelastic
d. producing where demand is unit elastic

D. A profit maximizing firm will continue to


raise its price if the higher price leads to an
increase in revenue, ceteris paribus. So at
what point will it stop raising its price? At the
point where the percent change in quantity is
equal to the percent change in price.
23

23. A perfectly elastic demand curve is


a. a vertical straight line
b. a horizontal straight line
c. a downward-sloping straight line
d. an upward-sloping straight line

B. A perfectly horizontal demand curve shows


that any increase in price beyond the price
at which the demand curve is at will lead to
zero sales.

24

24. If a firm whose product faces a perfectly


elastic demand curve raises its price,
a. it will sell exactly the same amount of
output as it did at the lower price
b. it will lose some, but not all, of its sales
c. its sales will decrease to zero
d. its sales will increase
C. This is the case for a farmer who is a part of
a perfectly competitive industry. Because
there are so many farmers at the market
selling identical products they become price
takers; they must take whatever price the
market determines. Any price above this
price will result in zero sales.
25

25. A perfectly inelastic demand curve is


a. a vertical straight line
b. a horizontal straight line
c. a downward-sloping straight line
d. an upward-sloping straight line

A. The vertical line is at the quantity that


will be demanded regardless of the
products price.

26

26. If a firm facing a perfectly inelastic demand


curve raises its price,
a. it will still sell exactly the same amount of
output as it did at the lower price
b. it will lose some, but not all, of its sales
c. its sales will decrease to zero
d. its sales will increase

A. In this case, a change in price has no effect


on the quantity demanded.

27

27. The more broadly a good is defined


a. the more substitutes it has, so its demand
will be more elastic
b. the less substitutes it has, so its demand will
be more elastic
c. the more substitutes it has, so its demand
will be less elastic
d. the less substitutes it has, so its demand will
be less elastic

D. Ease of substitution is a variable that


determines a products elasticity. The easier
the substitution, the more elastic the demand
curve. The more broadly defined the good,
the more difficult it is to find substitutes. 28

28. Which of the following effects a products


price elasticity of demand?
a. ease or difficulty of substitution
b. the time factor
c. how much of a necessity the product is to
consumers
d. all of the above

D. The easier the substitution, the more elastic


the demand curve. The more time consumers
have to respond to a price change, the more
elastic the demand curve. The less the product
in question is a necessity, the more elastic is
the demand curve it faces in the market.
29

29. Which of the following is likely to have the


most elastic demand?
a. beef steak
b. beef (including steak, ribs, burgers, etc.)
c. meat (including beef, pork, chicken, etc.)
d. protein foods (including meat, cheese, eggs,
etc.)

A. The more broad the market the less elastic


is the demand curve. Beef steak is a market
that is much less broad than beef, meat, and
protein foods.
30

30. Advertising is related to price elasticity of


demand
a. in no way whatsoever
b. in that producers try to convince
consumers that their particular product is a
close substitute for virtually all other
products in the industry
c. in that producers try to convince consumers
that their particular product is unique, with
no close substitutes

C. Price elasticity of demand is a measure of


consumers responsiveness to a change in a
products price in the market. Advertising
can influence consumers responsiveness. 31

31. Other things being equal, the price elasticity


of demand for a product will be more elastic
a. if spending on the item is a very large
proportion of the households budget
b. if spending on the item is a very small
proportion of the households budget
c. when the price of the product is very low
d. for a product with no close substitutes
A. The larger the price of a product is to a
consumers budget the more elastic is the
demand curve. For example, a ten percent
change in the price of a new car will have more
of an impact on decision making than a ten
percent change in the price of a box of salt.32

32. Price elasticity of demand and price elasticity


of supply are both influenced by
a. the availability of close substitutes for the
product
b. the proportion of the consumers budget
spent on the product
c. the length of the adjustment period
considered
C. In the early 1970s OPEC greatly increased
the price of their oil. Because oil is a necessity
with few substitutes, we had no choice but to
pay the higher price. However, in time the
western world developed substitutes, found
alternative sources of oil, and took action
that led to a decline in demand for imported
33

33. Price elasticity of supply is calculated as


a. the unit change in quantity supplied caused
by a $1 change in price
b. the percent change in quantity supplied
caused by a 1% change in price
c. the dollar change in price caused by a oneunit change in quantity supplied
d. the percent change in price caused by a 1%
change in quantity supplied

D. When considering supply curves,


suppliers are interested in the relationship
between a change in price and a change in
the quantity supplied.
34

