Chapter 5 Elasticity and Its Application

TRUE/FALSE 1. Elasticity measures how responsive quantity is to changes in price. ANS: T DIF: 1 EF: !"# NAT: Analytic $%&: Elasticity T%': 'rice elasticity o( )eman) *S&: De(initional +. *easures o( elasticity enhance our a,ility to stu)y the magnitu)es o( changes. ANS: T DIF: 1 EF: !"# NAT: Analytic $%&: Elasticity T%': 'rice elasticity o( )eman) *S&: De(initional -. The )eman) (or ,rea) is li.ely to ,e more elastic than the )eman) (or soli)"gol) ,rea) plates. ANS: F DIF: + EF: !"1 NAT: Analytic $%&: Elasticity T%': 'rice elasticity o( )eman) *S&: Interpretive /. In general0 )eman) curves (or necessities ten) to ,e price elastic. ANS: F DIF: 1 EF: !"1 $%&: Elasticity T%': 'rice elasticity o( )eman) !. In general0 )eman) curves (or lu1uries ten) to ,e price elastic. ANS: T DIF: 1 EF: !"1 $%&: Elasticity T%': 'rice elasticity o( )eman) NAT: Analytic *S&: Interpretive NAT: Analytic *S&: Interpretive

2. Necessities ten) to have inelastic )eman)s0 whereas lu1uries have elastic )eman)s. ANS: T DIF: + EF: !"1 NAT: Analytic $%&: Elasticity T%': 'rice elasticity o( )eman) *S&: Interpretive 3. 4oo)s with close su,stitutes ten) to have more elastic )eman)s than )o goo)s without close su,stitutes. ANS: T DIF: + EF: !"1 NAT: Analytic $%&: Elasticity T%': 'rice elasticity o( )eman) *S&: Interpretive 5. The )eman) (or ice 6rispies is more elastic than the )eman) (or cereal in general. ANS: T DIF: + EF: !"1 NAT: Analytic $%&: Elasticity T%': 'rice elasticity o( )eman) *S&: Interpretive 7. The )eman) (or soap is more elastic than the )eman) (or Dove soap. ANS: F DIF: + EF: !"1 NAT: Analytic $%&: Elasticity T%': 'rice elasticity o( )eman) *S&: Interpretive 1#. The )eman) (or gasoline will respon) more to a change in price over a perio) o( (ive wee.s than over a perio) o( (ive years. ANS: F DIF: + EF: !"1 NAT: Analytic $%&: Elasticity T%': 'rice elasticity o( )eman) *S&: Interpretive 11. Even the )eman) (or a necessity such as gasoline will respon) to a change in price0 especially over a longer time hori8on. ANS: T DIF: + EF: !"1 NAT: Analytic $%&: Elasticity T%': 'rice elasticity o( )eman) *S&: Interpretive 1+. The price elasticity o( )eman) is )e(ine) as the percentage change in quantity )eman)e) )ivi)e) ,y the percentage change in price. ANS: T DIF: 1 EF: !"1 NAT: Analytic $%&: Elasticity T%': 'rice elasticity o( )eman) *S&: De(initional 1-. The price elasticity o( )eman) is )e(ine) as the percentage change in price )ivi)e) ,y the percentage change in quantity )eman)e). ANS: F DIF: 1 EF: !"1 NAT: Analytic $%&: Elasticity T%': 'rice elasticity o( )eman) *S&: De(initional

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1/.

&hapter ! 9Elasticity an) Its Application

Suppose that when the price rises ,y +#: (or a particular goo)0 the quantity )eman)e) o( that goo) (alls ,y 1#:. The price elasticity o( )eman) (or this goo) is equal to +.#. ANS: F DIF: + EF: !"1 NAT: Analytic $%&: Elasticity T%': 'rice elasticity o( )eman) *S&: Analytical 1!. Suppose that when the price rises ,y 1#: (or a particular goo)0 the quantity )eman)e) o( that goo) (alls ,y +#:. The price elasticity o( )eman) (or this goo) is equal to +.#. ANS: T DIF: + EF: !"1 NAT: Analytic $%&: Elasticity T%': 'rice elasticity o( )eman) *S&: Analytical 12. I( the price o( calculators increases ,y 1! percent an) the quantity )eman)e) per wee. (alls ,y /! percent as a result0 then the price elasticity o( )eman) is -. ANS: T DIF: + EF: !"1 NAT: Analytic $%&: Elasticity T%': 'rice elasticity o( )eman) *S&: Applicative 13. Deman) is inelastic i( the price elasticity o( )eman) is greater than 1. ANS: F DIF: 1 EF: !"1 NAT: Analytic $%&: Elasticity T%': Inelastic )eman) *S&: De(initional 15. A linear0 )ownwar)"sloping )eman) curve has a constant elasticity ,ut a changing slope. ANS: F DIF: + EF: !"1 NAT: Analytic $%&: Elasticity T%': 'rice elasticity o( )eman) *S&: Interpretive 17. 'rice elasticity o( )eman) along a linear0 )ownwar)"sloping )eman) curve increases as price (alls. ANS: F DIF: EF: !"1 NAT: Analytic $%&: Elasticity T%': 'rice elasticity o( )eman) *S&: Interpretive +#. I( the price elasticity o( )eman) is equal to #0 then )eman) is unit elastic. ANS: F DIF: 1 EF: !"1 NAT: Analytic $%&: Elasticity T%': 'rice elasticity o( )eman) *S&: De(initional +1. I( the price elasticity o( )eman) is equal to 10 then )eman) is unit elastic. ANS: T DIF: 1 EF: !"1 NAT: Analytic $%&: Elasticity T%': 'rice elasticity o( )eman) *S&: De(initional ++. Deman) (or a goo) is sai) to ,e inelastic i( the quantity )eman)e) increases su,stantially when the price (alls ,y a small amount. ANS: F DIF: 1 EF: !"1 NAT: Analytic $%&: Elasticity T%': Inelastic )eman) *S&: De(initional +-. The mi)point metho) is use) to calculate elasticity ,etween two points ,ecause it gives the same answer regar)less o( the )irection o( the change. ANS: T DIF: + EF: !"1 NAT: Analytic $%&: Elasticity T%': *i)point metho) *S&: Interpretive +/. The (latter the )eman) curve that passes through a given point0 the more inelastic the )eman). ANS: F DIF: + EF: !"1 NAT: Analytic $%&: Elasticity T%': 'rice elasticity o( )eman) *S&: Interpretive +!. The (latter the )eman) curve that passes through a given point0 the more elastic the )eman). ANS: T DIF: + EF: !"1 NAT: Analytic $%&: Elasticity T%': 'rice elasticity o( )eman) *S&: Interpretive +2. I( )eman) is per(ectly inelastic0 the )eman) curve is vertical0 an) the price elasticity o( )eman) equals #. ANS: T DIF: + EF: !"1 NAT: Analytic $%&: Elasticity T%': 'er(ectly inelastic )eman) *S&: Interpretive +3. I( )eman) is per(ectly elastic0 the )eman) curve is hori8ontal0 an) the price elasticity o( )eman) equals 1. ANS: F DIF: + EF: !"1 NAT: Analytic $%&: Elasticity T%': 'er(ectly elastic )eman) *S&: Interpretive

