Topic 5 Elasticity and Its Application

MULTIPLE CHOICE

1. In general, elasticity is a measure of

a. the extent to which advances in technology are adopted by producers.
b. the extent to which a market is competitive.
c. how firms’ profits respond to changes in market prices.
d. how much buyers and sellers respond to changes in market conditions.

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2. When studying how some event or policy affects a market, elasticity provides information on the
a. equity effects on the market by identifying the winners and losers.
b. magnitude of the effect on the market.
c. speed of adjustment of the market in response to the event or policy.
d. number of market participants who are directly affected by the event or policy.
3. When consumers face rising gasoline prices, they typically
a. reduce their quantity demanded more in the long run than in the short run.
b. reduce their quantity demanded more in the short run than in the long run.
c. do not reduce their quantity demanded in the short run or the long run.
d. increase their quantity demanded in the short run but reduce their quantity demanded in the long
run.
4. A 10 percent increase in gasoline prices reduces gasoline consumption by about
a. 6 percent after one year and 2.5 percent after five years.
b. 2.5 percent after one year and 6 percent after five years.
c. 10 percent after one year and 20 percent after five years.
d. 0 percent after one year and 1 percent after five years.
THE ELASTICITY OF DEMAND

5. The price elasticity of demand measures how much

a. quantity demanded responds to a change in price.
b. quantity demanded responds to a change in income.
c. price responds to a change in demand.
d. demand responds to a change in supply.
6. Which of the following is not a determinant of the price elasticity of demand for a good?
a. the time horizon
b. the steepness or flatness of the supply curve for the good
c. the definition of the market for the good
d. the availability of substitutes for the good
7. The greater the price elasticity of demand, the
a. more likely the product is a necessity.
b. smaller the responsiveness of quantity demanded to a change in price.
c. greater the percentage change in price over the percentage change in quantity demanded.
d. greater the responsiveness of quantity demanded to a change in price.
8. The price elasticity of demand measures the
a. magnitude of the response in quantity demanded to a change in price.
b. direction of the shift in the demand curve in response to a market event.
c. size of the shortage created by the increase in demand.
d. responsiveness of quantity demanded to a change in income.
9. Economists compute the price elasticity of demand as the
a. percentage change in price divided by the percentage change in quantity demanded.
b. change in quantity demanded divided by the change in the price.
c. percentage change in quantity demanded divided by the percentage change in price.
d. percentage change in quantity demanded divided by the percentage change in income.
10. Suppose there is a 6 percent increase in the price of good X and a resulting 6 percent decrease in the quantity
of X demanded. Price elasticity of demand for X is
a. 0.
b. 1.
c. 6.
d. 36.
11. If the price elasticity of demand for a good is 4.0, then a 10 percent increase in price results in a
a. 0.4 percent decrease in the quantity demanded.
b. 2.5 percent decrease in the quantity demanded.
c. 4 percent decrease in the quantity demanded.
d. 40 percent decrease in the quantity demanded.
12. Elasticity of demand is closely related to the slope of the demand curve. The more responsive buyers are to a
change in price, the
a. steeper the demand curve will be.
b. flatter the demand curve will be.
c. further to the right the demand curve will sit.
d. closer to the vertical axis the demand curve will sit.
13. Elasticity of demand is closely related to the slope of the demand curve. The less responsive buyers are to a
change in price, the
a. steeper the demand curve will be.
b. flatter the demand curve will be.
c. further to the right the demand curve will sit.
d. closer to the vertical axis the demand curve will sit.
14. Goods with many close substitutes tend to have
a. more elastic demands.
b. less elastic demands.
c. price elasticities of demand that are unit elastic.
d. income elasticities of demand that are negative.
15. For a good that is a luxury, demand
a. tends to be inelastic.
b. tends to be elastic.
c. has unit elasticity.
d. cannot be represented by a demand curve in the usual way.
16. The value of the price elasticity of demand for a good will be relatively large when
a. there are no good substitutes available for the good.
b. the time period in question is relatively short.
c. the good is a luxury rather than a necessity.
d. All of the above are correct.
17. When quantity demanded responds strongly to changes in price, demand is said to be
a. fluid.
b. elastic.
c. dynamic.
d. highly variable.
18. Demand is elastic if the price elasticity of demand is
a. less than 1.
b. equal to 1.
c. equal to 0.
d. greater than 1.
19. For a good that is a necessity,
a. quantity demanded tends to respond substantially to a change in price.
b. demand tends to be inelastic.
c. the law of demand does not apply.
d. All of the above are correct.
20. Which of the following is likely to have the most price inelastic demand?
a. laptop computers
b. iPod shuffles
c. designer jeans
d. college tuition for a junior or senior
21. Which of the following is likely to have the most price inelastic demand?
a. athletic shoes
b. running shoes
c. Nike running shoes
d. Nike Shox running shoes