34. When price increases from $45 to $55, the


quantity supplied increases from 20 units to 30
units. The price elasticity of supply is
a. 1/2 = 0.5
b. 1.0
c. 2.0
C. *We always use the arc elasticity of demand
and supply formula, that is, we use average
values. Also, the sign is always positive because
there is a direct relationship between the change
in price and the change in quantity supplied.
The percent change in the quantity supplied is
10/25 and the percent change in price is 10/50.
So the price elasticity of supply is 10/25 divided
by 10/50 or 10/25 x 50/10 = 500/250 = 2.
35

35. A perfectly elastic supply curve


a. has no relevance, since real-world supply
curves are never perfectly elastic
b. is a horizontal straight line
c. is a vertical straight line
d. is not a straight line
B. A perfectly elastic supply curve is perfectly
horizontal for the same reason that a
perfectly demand curve is perfectly
horizontal. In this case, a change in price will
have an infinite effect on the change in the
quantity supplied.
36

36. Which of the following products would be


most likely to have a perfectly inelastic supply
curve?
a. wheat
b. cigarettes
c. economic textbooks
d. humidors used by President John F.
Kennedy
D. As price changes the suppliers of wheat,
cigarettes, and economic textbooks can
change the quantity supplied of these goods.
But with the humidors used by Kennedy, the
supply cannot be changed from what it is
because the quantity is fixed.
37

37. The most important determinant of price


elasticity of supply is
a. price elasticity of demand
b. how rapidly costs increase when a firm
increases its output
c. whether the production process relies
heavily on capital or on labor
B. If the cost of supplying each additional unit
rises sharply as output expands, then a
higher price will elicit little increase in
quantity supplied, so supply will tend to be
inelastic. But if the additional cost rises
slowly as output expands, the lure of a higher
price will prompt a large increase in output
and the supply curve is very price elastic. 38

38. Tax incidence refers to


a. who bears the burden of the tax
b. the principle of taxation being applied
c. the percent of a dollar of earned income
which a typical household in that country
pays in taxes
d. the percent of government spending which
is financed by taxes rather than by
borrowing or by printing money
A. If the government raises the sales tax
across the board, who is affected the most?
In this case, low income people will be
effected more than high income people.
39

39. The burden of a sales tax


a. falls on consumers, who must pay the entire
tax
b. falls on producers, who must pay the entire
tax
c. is paid partly by consumers and partly by
producers, depending on price elasticity of
demand and price elasticity of supply

C. If a business can raise its price and its


revenue increases, it can readily pass the tax
increase on to the consumer. However, if a
business raises its price and its revenue
declines, it will end up paying most of the
increase in sales tax.
40

40. Consumers pay a larger proportion of a sales


tax if
a. demand and supply are both more elastic
b. demand and supply are both less elastic
c. demand is more elastic and supply is less
elastic
d. demand is less elastic and supply is more
elastic

D. The less elastic is the demand curve, the less


effect there will be on the quantity demanded
as the price increases. The more elastic is the
supply curve for the good, the less the
increase in costs effects the quantity supplied.
41

41. Governments tend to tax products


a. with inelastic demand, because it leads to
higher revenue
b. with elastic demand, because it leads to
higher revenue
c. with elastic demand, because it leads to
higher business profit
d. which they think are beneficial to society,
because taxes lead to greater production

A. This is because the higher price that results


from the higher tax will not effect greatly the
quantity demanded of the product.
42

42. Economists distinguish between normal and


inferior goods using
a. price elasticity of demand
b. price elasticity of supply
c. income elasticity of demand
d. tax incidence

C. A normal good is one that consumers will


purchase more of as their incomes increase.
An inferior good is one that consumers will
buy less of as their incomes increase.
43

43. An inferior good is defined as one for which


demand increases as
a. price decreases
b. price increases
c. income increases
d. income decreases

D. New cars are an example of a normal good


and used cars is an example of an inferior
good. As consumers income decreases they
will tend to purchase more used cars and
fewer new cars.
44

44. Luxury goods are usually


a. price inelastic
b. income inelastic
c. income elastic
d. goods with negative income elasticity

C. A luxury good is one that consumers can


live without. So as the price of luxury goods
increase, there is a large effect on the
quantity demanded as consumers choose to
buy less of the good.
45

45. Income elasticity of demand is important to


producers because it indicates
a. the probable decrease in sales when price is
raised
b. the probable increase in quantity supplied
when price is raised
c. how a firms sales react to movements of
the economy through the business cycle
d. how a firms total revenue changes in
response to a price increase

C. This question deals with income elasticity


of demand and not price elasticity of
demand. Movements in the economy effect
consumers incomes.
46

46. Which of the following is not a cause of


special problems in U.S. agricultural markets?
a. many factors which determine farm
production are beyond the farmers control
b. the demand for farm products tends to be
price inelastic
c. the demand for farm products tends to be
income elastic