&hapter ! 9Elasticity an) Its Application

+5. Along the elastic portion o( a linear )eman) curve0 total revenue rises as price rises. ANS: F DIF: EF: !"1 NAT: Analytic $%&: Elasticity T%': Total revenue ; 'rice elasticity o( )eman) *S&: Interpretive +7. I( a (irm is (acing elastic )eman)0 then the (irm shoul) )ecrease price to increase revenue. ANS: T DIF: + EF: !"1 NAT: Analytic $%&: Elasticity T%': Total revenue ; 'rice elasticity o( )eman) *S&: Applicative -#. I( a (irm is (acing inelastic )eman)0 then the (irm shoul) )ecrease price to increase revenue. ANS: F DIF: + EF: !"1 NAT: Analytic $%&: Elasticity T%': Total revenue ; 'rice elasticity o( )eman) *S&: Applicative -1. <hen )eman) is inelastic0 a )ecrease in price increases total revenue. ANS: F DIF: + EF: !"1 NAT: Analytic $%&: Elasticity T%': Inelastic )eman) ; Total revenue *S&: Interpretive -+. The income elasticity o( )eman) is )e(ine) as the percentage change in quantity )eman)e) )ivi)e) ,y the percentage change in income. ANS: T DIF: 1 EF: !"1 NAT: Analytic $%&: Elasticity T%': Income elasticity o( )eman) *S&: De(initional --. The income elasticity o( )eman) is )e(ine) as the percentage change in quantity )eman)e) )ivi)e) ,y the percentage change in price. ANS: F DIF: 1 EF: !"1 NAT: Analytic $%&: Elasticity T%': Income elasticity o( )eman) *S&: De(initional -/. Normal goo)s have negative income elasticities o( )eman)0 while in(erior goo)s have positive income elasticities o( )eman). ANS: F DIF: + EF: !"1 NAT: Analytic $%&: Elasticity T%': Income elasticity o( )eman) *S&: Interpretive -!. I( the income elasticity o( )eman) (or a goo) is negative0 then the goo) must ,e an in(erior goo). ANS: T DIF: 1 EF: !"1 NAT: Analytic $%&: Elasticity T%': Income elasticity o( )eman) *S&: Interpretive -2. I( the cross"price elasticity o( )eman) (or two goo)s is negative0 then the two goo)s are su,stitutes. ANS: F DIF: + EF: !"1 NAT: Analytic $%&: Elasticity T%': &ross"price elasticity o( )eman) *S&: Interpretive -3. I( the cross"price elasticity o( )eman) (or two goo)s is negative0 then the two goo)s are complements. ANS: T DIF: + EF: !"1 NAT: Analytic $%&: Elasticity T%': &ross"price elasticity o( )eman) *S&: Interpretive -5. &ross"price elasticity o( )eman) measures how the quantity )eman)e) o( one goo) changes as the price o( another goo) changes. ANS: T DIF: 1 EF: !"1 NAT: Analytic $%&: Elasticity T%': &ross"price elasticity o( )eman) *S&: De(initional -7. &ross"price elasticity is use) to )etermine whether goo)s are in(erior or normal goo)s. ANS: F DIF: + EF: !"1 NAT: Analytic $%&: Elasticity T%': &ross"price elasticity o( )eman) *S&: Interpretive /#. &ross"price elasticity is use) to )etermine whether goo)s are su,stitutes or complements. ANS: T DIF: + EF: !"1 NAT: Analytic $%&: Elasticity T%': &ross"price elasticity o( )eman) *S&: Interpretive

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/1.

&hapter ! 9Elasticity an) Its Application

The cross"price elasticity o( garlic salt an) onion salt is "+0 which in)icates that garlic salt an) onion salt are su,stitutes. ANS: F DIF: + EF: !"1 NAT: Analytic $%&: Elasticity T%': &ross"price elasticity o( )eman) *S&: Interpretive /+. 'rice elasticity o( supply measures how much the quantity supplie) respon)s to changes in the price. ANS: T DIF: 1 EF: !"+ NAT: Analytic $%&: Elasticity T%': 'rice elasticity o( supply *S&: De(initional /-. Supply an) )eman) ,oth ten) to ,e more elastic in the long run an) more inelastic in the short run. ANS: T DIF: + EF: !"1 ; !"+ NAT: Analytic $%&: Elasticity T%': 'rice elasticities o( )eman) an) supply *S&: Interpretive //. I( the price elasticity o( supply is + an) the quantity supplie) )ecreases ,y 2:0 then the price must have )ecrease) ,y -:. ANS: T DIF: + EF: !"+ NAT: Analytic $%&: Elasticity T%': 'rice elasticity o( supply *S&: Applicative /!. Supply is sai) to ,e inelastic i( the quantity supplie) respon)s su,stantially to changes in the price0 an) elastic i( the quantity supplie) respon)s only slightly to price. ANS: F DIF: 1 EF: !"+ NAT: Analytic $%&: Elasticity T%': 'rice elasticity o( supply *S&: De(initional /2. Supply ten)s to ,e more elastic in the short run an) more inelastic in the long run. ANS: F DIF: + EF: !"+ NAT: Analytic T%': 'rice elasticity o( supply *S&: Interpretive /3. <hen the price o( .nee ,races increase) ,y +! percent0 the =race >oursel( &ompany increase) its quantity supplie) o( .nee ,races per wee. ,y 3! percent. =>&?s price elasticity o( supply o( .nee ,races is #.--. ANS: F DIF: + EF: !"+ NAT: Analytic $%&: Elasticity T%': 'rice elasticity o( supply *S&: Applicative /5. I( a supply curve is hori8ontal0 then supply is sai) to ,e per(ectly elastic0 an) the price elasticity o( supply approaches in(inity. ANS: T DIF: + EF: !"+ NAT: Analytic $%&: Elasticity T%': 'er(ectly elastic supply *S&: Interpretive /7. A government program that re)uces lan) un)er cultivation hurts (armers ,ut helps consumers. ANS: F DIF: + EF: !"NAT: Analytic $%&: Elasticity T%': Total revenue *S&: Applicative !#. %'E& (aile) to maintain a high price o( oil in the long run0 partly ,ecause ,oth the supply o( oil an) the )eman) (or oil are more elastic in the long run than in the short run. ANS: T DIF: + EF: !"NAT: Analytic $%&: Elasticity T%': %'E& ; 'rice elasticity o( )eman) ; 'rice elasticity o( supply *S&: Applicative !1. Drug inter)iction0 which re)uces the supply o( )rugs0 may )ecrease )rug"relate) crime ,ecause the )eman) (or )rugs is inelastic. ANS: F DIF: + EF: !"NAT: Analytic $%&: Elasticity T%': 'rice elasticity o( )eman) *S&: Applicative SHORT ANSWER 1. &onsi)er the (ollowing pairs o( goo)s. For which o( the two goo)s woul) you e1pect the )eman) to ,e more price elastic@ <hy@ a. water or )iamon)s ,. insulin or nasal )econgestant spray c. (oo) in general or ,rea.(ast cereal ). gasoline over the course o( a wee. or gasoline over the course o( a year e. personal computers or I=* personal computers

