Price Elasticity of Demand and Supply Answer Key Part 1

Chapter 5 Part 1—Price Elasticity of Demand and Supply MULTIPLE CHOICE 1. Suppose that a jewelry store found that when it increased prices by 10 percent, sales revenue increased by 3 percent. Which of the following is true about the price elasticity of demand for the store’s goods? a. Demand is perfectly inelastic. b. Demand is inelastic, but not perfectly. c. Demand is unitary classic. d. Demand is elastic, but not perfectly. e. Demand is perfectly elastic. ANS: B 2. Suppose an increase in symphony tickets prices reduces the total revenue. This is evidence that demand is: a. price elastic. b. price inelastic. c. unitary elastic. d. perfectly elastic. ANS: A 3. Suppose the Pleasant Corporation cuts the price of its American Girl dolls by 10 percent, and as a result, the quantity of the dolls sold increases by 25 percent. This indicates that the price elasticity of demand for the dolls over this range is: a. 2.5. c. 0.5. b. 0.4. d. 5.0. ANS: A 4. An increase in total revenue results occurs from which of the following? a. Price decreases when demand is inelastic. b. Price increases when demand is elastic. c. Price decreases when demand is elastic. d. Price increases when demand is unitary elastic. ANS: C 5. Suppose that Starbucks reduces the price of its premium coffee from $2.20 to $1.80 per cup, and as a result, the quantity sold per day increased from 350 to 450. Over this price range, the price elasticity of demand for Starbucks coffee is: a. 0.40. c. 1.25. b. 0.80. d. 2.50. ANS: C 6. Suppose you are the manager of a local water company, and you are instructed to get consumers to reduce their water consumption by 10 percent. If the price elasticity of demand for water is 0.25, by how much would you have to raise the price of water? a. 10 percent c. 40 percent b. 25 percent d. 100 percent ANS: C 7. If the quantity demanded increases by 20 percent in response to a 10 percent decrease in price, demand is classified as: a. unstable. c. relatively elastic. b. relatively inelastic. d. of unitary elasticity. ANS: C 8. A local Krispy Kreme doughnut shop reduced the price of its doughnuts from $4 per dozen to $3.50 per dozen, and as a result, the daily sales increased from 300 to 400 dozen. This indicates that the price elasticity of demand for the doughnuts was: a. elastic. b. inelastic. c. of unitary elasticity. d. indeterminate; more information is needed to determine the price elasticity of demand. ANS: A 9. If a demand curve for a good were completely vertical, it would be considered: a. perfectly elastic. c. of unitary elasticity. b. perfectly inelastic. d. relatively inelastic. ANS: B 10. If the demand for cigarettes is highly inelastic, this indicates that: a. higher cigarette prices will increase the demand for cigarettes. b. the price elasticity coefficient of cigarettes exceeds 1. c. the price elasticity coefficient of cigarettes equals 1. d. the quantity of cigarettes purchased by consumers is not very responsive to a change in the price of cigarettes. ANS: D 11. The price elasticity of demand for gasoline measures the: a. responsiveness of gasoline producers to changes in the quality of gasoline. b. responsiveness of customers to changes in the price of gasoline. c. responsiveness of consumer preferences to changes in the quality of gasoline. d. both a and c above. ANS: B 12. When demand is price inelastic: a. price and total revenue move in the same direction. b. price and total revenue move in the opposite direction. c. total revenue increases whether price goes up or down. d. total revenue decreases whether price goes up or down. ANS: A 13. If demand is inelastic, an increase in the price of a good will cause total revenue to: a. fall. b. remain constant since the decrease in quantity sold is exactly offset by the price increase. c. rise. d. rise if it is a normal good and fall if it is an inferior good. ANS: C 14. Price elasticity of demand refers to the ratio of the: a. percentage change in price of a good in response to a percentage change in quantity demanded. b. percentage change in price of a good to a percentage increase in income. c. percentage change in the quantity demanded of a good to a percentage change in its price. d. none of these. ANS: C 15. Price elasticity of demand is defined as the ratio of the: a. percentage increase in price to an increase in quantity demanded. b. unit change in quantity demanded to the dollar change in price. c. maximum amount that consumers will pay to increase quantity. d. percentage change in quantity demanded to the percentage change in price, other things being equal. ANS: D 16. Price elasticity of demand refers to the: a. percentage increase in price in response to a percentage increase in quantity demanded. b. percentage decrease in price in response to a percentage increase in income. c. minimum amount that