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Chapter Three Revision

The document is a multiple choice test on concepts of price elasticity, cross elasticity of demand, income elasticity of demand, and how taxes affect markets. It contains 12 multiple choice questions testing understanding of these economic concepts. The questions cover topics like how OPEC uses inelastic demand, elasticity of supply and demand curves, relationship between complements and substitutes, and who bears the burden of an excise tax based on elasticity of demand and supply.

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mariam raafat
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78 views

Chapter Three Revision

The document is a multiple choice test on concepts of price elasticity, cross elasticity of demand, income elasticity of demand, and how taxes affect markets. It contains 12 multiple choice questions testing understanding of these economic concepts. The questions cover topics like how OPEC uses inelastic demand, elasticity of supply and demand curves, relationship between complements and substitutes, and who bears the burden of an excise tax based on elasticity of demand and supply.

Uploaded by

mariam raafat
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Revision

Choose the correct answer:

1- If OPEC cuts oil production to increase the total revenue, they know that the demand for oil in
the global market is
A) perfectly elastic.
B) unit elastic.
C) elastic.
D) inelastic.
Answer: D

2. A shift of the supply curve of oil raises the price from $10 a barrel to $15 a barrel and reduces
the quantity demanded from 40 million to 15 million barrels a day. You can conclude that the
A) Demand for oil is elastic.
B) Demand for oil is inelastic.
C) Supply of oil is elastic.
D) Supply of oil is inelastic.
Answer: A
3. If goods are complements, definitely their
A) cross elasticity are positive.
B) income elasticity are positive.
C) income elasticity are negative.
D) cross elasticity are negative.
Answer: D

4. If a rise in the price of good 1 decreases the quantity of good 2 demanded,


A) the cross elasticity of demand is negative.
B) the cross elasticity of demand is positive.
C) good 1 is an inferior good.
D) good 2 is an inferior good.
Answer: A

5. If the cross elasticity of demand between goods A and B is positive,


A) The demands for A and B are both price elastic.
B) The demands for A and B are both price inelastic.
C) A and B are complements.
D) A and B are substitutes.
Answer: D
6. The cross elasticity of demand between Coca Cola and Pepsi Cola is
A) positive, that is, Coke and Pepsi are complements.
B) positive, that is, Coke and Pepsi are substitutes.
C) negative, that is, Coke and Pepsi are complements.
D) negative, that is, Coke and Pepsi are substitutes.
Answer: B

7. A 10 percent increase in income causes the quantity of apple juice demanded to increase form 18,800
to 21,200 gallons. The income elasticity of demand for apple juice is,
A) 0.5.
B) 0.8.
C) 1.0.
D) 1.2.
Answer: D

8. If the price elasticity of demand equals 1.0, then as the price falls the
A) quantity demanded decreases.
B) total revenue falls.
C) quantity demanded does not change.
D) total revenue does not change.
Answer: D
9. A full in the price of X from $12 to $8 causes an increase in the quantity of Y demanded from
900 to 1,100 units. What is the cross elasticity of demand between X and Y?
A) 0.5.
B) -0.5.
C) 2.
D) -2.
Answer: B

10. Consumers will bear a larger burden of an excise tax if,


A) both demand and supply are relatively inelastic.
B) both demand and supply are relatively elastic.
C) demand is relatively elastic and supply is relatively inelastic.
D) demand is relatively inelastic and supply is relatively elastic.
Answer: D

11. If the income elasticity of demand for some good is 2.4, a 10 percent increase in income
results in
A) a 240 percent decrease in quantity demanded.
B) a 24 percent increase in the quantity demanded.
C) a 2.4 percent increase in the quantity demanded.
D) a 24 percent decrease in quantity demanded.
Answer: B
. Use the following demand and supply schedules for product X to answer the
questions below. Show all work on a graph.

Unit Price (LE) Quantity Demanded (units) Quantity Supplied (units)


300 60 30
400 55 40
500 50 50
600 45 60
700 40 70

a. If the government decided to impose a tax of LE 450 per unit on product


X. as result the price increased from 500 to 800 .What effect will this have
on the market for product X, in general, and on producers and consumers, in
particular.
b. Who bears most of the tax burden? Why?
Tax burdens with relatively Inelastic demand
P D S2
Tax Wedge S1
800
Price E2 LE 450 • The equilibrium price before tax is LE
paid by
buyers
700 500.
• After tax is in place:
600
• The price paid by buyers increased to LE
Price 500 800.
E1
before • The price received by sellers decreased
tax
400 to LE 350.
Price 350 • The tax wedge is the difference between
received300 what buyer pays and what seller receives
by
sellers LE 450.
200
• Therefore,
100
• The buyer bears LE 300 (66.67%) of total
tax wedge.
• The seller bears LE 150 (33.33%) of total
0 10 20 30 40 50 60 70 80 Q tax wedge.

• The reason that buyers bear much of the tax burden is that the demand is relatively
(more Inelastic) compared to the supply of the product.
• Total tax revenue received by government
• (LE 450× 35 Units) = LE 15,750.
• Buyers (LE 300 × 35 Units) = LE 10,500.
• Sellers (LE 150 × 35 Units) = LE 5,250.

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