&hapter ! 9Elasticity an) Its Application

ANS: a. ,. c. ). e. DIF: T%': +.

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Diamon)s are lu1uries0 an) water is a necessity. There(ore0 )iamon)s have the more elastic )eman). Insulin has no close su,stitutes0 ,ut )econgestant spray )oes. There(ore0 nasal )econgestant spray has the more elastic )eman). =rea.(ast cereal has more su,stitutes than )oes (oo) in general. There(ore0 ,rea.(ast cereal has the more elastic )eman). The longer the time perio)0 the more elastic )eman) is. There(ore0 gasoline over the course o( a year has the more elastic )eman). There are more su,stitutes (or I=* personal computers than there are (or personal computers. There(ore0 I=* personal computers have the more elastic )eman). + EF: !"1 'rice elasticity o( )eman) NAT: Analytic *S&: Applicative $%&: Elasticity

>ou own a small town movie theatre. >ou currently charge A! per tic.et (or everyone who comes to your movies. >our (rien) who too. an economics course in college tells you that there may ,e a way to increase your total revenue. 4iven the )eman) curves shown0 answer the (ollowing questions.
1# 7 5 3 2 ! / + 1 1# +# -# /# !# 2# 3# 5# 7# 1## Quantity Price

A)ult Deman)

1# 7 5 3 2 ! / + 1

Price

&hil) Deman)

1#

1!

+#

+!

-#

-!

/#

/!

!#

!!

2#

2!

3#

Quantity

a. ,. c. ). e. (.

<hat is your current total revenue (or ,oth groups@ The elasticity o( )eman) is more elastic in which mar.et@ <hich mar.et has the more inelastic )eman)@ <hat is the elasticity o( )eman) ,etween the prices o( A! an) A+ in the a)ult mar.et@ Is this elastic or inelastic@ <hat is the elasticity o( )eman) ,etween A! an) A+ in the chil)ren?s mar.et@ Is this elastic or inelastic@ 4iven the graphs an) what your (rien) .nows a,out economics0 he recommen)s you increase the price o( a)ult tic.ets to A5 each an) lower the price o( a chil)?s tic.et to A-. Bow much coul) you increase total revenue i( you ta.e his a)vice@

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ANS:

&hapter ! 9Elasticity an) Its Application

a. ,. c. ). e. (. Total revenue (rom chil)ren?s tic.ets is A1## an) (rom a)ult tic.ets is A+!#. Total revenue (rom all sales woul) ,e A-!#. The )eman) (or chil)ren?s tic.ets is more elastic. The a)ult tic.et mar.et has the more inelastic )eman). The elasticity o( )eman) ,etween A! an) A+ is #.+20 which is inelastic. The elasticity o( )eman) ,etween A! an) A+ is 1.#0 which is unit elastic. Total revenue in the a)ult mar.et woul) ,e A-+#. Total revenue in the chil)renCs mar.et woul) ,e A1+#0 so total revenue (or ,oth groups woul) ,e A//#. A//# " A-!# is an increase in total revenue o( A7#. + EF: !"1 NAT: Analytic 'rice elasticity o( )eman) ; Total revenue
Price

DIF: T%': -.
A

$%&: Elasticity *S&: Applicative

Dse the graph shown to answer the (ollowing questions. 'ut the correct letterEsF in the ,lan..

Deman) &
Quantity

a. ,. c. ). e. (. g. h. i. H. ANS: a. ,. c. ). e. (. g. h. i. H. DIF: T%':

The elastic section o( the graph is represente) ,y section (rom GGGGGGG. The inelastic section o( the graph is represente) ,y section (rom GGGGGGG. The unit elastic section o( the graph is represente) ,y section GGGGGGG. The portion o( the graph in which a )ecrease in price woul) cause total revenue to (all woul) ,e (rom GGGGGGGGG. The portion o( the graph in which a )ecrease in price woul) cause total revenue to rise woul) ,e (rom GGGGGGGGG. The portion o( the graph in which a )ecrease in price woul) not cause a change in total revenue woul) ,e GGGGGGGGG. The section o( the graph in which total revenue woul) ,e at a ma1imum woul) ,e GGGGGGG. The section o( the graph in which elasticity is greater than 1 is GGGGGGG. The section o( the graph in which elasticity is equal to 1 is GGGGGG. The section o( the graph in which elasticity is less than 1 is GGGGGGG. A to = = to & = = to & A to = = = A to = = = to & + EF: !"1 NAT: Analytic 'rice elasticity o( )eman) ; Total revenue $%&: Elasticity *S&: Applicative

&hapter ! 9Elasticity an) Its Application

/.