22. For a good that is a necessity, demand
a. tends to be inelastic.
b. tends to be elastic.
c. has unit elasticity.
d. cannot be represented by a demand curve in the usual way.
23. There are very few, if any, good substitutes for motor oil. Therefore, the
a. demand for motor oil would tend to be inelastic.
b. demand for motor oil would tend to be elastic.
c. demand for motor oil would tend to respond strongly to changes in prices of other goods.
d. supply of motor oil would tend to respond strongly to changes in people’s tastes for large cars
relative to their tastes for small cars.
24. Demand is said to be inelastic if
a. buyers respond substantially to changes in the price of the good.
b. demand shifts only slightly when the price of the good changes.
c. the quantity demanded changes only slightly when the price of the good changes.
d. the price of the good responds only slightly to changes in demand.
25. Using the midpoint method, the price elasticity of demand for a good is computed to be approximately 0.75.
Which of the following events is consistent with a 10 percent decrease in the quantity of the good demanded?
a. a 7.5 increase in the price of the good
b. a 13.33 percent increase in the price of the good
c. an increase in the price of the good from $7.50 to $10
d. an increase in the price of the good from $10 to $17.50
26. The case of perfectly elastic demand is illustrated by a demand curve that is
a. vertical.
b. horizontal.
c. downward-sloping but relatively steep.
d. downward-sloping but relatively flat.
27. When small changes in price lead to infinite changes in quantity demanded, demand is perfectly
a. elastic, and the demand curve will be horizontal.
b. inelastic, and the demand curve will be horizontal.
c. elastic, and the demand curve will be vertical.
d. inelastic, and the demand curve will be vertical.
28. In which of these instances is demand said to be perfectly inelastic?
a. An increase in price of 2% causes a decrease in quantity demanded of 2%.
b. A decrease in price of 2% causes an increase in quantity demanded of 0%.
c. A decrease in price of 2% causes a decrease in total revenue of 0%.
d. An increase in price of 2% causes a decrease in quantity demanded of 1/2%.
29. Demand is said to be unit elastic if quantity demanded
a. changes by the same percent as the price.
b. changes by a larger percent than the price.
c. changes by a smaller percent than the price.
d. does not respond to a change in price.
30. An increase in price causes an increase in total revenue when demand is
a. elastic.
b. inelastic.
c. unit elastic.
d. All of the above are possible.
31. A city wants to raise revenues to build a new municipal swimming pool next year. The mayor suggests that
the city raise the price of admission to the current municipal pools this year to raise revenues. The city man-
ager suggests that the city lower the price of admission to raise revenues. Who is correct?
a. the mayor
b. the city manager
c. The answer depends on the price elasticity of demand.
d. The answer depends on the costs of construction of the new municipal swimming pool.
32. When demand is elastic, a decrease in price will cause
a. an increase in total revenue.
b. a decrease in total revenue.
c. no change in total revenue but an increase in quantity demanded.
d. no change in total revenue but a decrease in quantity demanded.
33. Income elasticity of demand measures how
a. the quantity demanded changes as consumer income changes.
b. consumer purchasing power is affected by a change in the price of a good.
c. the price of a good is affected when there is a change in consumer income.
d. many units of a good a consumer can buy given a certain income level.
34. For which of the following goods is the income elasticity of demand likely highest?
a. natural gas
b. doctor’s visits
c. hamburgers
d. boats
35. For which of the following goods is the income elasticity of demand likely lowest?
a. water
b. sapphire pendant necklaces
c. filet mignon steaks
d. fresh fruit
36. If an increase in income results in a decrease in the quantity demanded of a good, then for that good, the
a. cross-price elasticity of demand is negative.
b. price elasticity of demand is elastic.
c. income elasticity of demand is negative.
d. income elasticity of demand is positive.
37. To determine whether a good is considered normal or inferior, one could examine the value of the
a. income elasticity of demand for that good.
b. price elasticity of demand for that good.
c. price elasticity of supply for that good.
d. cross-price elasticity of demand for that good.
38. For which of the following types of goods would the income elasticity of demand be positive and relatively
large?
a. all inferior goods
b. all normal goods
c. goods for which there are many complements
d. luxuries
39. Cross-price elasticity of demand measures how
a. the price of one good changes in response to a change in the price of another good.
b. the quantity demanded of one good changes in response to a change in the quantity demanded of
another good.
c. the quantity demanded of one good changes in response to a change in the price of another good.
d. strongly normal or inferior a good is.
40. The cross-price elasticity of demand can tell us whether goods are
a. normal or inferior.
b. elastic or inelastic.
c. luxuries or necessities.
d. complements or substitutes.
41. If the cross-price elasticity of two goods is negative, then the two goods are
a. necessities.
b. complements.
c. normal goods.
d. inferior goods.
42. If the cross-price elasticity of two goods is positive, then the two goods are
a. substitutes.
b. complements.
c. normal goods.
d. inferior goods.
THE ELASTICITY OF SUPPLY

