True/False
Indicate whether the statement is true or
false.
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1.
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A price elasticity of demand of 2 means that a 10 percent increase in price will
result in a 20 percent decrease in quantity demanded.
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2.
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When demand is price inelastic, price and total revenue are positively
related.
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3.
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Both the slope of a linear demand curve and the price elasticity of demand are
constant.
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4.
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The elasticity of supply may be elastic at low levels of quantities supplied,
and inelastic at high levels of quantities supplied because firms often have a maximum capacity for
production.
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5.
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Broadly defined markets tend to have more elastic demand than narrowly defined
markets, because it is easier to find close substitutes for broadly defined goods.
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6.
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Due to one’s personal preferences, a necessity good may have inelastic
demand even though in the market it would generally be seen as a luxury good.
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7.
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Because quantity demanded and income move in opposite directions, inferior goods
have positive income elasticities.
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Multiple Choice
Identify the choice that best completes the
statement or answers the question.
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1.
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Which one of the following is NOT true of the demand for a good that is
price elastic?
a. | Total revenue rises if the price of the good is decreased | b. | The price elasticity
of demand is less than one | c. | The percentage change in the quantity demanded
is greater than the percentage change in the price | d. | Buyers are relatively responsive to price
changes of the good |
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2.
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A luxury good is most likely to have an income elasticity of demand which
is
a. | large | b. | negative | c. | low | d. | equal to one |
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3.
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Suppose that as the price of a good falls from $4.00 to $2.00 the quantity
demanded increases from 10 to 30. It can be concluded that the price elasticity of demand is
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4.
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If the demand for a given product is inelastic, a 3 percent increase in the
price will
a. | decrease the quantity demanded by more than 3 percent | b. | decrease the
quantity demanded by less than 3 percent | c. | increase the quantity demanded by more than 3
percent | d. | increase the quantity demanded by less than 3 percent |
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5.
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The price elasticity of demand for a good is 0.60. A 12 percent increase in
quantity demanded means a
a. | 72 percent decrease in price | b. | 20 percent decrease in
price | c. | 2 percent decrease in price | d. | 20 percent increase in
price |
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6.
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Total revenue will decrease if
a. | price rises and demand is elastic | b. | price rises and demand is
inelastic | c. | price falls and demand is elastic | d. | price rises and demand is of unit
elasticity |
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7.
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In the short run, the price elasticity of supply of spaces in the university
parking lot is most likely to be
a. | perfectly elastic | b. | perfectly inelastic | c. | unit
elastic | d. | elastic |
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8.
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Supply is price inelastic if
a. | a good is normal | b. | a good is inferior | c. | a good has many
substitutes | d. | a large percentage change in the price of the good causes a smaller percentage change
in the quantity supplied |
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9.
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Which of the following expressions is used to describe the relationship between
the price of one good and the demand for another good?
a. | the income elasticity of demand | b. | the cross-price elasticity of
demand | c. | the price elasticity of demand | d. | the complementary elasticity of
demand |
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10.
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The long-run supply curve is more likely to be
a. | less elastic than the short-run supply | b. | perfectly inelastic | c. | more elastic than
the short-run supply | d. | inelastic |
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11.
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The longer the time horizon,
a. | the more elastic the demand | b. | the less elastic the demand | c. | there is no affect
on demand | d. | the elasticity will change from elastic to inelastic
demand |
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12.
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If a product has perfectly inelastic demand, its demand curve will be
a. | horizontal | b. | vertical | c. | bowed in at a
constant level | d. | bowed out at a constant level |
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13.
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Which of the following helps to explain why increased farming technology over
the past 100 years has lead to farmers leaving the industry and moving to the city?
a. | increased food supply coupled with elastic food demand | b. | decreased food
supply coupled with elastic food demand | c. | increased food supply coupled with inelastic
food demand | d. | decreased food supply coupled with inelastic food
demand |
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Short Answer
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1.
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Farmers have a relatively inelastic demand for their crops. Suppose there is an
unusually very large harvest in a particular year. How would you expect this to affect the incomes of
the farmers?
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2.
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Draw a supply curve to illustrate the supply of original paintings by the Group
of Seven. Explain whether supply is perfectly elastic or perfectly inelastic.
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3.
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Suppose that you are hired as a consultant for the Toronto Transit Commission
(TTC). Its data show that at the current fare of $2.25, the system carries 500,000 riders per
day. Data also indicate that for each $0.50 increase in fare, rides decrease by 1,000 per
day. What is the price elasticity of demand if the fare is increased? Do you think that the
situation will remain the same in the longer term? Explain. What advice will you give to the
TTC?
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4.
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Assume that the university parking lot has 20,000 parking spaces. What do you
think the price elasticity of supply would be like? What do you think the price elasticity of demand
would be? Explain how the university can use this information to set parking fees.
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5.
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A rise in price has increased total revenue. What can one surmise about the
demand for the firm’s product?
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