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Dsing the mi)point metho)0 compute the elasticity o( )eman) ,etween points A an) =. Is )eman) along this portion o( the curve elastic or inelastic@ Interpret your answer with regar) to price an) quantity )eman)e). Now compute the elasticity o( )eman) ,etween points = an) &. Is )eman) along this portion o( the curve elastic or inelastic@
++ +# 15 12 1/ 1+ 1# 5 2 / + & = A Price

Deman)
1## +## -## /## !## 2## 3## 5## 7## Quantity

ANS: In the section o( the )eman) curve (rom A to =0 the elasticity o( )eman) woul) ,e +.!. This woul) ,e an elastic portion o( the curve. This woul) mean that (or every 1 percent change in price0 quantity )eman)e) woul) change ,y +.! percent. In the section o( the )eman) curve (rom = to &0 the elasticity o( )eman) woul) ,e .3!. This woul) ,e an inelastic portion o( the curve. This woul) mean that (or every 1 percent change in price0 quantity )eman)e) woul) change ,y #.3! percent. DIF: T%': !. + EF: !"1 'rice elasticity o( )eman) NAT: Analytic *S&: Applicative $%&: Elasticity

<hen the Sha((ers ha) a monthly income o( A/0###0 they usually ate out 5 times a month. Now that the couple ma.es A/0!## a month0 they eat out 1# times a month. &ompute the couple?s income elasticity o( )eman) using the mi)point metho). E1plain your answer. EIs a restaurant meal a normal or in(erior goo) to the couple@F

ANS: The income elasticity o( )eman) (or the Sha((ers is 1.57. Since the income elasticity o( )eman) is positive0 eating out woul) ,e interprete) as a normal goo). DIF: T%': 2. + EF: !"1 Income elasticity o( )eman) NAT: Analytic *S&: Applicative $%&: Elasticity

ecently0 in Smalltown0 the price o( Twin.ies (ell (rom A#.5# to A#.3#. As a result0 the quantity )eman)e) o( Bo"Bo?s )ecrease) (rom 1+# to 1##. <hat woul) ,e the appropriate elasticity to compute@ Dsing the mi)point metho)0 compute this elasticity. <hat )oes your answer tell you@

ANS: The appropriate elasticity to compute woul) ,e cross"price elasticity. The cross"price elasticity (or this e1ample woul) ,e 1.-2. The two goo)s are su,stitutes ,ecause the cross"price elasticity is positive. DIF: T%': + EF: !"1 &ross"price elasticity o( )eman) NAT: Analytic *S&: Applicative $%&: Elasticity

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&hapter ! 9Elasticity an) Its Application

Sec
1.

! Elasticity and Its Application

In general0 elasticity is a measure o( a. the e1tent to which a)vances in technology are a)opte) ,y pro)ucers. ,. the e1tent to which a mar.et is competitive. c. how (irmsC pro(its respon) to changes in mar.et prices. ). how much ,uyers an) sellers respon) to changes in mar.et con)itions. DIF: 1 $%&: Elasticity EF: T%': !"# Elasticity *S&: De(initional

"ULTI#LE CHOICE

ANS: D NAT: Analytic +.

Elasticity is a. a measure o( how much ,uyers an) sellers respon) to changes in mar.et con)itions. ,. the stu)y o( how the allocation o( resources a((ects economic well",eing. c. the ma1imum amount that a ,uyer will pay (or a goo). ). the value o( everything a seller must give up to pro)uce a goo). DIF: 1 $%&: Elasticity EF: T%': !"# Elasticity *S&: De(initional

ANS: A NAT: Analytic -.

<hen stu)ying how some event or policy a((ects a mar.et0 elasticity provi)es in(ormation on the a. equity e((ects on the mar.et ,y i)enti(ying the winners an) losers. ,. magnitu)e o( the e((ect on the mar.et. c. spee) o( a)Hustment o( the mar.et in response to the event or policy. ). num,er o( mar.et participants who are )irectly a((ecte) ,y the event or policy. DIF: + $%&: Elasticity EF: T%': !"# Elasticity *S&: Interpretive

ANS: = NAT: Analytic /.

Bow )oes the concept o( elasticity allow us to improve upon our un)erstan)ing o( supply an) )eman)@ a. Elasticity allows us to analy8e supply an) )eman) with greater precision than woul) ,e the case in the a,sence o( the elasticity concept. ,. Elasticity provi)es us with a ,etter rationale (or statements such as Ian increase in x will lea) to a )ecrease in yJ than we woul) have in the a,sence o( the elasticity concept. c. <ithout elasticity0 we woul) not ,e a,le to a))ress the )irection in which price is li.ely to move in response to a surplus or a shortage. ). <ithout elasticity0 it is very )i((icult to assess the )egree o( competition within a mar.et. DIF: + $%&: Elasticity EF: T%': !"# Elasticity *S&: Interpretive

ANS: A NAT: Analytic !.

<hen consumers (ace rising gasoline prices0 they typically a. re)uce their quantity )eman)e) more in the long run than in the short run. ,. re)uce their quantity )eman)e) more in the short run than in the long run. c. )o not re)uce their quantity )eman)e) in the short run or the long run. ). increase their quantity )eman)e) in the short run ,ut re)uce their quantity )eman)e) in the long run. DIF: + $%&: Elasticity EF: T%': !"# Elasticity *S&: Applicative

ANS: A NAT: Analytic 2.

A 1# percent increase in gasoline prices re)uces gasoline consumption ,y a,out a. 2 percent a(ter one year an) +.! percent a(ter (ive years. ,. +.! percent a(ter one year an) 2 percent a(ter (ive years. c. 1# percent a(ter one year an) +# percent a(ter (ive years. ). # percent a(ter one year an) 1 percent a(ter (ive years. DIF: + $%&: Elasticity EF: T%': !"# Elasticity *S&: Applicative

ANS: = NAT: Analytic

&hapter ! 9Elasticity an) Its Application

3. <hich o( the (ollowing statements a,out the consumersC responses to rising gasoline prices is correct@ a. A,out 1# percent o( the long"run re)uction in quantity )eman)e) arises ,ecause people )rive less an) a,out 7# percent arises ,ecause they switch to more (uel"e((icient cars. ,. A,out 7# percent o( the long"run re)uction in quantity )eman)e) arises ,ecause people )rive less an) a,out 1# percent arises ,ecause they switch to more (uel"e((icient cars. c. A,out hal( o( the long"run re)uction in quantity )eman)e) arises ,ecause people )rive less an) a,out hal( arises ,ecause they switch to more (uel"e((icient cars. ). =ecause gasoline is a necessity0 consumers )o not )ecrease their quantity )eman)e) in either the short run or the long run. DIF: + $%&: Elasticity EF: T%': !"# Elasticity *S&: Applicative

/#

ANS: & NAT: Analytic

Sec $ ! Elasticity and Its Application ! The Elasticity o% &e'and

"ULTI#LE CHOICE 1. The price elasticity o( )eman) measures how much a. quantity )eman)e) respon)s to a change in price. ,. quantity )eman)e) respon)s to a change in income. c. price respon)s to a change in )eman). ). )eman) respon)s to a change in supply. DIF: 1 $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

ANS: A NAT: Analytic *S&: De(initional +.

The price elasticity o( )eman) measures a. ,uyersC responsiveness to a change in the price o( a goo). ,. the e1tent to which )eman) increases as a))itional ,uyers enter the mar.et. c. how much more o( a goo) consumers will )eman) when incomes rise. ). the movement along a supply curve when there is a change in )eman). DIF: 1 $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

ANS: A NAT: Analytic *S&: De(initional -.

