Transcript Tutorial - Cengage

Chapter 5
Practice Quiz Tutorial
Price Elasticity of
Demand
©2004 South-Western
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1. If an increase in bus fares in Charlotte, North
Carolina, reduces total revenue of the public
transit system, this is evidence that demand is
a. price elastic.
b. price inelastic
c. unitary elastic
d. perfectly elastic.
A. When price increases and the total revenue
decreases, by definition, this represents an
elastic demand curve. The revenue lost from
selling fewer units is not offset by the revenue
gained by charging a higher price.
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2. Which of the following results in an increase
in total revenue?
a. Price increases when demand is elastic.
b. Price decreases when demand is elastic.
c. Price increases when demand is unitary
elastic.
d. Price decreases when demand is inelastic.
B. When price decreases and the total
revenue increases, the revenue gained by
the increase in sales more than offsets the
revenue lost from the lower price. By
definition, this represents an elastic
demand curve.
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3. You are on a committee that is considering
ways to raise money for your city’s
symphony program. You would recommend
increasing the price of symphony tickets only
if you thought the demand curve for these
tickets was
a. inelastic.
b. elastic.
c. unitary elastic.
d. perfectly elastic.
A. When the demand curve is inelastic, the
revenue gained from the higher price more
than offsets the revenue lost from the decline
in sales.
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4. The price elasticity of demand for a
horizontal demand curve is
a. perfectly elastic.
b. perfectly inelastic.
c. unitary elastic.
d. inelastic.
e. elastic.
A. A perfectly elastic demand curve exists
when any increase in price leads to zero
sales. The only curve that would illustrate
this would be a horizontal line at the
beginning price.
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5. Suppose the quantity of steak purchased by
the Jones family is 110 pounds per year
when the price is $2.10 per pound and 90
pounds per year when the price is $3.90 per
pound. The price elasticity of demand
coefficient for this family is
a. 0.33.
b. 0.50.
c. 1.00.
d. 2.00.
A. (110 – 90)/(110 + 90) = 20/200 = 1/10 divided by
(2.10 – 3.90)/(2.10 + 3.90) = 1.80/6.00
Elasticity coefficient = 1/10 x 6.00/1.80 = 0.33
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6. If a 5 percent reduction in the price of a
good produces a 3 percent increase in the
quantity demanded, the price elasticity of
demand over this range of the demand
curve is
a. elastic.
b. perfectly elastic.
c. unitary elastic.
d. inelastic.
e. perfectly inelastic.
D. Since the percentage change in quantity
demanded is less than the percentage change
in price, this range is defined inelastic
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7. A manufacturer of Beanie Babies hires an
economist to study the price elasticity of
demand for this product. The economist
estimates that the price elasticity of demand
coefficient for a range of prices close to the
selling price is greater than 1. The
relationship between changes in price and
quantity demanded for this segment of the
demand curve is
a. elastic.
b. inelastic.
c. perfectly elastic.
d. perfectly inelastic.
e. unitary elastic.
A. Elasticity > 1 = elastic demand
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8. A downward-sloping demand curve will have a
a. higher price elasticity of demand coefficient
along the top of the demand curve.
b. lower price elasticity coefficient along the
top of the demand curve.
c. constant price elasticity of demand
coefficient throughout the length of the
demand curve.
d. positive slope.
A. The quantity demanded by consumers is
more sensitive to a price change at higher
prices than at lower prices.
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9. The price elasticity of demand coefficient for
a good will be less
a. if there are few or no substitutes available.
b. if a small portion of the budget will be
spent on it.
c. in the short run than in the long run.
d. if all of the above cases.
D. A low elasticity of demand means that
there is a low sensitivity to a change in
price. When the good has few substitutes,
or the purchase represents a small portion
of one’s budget, or they do not have much
time to adjust to the price change, price
elasticity of demand is inelastic.
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