consumers will pay for a percentage change in quantity demanded or supplied. d. responsiveness of quantity demanded to a change in the price of a good. ANS: D 17. If demand is price elastic, a decrease in price causes: a. an increase in total revenue. b. a decrease in total revenue. c. no change in total revenue. d. an increase in quantity, but anything can happen to revenue. ANS: A 18. If a decrease in the price of movie tickets increases the total revenue of movie theaters, this is evidence that demand is: a. price elastic. c. unit elastic with respect to price. b. price inelastic. d. perfectly inelastic. ANS: A 19. A perfectly elastic demand curve has an elasticity coefficient of: a. 0. c. less than 1. b. 1. d. infinity. ANS: D 20. Over the elastic portion of a demand curve, a decrease in price causes: a. an increase in total revenue. b. a decrease in total revenue. c. no change in total revenue. d. an increase in quantity demanded, but anything can happen to revenue. ANS: A 21. Using the midpoints formula, what would be price elasticity of demand for a gallbladder operation if the number of operations fell from 6,000 to 4,000 per week after its price increased from $6,000 to $10,000? a. 0.25. c. 0.80. b. 0.50. d. 1.25 ANS: C 22. If the percentage change in the quantity demanded of a good is less than the percentage change in price, price elasticity of demand is: a. elastic. c. perfectly inelastic. b. inelastic. d. unitary elastic. ANS: B 23. If the percentage change in the quantity demanded of a good is greater than the percentage change in price, price elasticity of demand is: a. elastic. c. perfectly inelastic. b. inelastic. d. perfectly elastic. ANS: A 24. If the percentage change in the quantity demanded of a good equals the percentage change in price, price elasticity of demand is: a. elastic. c. perfectly elastic. b. inelastic. d. unitary elastic. ANS: D 25. Along the elastic range of a demand curve, a decrease in price causes: a. no change in total revenue. b. a decrease in total revenue. c. an increase in total revenue. d. an unpredictable change in total revenue. ANS: C 26. If a decrease in the price of theater tickets increases the total revenue earned by the theater, this is evidence that demand is: a. price elastic. c. unitary elastic. b. price inelastic. d. perfectly inelastic. ANS: A 27. Along the elastic range of a demand curve, a price change causes: a. a change in total revenue in the opposite direction. b. a change in total revenue in the same direction. c. no change in total revenue. d. an unpredictable change in the total revenue. ANS: A 28. Suppose the president of a college argues that a 25 percent tuition increase will raise revenues for the college. It can be concluded that the president thinks that demand to attend this college is: a. elastic. c. unitary elastic. b. inelastic, but not perfectly inelastic. d. perfectly elastic. ANS: B 29. Suppose Good Food's supermarket raises the price of its steak and finds its total revenue from steak sales does not change. This is evidence that price elasticity of demand for steak is: a. perfectly elastic. b. perfectly inelastic. c. unitary elastic. d. inelastic. e. elastic. ANS: C 30. The price elasticity of demand for a vertical demand curve is: a. perfectly elastic. b. perfectly inelastic. c. unitary elastic. d. elastic. e. inelastic. ANS: B 31. The president of Tucker Motors says, "Lowering the price won't sell a single additional Tucker car." The president believes that the price elasticity of demand is: a. perfectly elastic. b. perfectly inelastic. c. unitary elastic. d. elastic. e. inelastic. ANS: B 32. If the price elasticity of demand is computed for two products, and product A measures .79, and product B measures 1.6, then: a. product A is more price elastic than product B. b. product B is more price elastic than product A. c. consumers are more sensitive to price changes in product A than in product B. d. product B is more price inelastic than product A. e. products A and B must be substitutes. ANS: B 33. Demand price elasticity measures: a. how much supply will change as price changes. b. how consumers change their purchases in response to a change in income. c. how consumers change their purchases in response to a change in the price of a substitute good. d. how consumers change their purchases in response to a change in the price of a product. e. the change in price brought about by a change in consumer demand. ANS: D Exhibit 5-1 Demand curve 34. In Exhibit 5-1, the demand curve between points a and b is: a. price elastic. b. price inelastic. c. unit elastic. d. perfectly elastic. e. perfectly inelastic. ANS: C 35. In Exhibit 5-1, the demand curve between points b and c is: a. price elastic. b. price inelastic. c. unit elastic. d. perfectly elastic. e. perfectly inelastic. ANS: B 36. In Exhibit 5-1, between points a and b, the price elasticity