The price elasticity o( )eman) (or a goo) measures the willingness o( a. consumers to ,uy less o( the goo) as price rises. ,. consumers to avoi) monopolistic mar.ets in (avor o( competitive mar.ets. c. (irms to pro)uce more o( a goo) as price rises. ). (irms to cater to the tastes o( consumers. DIF: 1 $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

ANS: A NAT: Analytic *S&: Interpretive /.

<hich o( the (ollowing statements a,out the price elasticity o( )eman) is correct@ a. The price elasticity o( )eman) (or a goo) measures the willingness o( ,uyers o( the goo) to ,uy less o( the goo) as its price increases. ,. 'rice elasticity o( )eman) re(lects the many economic0 psychological0 an) social (orces that shape consumer tastes. c. %ther things equal0 i( goo) x has close su,stitutes an) goo) y )oes not have close su,stitutes0 then the )eman) (or goo) x will ,e more elastic than the )eman) (or goo) y. ). All o( the a,ove are correct. DIF: + $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

ANS: D NAT: Analytic *S&: Interpretive

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!.

&hapter ! 9Elasticity an) Its Application

For a goo) that is a necessity0 a. quantity )eman)e) ten)s to respon) su,stantially to a change in price. ,. )eman) ten)s to ,e inelastic. c. the law o( )eman) )oes not apply. ). All o( the a,ove are correct. DIF: + $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

ANS: = NAT: Analytic *S&: Interpretive 2.

4oo)s with many close su,stitutes ten) to have a. more elastic )eman)s. ,. less elastic )eman)s. c. price elasticities o( )eman) that are unit elastic. ). income elasticities o( )eman) that are negative. DIF: + $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

ANS: A NAT: Analytic *S&: Interpretive 3.

<hich o( the (ollowing is li.ely to have the most price inelastic )eman)@ a. mint"(lavore) toothpaste ,. toothpaste c. &olgate mint"(lavore) toothpaste ). a generic mint"(lavore) toothpaste DIF: + $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

ANS: = NAT: Analytic *S&: Applicative 5.

<hich o( the (ollowing is li.ely to have the most price inelastic )eman)@ a. white chocolate chip with maca)amia nut coo.ies ,. *rs. Fiel)Cs chocolate chip coo.ies c. mil. chocolate chip coo.ies ). coo.ies DIF: + $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

ANS: D NAT: Analytic *S&: Applicative 7.

I( the price o( natural gas rises0 when is the price elasticity o( )eman) li.ely to ,e the highest@ a. imme)iately a(ter the price increase ,. one month a(ter the price increase c. three months a(ter the price increase ). one year a(ter the price increase DIF: + $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

ANS: D NAT: Analytic *S&: Applicative 1#.

I( the price o( mil. rises0 when is the price elasticity o( )eman) li.ely to ,e the lowest@ a. imme)iately a(ter the price increase ,. one month a(ter the price increase c. three months a(ter the price increase ). one year a(ter the price increase DIF: + $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

ANS: A NAT: Analytic *S&: Applicative 11.

For a goo) that is a lu1ury0 )eman) a. ten)s to ,e inelastic. ,. ten)s to ,e elastic. c. has unit elasticity. ). cannot ,e represente) ,y a )eman) curve in the usual way.

&hapter ! 9Elasticity an) Its Application

ANS: = NAT: Analytic *S&: Interpretive 1+. DIF: + $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

/+

For a goo) that is a necessity0 )eman) a. ten)s to ,e inelastic. ,. ten)s to ,e elastic. c. has unit elasticity. ). cannot ,e represente) ,y a )eman) curve in the usual way. DIF: + $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

ANS: A NAT: Analytic *S&: Interpretive 1-.

A person who ta.es a prescription )rug to control high cholesterol most li.ely has a )eman) (or that )rug that is a. inelastic. ,. unit elastic. c. elastic. ). highly responsive to changes in income. DIF: + $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

ANS: A NAT: Analytic *S&: Interpretive 1/.

The )eman) (or Neapolitan ice cream is li.ely quite elastic ,ecause a. ice cream must ,e eaten quic.ly. ,. this particular (lavor o( ice cream is viewe) as a necessity ,y many ice"cream lovers. c. the mar.et is ,roa)ly )e(ine). ). other (lavors o( ice cream are goo) su,stitutes (or this particular (lavor. DIF: + $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

ANS: D NAT: Analytic *S&: Interpretive 1!.

The )eman) (or <erthers can)y is li.ely a. elastic ,ecause can)y is e1pensive relative to other snac.s. ,. elastic ,ecause there are many close su,stitutes (or <erthers. c. elastic ,ecause <erthers are regar)e) as a necessity ,y many people. ). inelastic ,ecause it is usually eaten quic.ly0 ma.ing the relevant time hori8on short. DIF: + $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

ANS: = NAT: Analytic *S&: Interpretive 12.

There are very (ew0 i( any0 goo) su,stitutes (or motor oil. There(ore0 a. the )eman) (or motor oil woul) ten) to ,e inelastic. ,. the )eman) (or motor oil woul) ten) to ,e elastic. c. the )eman) (or motor oil woul) ten) to respon) strongly to changes in prices o( other goo)s. ). the supply o( motor oil woul) ten) to respon) strongly to changes in peopleCs tastes (or large cars relative to their tastes (or small cars. DIF: + $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

ANS: A NAT: Analytic *S&: Interpretive 13.

Bol)ing all other (orces constant0 when the price o( gasoline rises0 the num,er o( gallons o( gasoline )eman)e) woul) (all su,stantially over a ten"year perio) ,ecause a. ,uyers ten) to ,e much less sensitive to a change in price when given more time to react. ,. ,uyers ten) to ,e much more sensitive to a change in price when given more time to react. c. ,uyers will have su,stantially more real income over a ten"year perio). ). the quantity supplie) o( gasoline increases very little in response to an increase in the price o( gasoline.

/-

&hapter ! 9Elasticity an) Its Application

DIF: + $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

ANS: = NAT: Analytic *S&: Interpretive 15.

A goo) will have a more inelastic )eman)0 a. the greater the availa,ility o( close su,stitutes. ,. the ,roa)er the )e(inition o( the mar.et. c. the longer the perio) o( time. ). the more it is regar)e) as a lu1ury. DIF: + $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

ANS: = NAT: Analytic *S&: Interpretive 17.

A goo) will have a more elastic )eman)0 a. the greater the availa,ility o( close su,stitutes. ,. the more narrow the )e(inition o( the mar.et. c. the shorter the perio) o( time. ). the more it is regar)e) as a necessity. DIF: + $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

ANS: A NAT: Analytic *S&: Interpretive +#.

