Transcript Economics for Today by Irvin Tucker

Chapter 5
Practice Quiz
Price Elasticity of
Demand and Supply
1
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.
2
2. Which of the following is the result of 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.
3
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.
4
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.
5
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 2.103.90/2.10+3.90=1.80/6.00=Elasticity coefficient
=1/10x6.00/1.80=0.33
6
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.
7
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.
e. unitary elastic.
b. inelastic.
c. perfectly elastic.
d. perfectly inelastic.
A. Elasticity > 1 = elastic demand
8
8. A downward-sloping straight line 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.
9
9. The price elasticity of demand coefficient for
a good will be lower
a. if there are few or no substitutes available.
b. if a small portion of the budget will be
spent on the good.
c. in the short run than in the long run.
d. if all of the above are true.
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.
10
10. The income elasticity of demand for shoes is
estimated to be 1.50. We can conclude that
shoes
a. have a relatively steep demand curve.
b. have a relatively flat demand curve.
c. are a normal good.
d. are an inferior good.
C. If the income elasticity coefficient is a
positive number, then the good or service
is a normal good.
11
11. To determine whether two goods are
substitutes or complements, an economist
would estimate the
a. price elasticity of demand.
b. income elasticity of demand.
c. cross-elasticity of demand.
d. price elasticity of supply.
C. Cross-elasticity of demand shows what
will happen to the demand for one good if
the price of a complementary good, or a
good that is a substitute, changes.
12
12. If the government wanted to raise tax revenue
and shift most of the tax burden to the sellers, it
would impose a tax on a good with a
a. steep (inelastic) demand curve and a steep
(inelastic) supply curve.
b. steep (inelastic) demand curve and a flat
(elastic) supply curve.
c. flat (perfectly elastic) demand curve and a
steep (inelastic) supply curve.
d. flat (perfectly elastic) demand curve and a
flat (elastic) supply curve.
C. An elastic demand curve would mean that a
leftward shift in the supply curve would lead
to a big decrease in quantity demanded and
little change in price, so the businesses would
13
lose total revenue.
Exhibit 11 Supply and Demand Curves for Cigarettes
.. ..
3.50
3.00
2.50
Price
per 2.00
pack
(dollars) 1.50
1.00
Supply
after tax
Supply
before tax
Demand
0.50
0
2
8 10 12 14
6
Quantity of output
(millions of packs per day)
4
14
13. As shown in Exhibit 11, assume the
government places a $1 per pack sales tax on
cigarettes. The percentage of the burden of
taxation paid by consumers of a pack of
cigarettes is
a. zero.
b. 25 percent.
c. 50 percent.
d. 100 percent.
C. Since the result of the $1 per pack tax is an
increase of $0.50 per pack in the equilibrium
price paid by consumers, 50 percent of the
taxation burden is paid by consumers.
15
14. As shown in Exhibit 11, assume the
government places a $1 per pack sales tax on
cigarettes. The percentage of the burden of
taxation paid by tobacco sellers is
a. zero.
b. 50 percent.
c. 75 percent.
d. 100 percent.
B. Since the result of the $1 per pack tax is a
decrease of $0.50 per pack in the revenue
earned by sellers, 50 percent of the taxation
burden is paid by tobacco sellers.
16
15. As shown in Exhibit 11, the $1 per pack sales
tax on cigarettes raises tax revenue per day
totaling
a. $5 million.
b. $6 million.
c. $10 million.
d. $15 million.
B. The tax revenue per day equals the $1 tax
per pack times the 6 million packs sold at
the new $2.50 after-tax equilibrium.
17