Homework 4
1. If the price elasticity of demand for a product is 2.5, then a price cut from $2.00 to $1.80 will:
A. increase the quantity demanded by about 2.5 percent.
B. decrease the quantity demanded by about 2.5 percent.
C. increase the quantity demanded by about 25 percent.
D. increase the quantity demanded by about 250 percent.
2. Suppose that as the price of Y falls from $2.00 to $1.90 the quantity of Y demanded increases from 110 to 118. Then the price elasticity of demand is:
A. 4.00.
B. 2.09.
C. 1.37.
D. 3.94.
3. A perfectly inelastic demand schedule:
A. rises upward and to the right, but has a constant slope.
B. can be represented by a line parallel to the vertical axis.
C. cannot be shown on a two-dimensional graph.
D. can be represented by a line parallel to the horizontal axis.
4. The price elasticity of demand of a straight-line demand curve is:
A. elastic in high-price ranges and inelastic in low-price ranges.
B. elastic, but does not change at various points on the curve.
C. inelastic, but does not change at various points on the curve.
D. 1 at all points on the curve.
5. The price elasticity of demand is generally:
A. negative, but the minus sign is ignored.
B. positive, but the plus sign is ignored.
C. positive for normal goods and negative for inferior goods.
D. positive because price and quantity demanded are inversely related.
6. For a linear demand curve:
A. elasticity is constant along the curve.
B. elasticity is unity at every point on the curve.
C. demand is elastic at low prices.
D. demand is elastic at high prices.
7. The price of product X is reduced from $100 to $90 and, as a result, the quantity demanded increases from 50 to 60 units. Therefore demand for X in this price range:
A. has declined.
B. is of unit elasticity.
C. is inelastic.
D. is elastic.
8. Refer to the above diagram. Between prices of $5.70 and $6.30:
A. D1 is more elastic than D2.
B. D2 is an inferior good and D1 is a normal good.
C. D1 and D2 have identical elasticities.
D. D2 is more elastic than D1.
9. Refer to the above diagram and assume a single good. If the price of the good decreases from $6.30 to $5.70, consumer expenditure would:
A. decrease if demand were D1 only.
B. decrease if demand were D2 only.
C. decrease if demand were either D1 or D2.
D. increase if demand were either D1 or D2.
10. A firm can sell as much as it wants at a constant price. Demand is thus:
A. perfectly inelastic.
B. perfectly elastic.
C. relatively inelastic.
D. relatively elastic.
11. A demand curve which is parallel to the horizontal axis is:
A. perfectly inelastic.
B. perfectly elastic.
C. relatively inelastic.
D. relatively elastic.
12. When the percentage change in price is greater than the resulting percentage change in quantity demanded:
A. a decrease in price will increase total revenue.
B. demand may be either elastic or inelastic.
C. an increase in price will increase total revenue.
D. demand is elastic.
13. The Illinois Central Railroad once asked the Illinois Commerce Commission for permission to increase its commuter rates by 20 percent. The railroad argued that declining revenues made this rate increase essential. Opponents of the rate increase contended that the railroad's revenues would fall because of the rate hike. It can be concluded that:
A. both groups felt that the demand was elastic but for different reasons.
B. both groups felt that the demand was inelastic but for different reasons.
C. the railroad felt that the demand for passenger service was inelastic and opponents of the rate increase felt it was elastic.
D. the railroad felt that the demand for passenger service was elastic and opponents of the rate increase felt it was inelastic.
14. The state legislature has cut Gigantic State University's appropriations. GSU's Board of Regents decides to increase tuition fees to compensate for the loss of revenue. The board is assuming that the:
A. demand for education at GSU is elastic.
B. demand for education at GSU is inelastic.
C. coefficient of price elasticity of demand for education at GSU is unity.
D. coefficient of price elasticity of demand for education at GSU is greater than unity.
15. The more time consumers have to adjust to a change in price:
A. the smaller will be the price elasticity of demand.
B. the greater will be the price elasticity of demand.
C. the more likely the product is a normal good.
D. the more likely the product is an inferior good.
16. The narrower the definition of a product:
A. the larger the number of substitutes and the greater the price elasticity of demand.
B. the smaller the number of substitutes and the greater the price elasticity of demand.
C. the larger the number of substitutes and the smaller the price elasticity of demand.
D. the smaller the number of substitutes and the smaller the price elasticity of demand.
17. The demand for a luxury good whose purchase would exhaust a big portion of one's income is:
A. perfectly price inelastic.
B. perfectly price elastic.
C. relatively price inelastic.
D. relatively price elastic.
18. Suppose the income elasticity of demand for toys is +2.00. This means that:
A. a 10 percent increase in income will increase the purchase of toys by 20 percent.
B. a 10 percent increase in income will increase the purchase of toys by 2 percent.
C. a 10 percent increase in income will decrease the purchase of toys by 2 percent.
D. toys are an inferior good.
19. If the income elasticity of demand for lard is -3.00, this means that:
A. lard is a substitute for butter.
B. lard is a normal good.
C. lard is an inferior good.
D. more lard will be purchased when its price falls.
20. The formula for cross elasticity of demand is percentage change in:
A. quantity demanded of X/percentage change in price of X.
B. quantity demanded of X/percentage change in income.
C. quantity demanded of X/percentage change in price of Y.
D. price of X/percentage change in quantity demanded of Y.