<hich o( the (ollowing statements is correct@ a. The )eman) (or (lat"screen computer monitors is more elastic than the )eman) (or monitors in general. ,. The )eman) (or gran)(ather cloc.s is more elastic than the )eman) (or cloc.s in general. c. The )eman) (or car),oar) is more elastic over a long perio) o( time than over a short perio) o( time. ). All o( the a,ove are correct. DIF: + $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

ANS: D NAT: Analytic *S&: Interpretive +1.

<hich o( the (ollowing statements is correct@ a. The )eman) (or natural gas is more elastic over a short perio) o( time than over a long perio) o( time. ,. The )eman) (or smo.e alarms is more elastic than the )eman) (or 'ersian rugs. c. The )eman) (or ,our,on whis.ey is more elastic than the )eman) (or alcoholic ,everages in general. ). All o( the a,ove are correct. DIF: + $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

ANS: & NAT: Analytic *S&: Interpretive ++.

<hich o( the (ollowing is not a )eterminant o( the price elasticity o( )eman) (or a goo)@ a. the time hori8on ,. the steepness or (latness o( the supply curve (or the goo) c. the )e(inition o( the mar.et (or the goo) ). the availa,ility o( su,stitutes (or the goo) DIF: + $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

ANS: = NAT: Analytic *S&: Interpretive +-.

The greater the price elasticity o( )eman)0 the a. more li.ely the pro)uct is a necessity. ,. smaller the responsiveness o( quantity )eman)e) to a change in price. c. greater the percentage change in price over the percentage change in quantity )eman)e). ). greater the responsiveness o( quantity )eman)e) to a change in price.

&hapter ! 9Elasticity an) Its Application

ANS: D NAT: Analytic *S&: Interpretive +/. DIF: + $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

//

The value o( the price elasticity o( )eman) (or a goo) will ,e relatively large when a. there are no goo) su,stitutes availa,le (or the goo). ,. the time perio) in question is relatively short. c. the goo) is a lu1ury as oppose) to a necessity. ). All o( the a,ove are correct. DIF: + $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

ANS: & NAT: Analytic *S&: Interpretive +!.

For which o( the (ollowing goo)s woul) )eman) ,e most elastic@ a. clothing ,. ,lue Heans c. Tommy Bil(iger Heans ). All three woul) have the same elasticity o( )eman) since they are all relate). DIF: + $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

ANS: & NAT: Analytic *S&: Applicative +2.

For which o( the (ollowing goo)s woul) )eman) ,e most inelastic@ a. chocolate ,. 4o)iva chocolate c. BersheyCs chocolate ). All three woul) have the same elasticity o( )eman) since they are all relate). DIF: + $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

ANS: A NAT: Analytic *S&: Applicative +3.

<hether a goo) is a lu1ury or necessity )epen)s on a. the price o( the goo). ,. the pre(erences o( the ,uyer. c. the intrinsic properties o( the goo). ). how scarce the goo) is. DIF: + $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

ANS: = NAT: Analytic *S&: Interpretive +5.

The price elasticity o( )eman) (or ,rea) a. is compute) as the percentage change in quantity )eman)e) o( ,rea) )ivi)e) ,y the percentage change in price o( ,rea). ,. )epen)s0 in part0 on the availa,ility o( close su,stitutes (or ,rea). c. re(lects the many economic0 social0 an) psychological (orces that in(luence consumers? tastes (or ,rea). ). All o( the a,ove are correct. DIF: 1 $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

ANS: D NAT: Analytic *S&: Interpretive +7.

The price elasticity o( )eman) (or eggs a. is compute) as the percentage change in quantity )eman)e) o( eggs )ivi)e) ,y the percentage change in price o( eggs. ,. will ,e lower i( there is a new invention that is a close su,stitute (or eggs. c. will ,e higher i( consumers consi)er eggs to ,e a lu1ury goo). ). All o( the a,ove are correct.

/!

&hapter ! 9Elasticity an) Its Application

DIF: 1 $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

ANS: A NAT: Analytic *S&: Interpretive -#.

%ther things equal0 the )eman) (or a goo) ten)s to ,e more inelastic0 the a. (ewer the availa,le su,stitutes. ,. longer the time perio) consi)ere). c. more the goo) is consi)ere) a lu1ury goo). ). more narrowly )e(ine) is the mar.et (or the goo). DIF: + $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

ANS: A NAT: Analytic *S&: Interpretive -1.

Economists compute the price elasticity o( )eman) as the a. percentage change in price )ivi)e) ,y the percentage change in quantity )eman)e). ,. change in quantity )eman)e) )ivi)e) ,y the change in the price. c. percentage change in quantity )eman)e) )ivi)e) ,y the percentage change in price. ). percentage change in quantity )eman)e) )ivi)e) ,y the percentage change in income. DIF: + $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

ANS: & NAT: Analytic *S&: De(initional -+.

Suppose there is a 2 percent increase in the price o( goo) K an) a resulting 2 percent )ecrease in the quantity o( K )eman)e). 'rice elasticity o( )eman) (or K is a. #. ,. 1. c. 2. ). -2. DIF: + $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

ANS: = NAT: Analytic *S&: Applicative --.

I( the price elasticity o( )eman) (or a goo) is /.#0 then a 1# percent increase in price results in a a. #./ percent )ecrease in the quantity )eman)e). ,. +.! percent )ecrease in the quantity )eman)e). c. / percent )ecrease in the quantity )eman)e). ). /# percent )ecrease in the quantity )eman)e). DIF: + $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

ANS: D NAT: Analytic *S&: Applicative -/.

I( the price elasticity o( )eman) (or a goo) is 1#.#0 then a / percent increase in price results in a a. #./ percent )ecrease in the quantity )eman)e). ,. +.! percent )ecrease in the quantity )eman)e). c. / percent )ecrease in the quantity )eman)e). ). /# percent )ecrease in the quantity )eman)e). DIF: + $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

ANS: D NAT: Analytic *S&: Applicative -!.

I( the price elasticity o( )eman) (or a goo) is #./0 then a 1# percent increase in price results in a a. #./ percent )ecrease in the quantity )eman)e). ,. +.! percent )ecrease in the quantity )eman)e). c. / percent )ecrease in the quantity )eman)e). ). /# percent )ecrease in the quantity )eman)e). DIF: + $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

ANS: & NAT: Analytic *S&: Applicative

&hapter ! 9Elasticity an) Its Application

-2. I( the price elasticity o( )eman) (or a goo) is #.+!0 then a +# percent )ecrease in price results in a a. #.#1+! percent increase in the quantity )eman)e). ,. / percent increase in the quantity )eman)e). c. ! percent increase in the quantity )eman)e). ). 5# percent increase in the quantity )eman)e). DIF: + $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

/2

ANS: & NAT: Analytic *S&: Applicative -3.