C. How much consumers spend on food is not


effected much by a change in their income.
At least in America, if peoples income
increases, they will tend to buy more new
cars, but will spend about the same on food.
47

47. A characteristic of many unregulated


agricultural markets is that
a. total farm revenue increases when there are
bumper (large) crops and decreases when
there are meager (small) crops
b. total farm revenue decreases when there
are bumper crops and it increases when
there are meager crops
c. total farm revenue increases when demand
decreases and decreases when demand
increases
B. The bumper crops lead to such low prices
that the farmer makes very little money. The
shortage leads to higher prices enabling the
farmer to make more money.
48

48. Cross-price elasticity of demand is used to


determine whether
a. a product is an inferior or normal good
b. a product is a necessity or a luxury
c. two products are substitutes or
complements
d. price and total revenue are directly or
inversely related

C. When two products are related, a change in


the price of one will effect the demand for the
other. For example, steak and steak sauce are
related. As the price of steak changes, the
demand for steak sauce will change.
49

49. Substitutes are defined as products with


a. positive cross-price elasticity of demand
b. negative cross-price elasticity of demand
c. positive income elasticity of demand
d. negative income elasticity of demand

A. Sherbet is a substitute for ice cream. As the


price of ice cream increases, consumers will
tend to buy more sherbet. The cross-price
elasticity of demand is positive, in this case,
because as the price of ice cream increases
there is a corresponding increase in the
demand for sherbet.
50

50. Negative cross-price elasticity of demand


indicates that
a. the product is an inferior good
b. the product is a necessity
c. the product is a luxury
d. the two products are complements

D. Steak and steak sauce are complementary


goods because they tend to be used together. As
the price of steak increases (people will
therefore buy less steak) the demand for steak
sauce will decrease. The cross-price elasticity is
negative because the increase in price leads to a
decrease in the quantity demanded.
51

Price

Demand
Last slide viewed

Quantity
Exhibit 18.1

52

51. The price elasticity of demand in


Exhibit 18-1 is
a. unit elastic
b. somewhat elastic
c. perfectly elastic
d. perfectly inelastic

D. It is perfectly inelastic because a


change in price will have no effect
on the quantity demanded.

53

52. What is the price elasticity of demand in


Exhibit 18-1 ?
a. 0
b. -1
c. negative infinity
d. 1

A. The price elasticity of demand is the


percent change in quantity divided by the
percent change in price. In this case there
is 0 change in the quantity demanded as
the price changes.
54

Last slide viewed

Price
De
m

$40
$20
0

Exhibit 18.2

an

Quantity
55

53. What is the price elasticity of demand


between $20 and $40 in Exhibit 18-2?
a. -1
b. -3/7
c. -2 1/3
d. -7
B. The percent change in quantity is 2/7 and
the percent change in price is 20/30 so the
price elasticity of demand is 2/7 x 30/20 =
60/140 = 6/14 = 3/7. *Remember, your
author uses the negative sign when referring
to elasticity of demand.
56

54. What is the price elasticity of demand in the


segment of the demand curve below $40 and
above $20 in Exhibit 18-2?
a. elastic
b. inelastic
c. unit elastic
d. 0

B. It is inelastic because 3/7 is less than one. An


elasticity greater than one is elastic, a value
of one is unitary elastic, and a value of less
than one is inelastic.
57

55. If a firms demand curve is illustrated in


Exhibit 18-2 and it is currently charging $20,
its total revenue will
a. remain unchanged, if it changes its price
slightly
b. increase, if it lowers its price substantially
c. increase, if it lowers its price slightly
d. increase, if it raises its price slightly

D. This is because the demand curve is price


inelastic, which means that the firm can raise
price and its total revenue will increase.
58

Price

Last slide viewed


1

$40

$20
$10
0
Exhibit 18.3

Quantity
100 200
59

56. What is the price elasticity of supply


between $10 and $20 on supply curve S in
Exhibit 18-3?
a. 0
b. infinity
c. 1
d. 2
C. Price elasticity of supply is the percent
change quantity divided by the percent
change in price. The percent change in
quantity is 100/150 and the percent change in
price is 10/15. So price elasticity of supply is
100/150 x 15/10 = 1500/1500 = 1
60

57. What is the price elasticity of supply between


$20 and $40 on supply curve S1 in Exhibit 18-3
?
a. 0
b. infinity
c. 1
d. 2

C. The percent change in quantity is 100/150


and the percent change in price is 20/30. So
the price elasticity of supply is 100/150 x
30/20 = 3000/3000 = 1
61

58. Which supply curve tends to be more elastic


in Exhibit 18-3?
a. both S and S1 have the same elasticity
b. S is more elastic at lower prices, and S is
more elastic at higher prices
c. S
d. S1

A. Both have a price elasticity of one.

62

END