43. A key determinant of the price elasticity of supply is the

a. time horizon.
b. income of consumers.
c. price elasticity of demand.
d. importance of the good in a consumer’s budget.
44. The price elasticity of supply measures how much
a. the quantity supplied responds to changes in input prices.
b. the quantity supplied responds to changes in the price of the good.
c. the price of the good responds to changes in supply.
d. sellers respond to changes in technology.
45. A key determinant of the price elasticity of supply is the time period under consideration. Which of the follow-
ing statements best explains this fact?
a. Supply curves are steeper over long periods of time than over short periods of time.
b. Buyers of goods tend to be more responsive to price changes over long periods of time than over
short periods of time.
c. The number of firms in a market tends to be more variable over long periods of time than over short
periods of time.
d. Firms prefer to change their prices in the short run rather than in the long run.
46. Generally, a firm is more willing and able to increase quantity supplied in response to a price change when
a. the relevant time period is short rather than long.
b. the relevant time period is long rather than short.
c. supply is inelastic.
d. the firm is experiencing capacity problems.
47. If the price elasticity of supply is 1.5, and a price increase led to a 1.8% increase in quantity supplied, then the
price increase is about
a. 0.67%.
b. 0.83%.
c. 1.20%.
d. 2.70%.
48. If the price elasticity of supply is 0.2, and a price increase led to a 3% increase in quantity supplied, then the
price increase is about
a. 0.07%.
b. 0.60%.
c. 6%.
d. 15%.
49. Suppose the price elasticity of supply for candles is 0.3 in the short run and 1.2 in the long run. If an increase
in the demand for candles causes the price of candles to increase by 36%, then the quantity supplied of candles
will increase by about
a. 0.8% in the short run and 3.3% in the long run.
b. 1.2% in the short run and 0.3% in the long run.
c. 10.8% in the short run and 43.2% in the long run.
d. 120% in the short run and 30% in the long run.
50. A manufacturer produces 400 units when the market price of $10 per unit and produces 600 units when the
market price is $12 per unit. Using the midpoint method, for this range of prices, the price elasticity of supply
is about
a. 0.45.
b. 2.0.
c. 2.2.
d. 200.
51. The supply of a good will be more elastic, the
a. more the good is considered a luxury.
b. broader is the definition of the market for the good.
c. larger the number of close substitutes for the good.
d. longer the time period being considered.

52. When a supply curve is relatively flat, the

a. sellers are not at all responsive to a change in price.
b. equilibrium price changes substantially when the demand for the good changes.
c. supply is relatively elastic.
d. supply is relatively inelastic.
 53. If a 15% change in price results in a 20% change in quantity supplied, then the price elasticity of supply is
about
a. 1.33, and supply is elastic.
b. 1.33, and supply is inelastic.
c. 0.75, and supply is elastic.
d. 0.75, and supply is inelastic.

54. If the quantity supplied responds only slightly to changes in price, then
a. supply is said to be elastic.
b. supply is said to be inelastic.
c. an increase in price will not shift the supply curve very much.
d. even a large decrease in demand will change the equilibrium price only slightly.

55. Frequently, in the short run, the quantity supplied of a good is

a. impossible, or nearly impossible, to measure.
b. not very responsive to price changes.
c. determined by the quantity demanded of the good.
d. determined by psychological forces and other non-economic forces.

56. If the price elasticity of supply for wheat is less than 1, then the supply of wheat is
a. inelastic.
b. elastic.
c. unit elastic.
d. quite sensitive to changes in income.

57. The supply of oil is likely to be

a. inelastic in both the short run and long run.
b. elastic in both the short run and long run.
c. elastic in the short run and inelastic in the long run.
d. inelastic in the short run and elastic in the long run.

58. Which of the following statements is not correct concerning government attempts to reduce the flow of illegal
drugs into the country? Drug interdiction
a. raises prices and total revenue in the drug market.
b. can increase drug-related crime.
c. shifts the demand curve for drugs to the left.
d. shifts the supply curve of drugs to the left.
SHORT ANSWER

1. Consider the following pairs of goods. For which of the two goods would you expect the demand to be more
price elastic? Why?
a. water or diamonds
b. insulin or nasal decongestant spray
c. food in general or breakfast cereal
d. gasoline over the course of a week or gasoline over the course of a year
e. personal computers or IBM personal computers

2. When the Shaffers had a monthly income of $4,000, they usually ate out 8 times a month. Now that the couple
makes $4,500 a month, they eat out 10 times a month. Compute the couple's income elasticity of demand us-
ing the midpoint method. Explain your answer. Is a restaurant meal a normal or inferior good to the couple?