I( the price elasticity o( )eman) (or a goo) is 1.!0 then a - percent )ecrease in price results in a a. #.! percent increase in the quantity )eman)e). ,. + percent increase in the quantity )eman)e). c. /.! percent increase in the quantity )eman)e). ). ! percent increase in the quantity )eman)e). DIF: + $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

ANS: & NAT: Analytic *S&: Applicative -5.

I( the price elasticity o( )eman) (or a goo) is #.50 then which o( the (ollowing events is consistent with a / percent )ecrease in the quantity o( the goo) )eman)e)@ a. a #.+ percent increase in the price o( the goo) ,. a -.+ percent increase in the price o( the goo) c. a /.5 percent increase in the price o( the goo) ). a ! percent increase in the price o( the goo) DIF: + $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

ANS: D NAT: Analytic *S&: Applicative -7.

For a particular goo)0 a + percent increase in price causes a 1+ percent )ecrease in quantity )eman)e). <hich o( the (ollowing statements is most li.ely applica,le to this goo)@ a. There are no close su,stitutes (or this goo). ,. The goo) is a lu1ury. c. The mar.et (or the goo) is ,roa)ly )e(ine). ). The relevant time hori8on is short. DIF: $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

ANS: = NAT: Analytic *S&: Analytical /#.

For a particular goo)0 a 1+ percent increase in price causes a - percent )ecrease in quantity )eman)e). <hich o( the (ollowing statements is most li.ely applica,le to this goo)@ a. There are many su,stitutes (or this goo). ,. The goo) is a necessity. c. The mar.et (or the goo) is narrowly )e(ine). ). The relevant time hori8on is long. DIF: $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

ANS: = NAT: Analytic *S&: Analytical /1.

For a particular goo)0 a - percent increase in price causes a 1# percent )ecrease in quantity )eman)e). <hich o( the (ollowing statements is most li.ely applica,le to this goo)@ a. The relevant time hori8on is short. ,. The goo) is a necessity. c. The mar.et (or the goo) is ,roa)ly )e(ine). ). There are many close su,stitutes (or this goo). DIF: $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

ANS: D NAT: Analytic *S&: Analytical

/3
/+.

&hapter ! 9Elasticity an) Its Application

For a particular goo)0 a 1# percent increase in price causes a - percent )ecrease in quantity )eman)e). <hich o( the (ollowing statements is most li.ely applica,le to this goo)@ a. The relevant time hori8on is short. ,. The goo) is a lu1ury. c. The mar.et (or the goo) is narrowly )e(ine). ). There are many close su,stitutes (or this goo). DIF: $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

ANS: A NAT: Analytic *S&: Analytical /-.

Deman) is sai) to have unit elasticity i( elasticity is a. less than 1. ,. greater than 1. c. equal to 1. ). equal to #. DIF: 1 $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

ANS: & NAT: Analytic *S&: De(initional //.

Deman) is sai) to ,e unit elastic i( a. quantity )eman)e) changes ,y the same percent as the price. ,. quantity )eman)e) changes ,y a larger percent than the price. c. the )eman) curve shi(ts ,y the same percentage amount as the price. ). quantity )eman)e) )oes not respon) to a change in price. DIF: + $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

ANS: A NAT: Analytic *S&: De(initional /!.

Elasticity o( )eman) is closely relate) to the slope o( the )eman) curve. The more responsive ,uyers are to a change in price0 the a. steeper the )eman) curve will ,e. ,. (latter the )eman) curve will ,e. c. (urther to the right the )eman) curve will sit. ). closer to the vertical a1is the )eman) curve will sit. DIF: + $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

ANS: = NAT: Analytic *S&: Interpretive /2.

Elasticity o( )eman) is closely relate) to the slope o( the )eman) curve. The less responsive ,uyers are to a change in price0 the a. steeper the )eman) curve will ,e. ,. (latter the )eman) curve will ,e. c. (urther to the right the )eman) curve will sit. ). closer to the vertical a1is the )eman) curve will sit. DIF: + $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

ANS: A NAT: Analytic *S&: Interpretive /3.

The (latter the )eman) curve through a given point0 the a. greater the price elasticity o( )eman) at that point. ,. smaller the price elasticity o( )eman) at that point. c. closer the price elasticity o( )eman) will ,e to the slope o( the curve. ). greater the a,solute value o( the change in total revenue when there is a movement (rom that point upwar) an) to the le(t along the )eman) curve. DIF: $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

ANS: A NAT: Analytic *S&: Analytical

&hapter ! 9Elasticity an) Its Application

/5. The smaller the price elasticity o( )eman)0 the a. steeper the )eman) curve will ,e through a given point. ,. (latter the )eman) curve will ,e through a given point. c. more strongly ,uyers respon) to a change in price ,etween any two prices P1 an) P+. ). smaller the )ecrease in equili,rium price when the supply curve shi(ts rightwar) (rom S1 to S+. DIF: $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

/5

ANS: A NAT: Analytic *S&: Analytical /7.

<hen quantity moves proportionately the same amount as price0 )eman) is a. elastic0 an) the price elasticity o( )eman) is 1. ,. per(ectly elastic0 an) the price elasticity o( )eman) is in(initely large. c. per(ectly inelastic0 an) the price elasticity o( )eman) is #. ). unit elastic0 an) the price elasticity o( )eman) is 1. DIF: + $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

ANS: D NAT: Analytic *S&: Interpretive !#.

Lean"'aul says that he will spen) e1actly 3! cents a )ay on *M*s0 regar)less o( the price o( *M*s. Lean" 'aulCs )eman) (or *M*s is a. per(ectly elastic. ,. unit elastic. c. per(ectly inelastic. ). None o( the a,ove answers is correct. DIF: + $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

ANS: = NAT: Analytic *S&: Interpretive !1.

As we move )ownwar) an) to the right along a linear0 )ownwar)"sloping )eman) curve0 a. slope an) elasticity ,oth remain constant. ,. slope changes ,ut elasticity remains constant. c. slope an) elasticity ,oth change. ). slope remains constant ,ut elasticity changes. DIF: + $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

ANS: D NAT: Analytic *S&: Interpretive !+.

<hen we move upwar) an) to the le(t along a linear0 )ownwar)"sloping )eman) curve0 price elasticity o( )eman) a. (irst ,ecomes smaller0 then larger. ,. always ,ecomes larger. c. always ,ecomes smaller. ). (irst ,ecomes larger0 then smaller. DIF: + $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

ANS: = NAT: Analytic *S&: Interpretive !-.

