2 1. If an increase in bus fares in Charlotte, North Carolina reduces total revenue of the public transit system, this is evidence that demand isa. 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.
3 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 unitaryelastic.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.
4 3. You are on a committee that is considering ways to raise money for your city’ssymphony program. You would recommendincreasing the price of symphony ticketsonly if you thought the demand curve forthese tickets wasa. inelastic.b. elastic.c. unitary elastic.d. perfectly elastic.When the demand curve is inelastic, the revenue gained from the higher price more than offsets the revenue lost from the decline in sales.
5 4. The price elasticity of demand for a horizontal demand curve isa. perfectly elastic.b. perfectly inelastic.c. unitary elastic.d. inelastic.e. elastic.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.
6 5. Suppose the quantity of steak purchased by the Jones family is 110 pounds per yearwhen the price is $2.10 per pound and 90pounds per year when the price is $3.90 perpound. The price elasticity of demandcoefficient for this family isabcdA /110+90=20/200=1/10 divided by / =1.80/6.00=1/10x6.00/1.80=0.33
7 6. If a 5 percent reduction in the price of a good produces a 3 percent increase in thequantity demanded, the price elasticity ofdemand over this range of the demandcurve isa. elastic.b. perfectly elastic.c. unitary elastic.d. inelastic.e. perfectly inelastic.D. Since the percentage change in quantitydemanded is less than the percentage changein price, this range is defined inelastic.
8 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 isa. elastic e. unitary elastic.b. inelastic.c. perfectly elastic.d. perfectly inelastic.A. Elasticity > 1 = elastic demand
9 a. higher price elasticity of demand coefficient 8. A downward-sloping straight line demandcurve will have aa. higher price elasticity of demand coefficientalong the top of the demand curve.b. lower price elasticity coefficient alongthe top of the demand curve.c. constant price elasticity of demandcoefficient throughout the length of thedemand curve.d. positive slope.The quantity demanded by consumers is more sensitive to a price change at higher prices than at lower prices.
10 9. The price elasticity of demand coefficient for a good will be lowera. if there are few or no substitutes available.b. if a small portion of the budget will bespent 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.
11 10. The income elasticity of demand for shoes is estimated to be We can conclude thatshoesa. have a relatively steep demand curve.b. have a relatively flat demand curve.c. are a normal good.d. are an inferior good.If the income elasticity coefficient is a positive number, then the good or service is a normal good.
12 11. To determine whether two goods are substitutes or complements, an economistwould estimate thea. 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 whatwill happen to the demand for one good ifthe price of a complementary good, or agood that is a substitute, changes.
13 12. If the government wanted to raise tax revenue and shift most of the tax burden to the sellers, itwould impose a tax on a good with aa. steep (inelastic) demand curve and a steep (inelastic) supply curve.b. steep (inelastic) demand curve and a flat(elastic) supply curve.c. flat (elastic) demand curve and a steep(inelastic) supply curve.d. flat (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 lose total revenue.