of demand measures: a. 0.67. b. 1.5. c. 2.0. d. 1.56. e. 1.0. ANS: E 37. In Exhibit 5-1, between points b and c, the price elasticity of demand measures a. 4.27. b. 1.5. c. 1.56. d. 0.636. e. 0.425. ANS: D 38. If demand price elasticity measures 2, this implies that consumers would: a. buy twice as much of the product if the price drops 10 percent. b. require a 2 percent drop in price to increase their purchases by 1 percent. c. buy 2 percent more of the product in response to a 1 percent drop in price. d. require at least a $2 increase in price before showing any response to the price increase. e. buy twice as much of the product if the price drops 1 percent. ANS: C 39. If the demand curve over a certain range is "price elastic," this implies that the: a. percentage change in the quantity demanded exceeds one. b. percentage change in the quantity demanded exceeds the percentage change in product price. c. percentage change in price exceeds the percentage change in quantity demanded. d. product is non-reactive. e. product has no good substitute. ANS: B 40. If the demand curve is unit elastic, this implies that: a. consumers do not react to a change in product price. b. the good can only be purchased in units of 1. c. this good has no good substitutes. d. the good is a basic food staple. e. the percentage change in the quantity demanded = the percentage change in product price. ANS: E 41. Which of the statements below does not describe a demand curve that is unit elastic? a. The percentage change in the quantity demanded = percentage change in product price. b. An increase in product price will not change total revenue. c. The price elasticity of demand equals one. d. A change in price does not change quantity demanded. e. A decrease in product price will not change total revenue. ANS: D 42. Demand price elasticity is measured by the: a. percentage change in income / percentage change in price. b. percentage change in quantity demanded / percentage change in income. c. percentage change in price / percentage change in quantity demanded. d. percentage change in quantity demanded / percent change in price. e. percentage change in total revenue / percentage change in price. ANS: D 43. If Sam, the Pizza Man, lowers the price of his pizzas from $6 to $5 and finds that sales increase from 400 to 600 pizzas per week, then the demand for Sam's pizzas in this range is: a. price inelastic. b. price elastic. c. unit elastic. d. cross elastic. e. income inelastic. ANS: B 44. If Herbert, the hair stylist, raises the price of his cuts from $13 to $15 and finds the number of cuts falls from 300 to 260, then the demand for Herbert's cuts in this range is: a. price inelastic. b. price elastic. c. unit elastic. d. cross elastic. e. income inelastic. ANS: C 45. If a 10 percent cut in price causes a 15 percent increase in sales, then: a. total revenue will decrease. b. demand is price inelastic in this range. c. demand is price elastic in this range. d. demand is unit elastic in this range. e. total revenue will remain the same. ANS: C 46. If Pete raises his price of muffins from $2 to $3 and his sales revenue increases from $35,000 to $38,000, then: a. b. c. d. the demand for Pete's muffins in this range is price elastic. the demand for Pete's muffins in this range is price inelastic. the demand for Pete's muffins in this range is unit elastic. the percentage change in quantity demanded must exceed the percentage change in product price. e. this is impossible since this would violate the law of demand. ANS: B 47. You are part of a local community theater group. It is the goal of the group to increase the amount of revenue earned through ticket sales. Mary says the obvious solution is to increase ticket prices. Is Mary correct? a. Mary is correct if the demand for tickets is price inelastic. b. Mary is incorrect if the demand for tickets is price inelastic. c. Mary is correct. The increase in ticket prices will always increase revenue. d. Mary is incorrect. The increase in ticket prices will never increase revenue. e. Mary is incorrect. The way to increase revenue is to decrease ticket prices. ANS: A 48. Elasticity measures how "sensitive" consumers are by measuring their change in ____ as the price of the product changes. a. attitude b. income c. quantity demanded d. supply e. taxes ANS: C 49. If the price elasticity of demand for a product measures .45, a. this good has many available substitutes. b. this good must be a nonessential good. c. this good is a high-priced good. d. a decrease in price will increase total revenue. e. this good is demand price inelastic. ANS: E 50. If a straight-line demand curve slopes down, price elasticity will: a. remain the same at all points on the demand curve. b. change between any two points along the demand curve. c. always be greater than one. d. always equal one. e. always be less than one. ANS: B