The price elasticity o( )eman) changes as we move along a a. hori8ontal )eman) curve. ,. vertical )eman) curve. c. linear0 )ownwar)"sloping )eman) curve. ). All o( the a,ove are correct. DIF: + $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

ANS: & NAT: Analytic *S&: Interpretive

/7
!/.

&hapter ! 9Elasticity an) Its Application

The )i((erence ,etween slope an) elasticity is that a. slope is a ratio o( two changes0 an) elasticity is a ratio o( two percentage changes. ,. slope is a ratio o( two percentage changes0 an) elasticity is a ratio o( two changes. c. slope measures changes in quantity )eman)e) more accurately than elasticity. ). none o( the a,oveN there is no )i((erence ,etween slope an) elasticity. DIF: + $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

ANS: A NAT: Analytic *S&: Interpretive !!.

Accor)ing to a New York Times article pu,lishe) in Novem,er +##!0 author Anna =ernase. asserts that a 1# percent increase in the price o( gasoline lea)s to a )ecline in the quantity )eman)e) o( a,out a. #.#1 percent. ,. + percent. c. +# percent. ). +## percent. DIF: + $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

ANS: = NAT: Analytic *S&: Interpretive !2.

Accor)ing to a New York Times article pu,lishe) in Novem,er +##!0 author Anna =ernase. asserts that a 1# percent increase in the price o( electricity lea)s to a )ecline in the quantity )eman)e) o( a,out a. #.#1 percent. ,. - percent. c. -# percent. ). -## percent. DIF: + $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

ANS: = NAT: Analytic *S&: Interpretive Figure 5-1

Price

A = & D & = A
Quantity

!3.

Re%er to Fi()re 5!$* The )eman) curve representing the )eman) (or a lu1ury goo) with several close su,stitutes is a. A. ,. =. c. &. ). D. DIF: + $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

ANS: & NAT: Analytic *S&: Applicative

&hapter ! 9Elasticity an) Its Application

!5.

!#

Re%er to Fi()re 5!$* Atog says he woul) ,uy one cup o( co((ee per )ay regar)less o( the price. I( this is true0 then Atog?s )eman) (or co((ee is represente) ,y )eman) curve a. A. ,. =. c. &. ). D. DIF: $%&: Elasticity EF: T%': !"1 'er(ectly inelastic )eman)

ANS: A NAT: Analytic *S&: Applicative Figure 5-2

Price

'a ',

D1 DD+
Quantity

!7.

Re%er to Fi()re 5!+. As price (alls (rom 'a to ',0 which )eman) curve represents the most elastic )eman)@ a. D1 ,. D+ c. D). All o( the a,ove are equally elastic. DIF: + $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

ANS: A NAT: Analytic *S&: Applicative 2#.

Re%er to Fi()re 5!+. As price (alls (rom 'a to ',0 we coul) use the three )eman) curves to calculate three )i((erent values o( the price elasticity o( )eman). <hich o( the three )eman) curves woul) pro)uce the smallest elasticity@ a. D1 ,. D+ c. D). All o( the a,ove are equally elastic. DIF: + $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

ANS: & NAT: Analytic *S&: Applicative

Table 5-1 ,ood #rice Elasticity o% &e'and A 1.= +.1 21. Re%er to Ta-le 5!$* <hich o( the (ollowing is consistent with the elasticities given in Ta,le !"+@ a. A is a lu1ury an) = is a necessity. ,. A is a goo) several years a(ter a price increase0 an) = is that same goo) several )ays a(ter the price increase. c. A is a 6it 6at ,ar an) = is can)y. ). A has (ewer su,stitutes than =.

!1

&hapter ! 9Elasticity an) Its Application

DIF: $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

ANS: D NAT: Analytic *S&: Analytical 2+.

Re%er to Ta-le 5!$* <hich o( the (ollowing is consistent with the elasticities given in Ta,le !"+@ a. A is grapes an) = is (ruit. ,. A is T"shirts an) = is soc.s. c. A is train tic.ets ,e(ore cars were invente)0 an) = is train tic.ets a(ter cars were invente). ). A is )iamon) nec.laces an) = is ,e)s. DIF: $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

ANS: & NAT: Analytic *S&: Analytical 2-.

Stu)ies in)icate that the price elasticity o( )eman) (or cigarettes is a,out #./. A government policy aime) at re)ucing smo.ing change) the price o( a pac. o( cigarettes (rom A+ to A2. Accor)ing to the mi)point metho)0 the government policy shoul) have re)uce) smo.ing ,y a. -#:. ,. /#:. c. 5#:. ). +!#:. DIF: $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

ANS: = NAT: Analytic *S&: Applicative 2/.

I( a 1!: increase in price (or a goo) results in a +#: )ecrease in quantity )eman)e)0 the price elasticity o( )eman) is a. #.3!. ,. 1.+!. c. 1.--. ). 1.2#. DIF: + $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

ANS: & NAT: Analytic *S&: Analytical 2!.

I( a +#: increase in price (or a goo) results in a 1!: )ecrease in quantity )eman)e)0 the price elasticity o( )eman) is a. #.3!. ,. 1.+!. c. 1.--. ). 1.2#. DIF: + $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

ANS: A NAT: Analytic *S&: Analytical 22.

I( a 1#: )ecrease in price (or a goo) results in a +#: increase in quantity )eman)e)0 the price elasticity o( )eman) is a. #.!#. ,. 1. c. 1.!. ). +. DIF: + $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

ANS: D NAT: Analytic *S&: Analytical

&hapter ! 9Elasticity an) Its Application

23. I( a 2: )ecrease in price (or a goo) results in a +: increase in quantity )eman)e)0 the price elasticity o( )eman) is a. #.#+. ,. #.--. c. -. ). /. DIF: + $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

!+

ANS: = NAT: Analytic *S&: Analytical 25.

Suppose that quantity )eman) rises ,y 1#: as a result o( a 1!: )ecrease in price. The price elasticity o( )eman) (or this goo) is a. inelastic an) equal to #.23. ,. elastic an) equal to #.23. c. inelastic an) equal to 1.!#. ). elastic an) equal to 1.!#. DIF: + $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

ANS: A NAT: Analytic *S&: Analytical 27.

Suppose that quantity )eman) (alls ,y -#: as a result o( a !: increase in price. The price elasticity o( )eman) (or this goo) is a. inelastic an) equal to 2. ,. elastic an) equal to 2. c. inelastic an) equal to #.13. ). elastic an) equal to #.13. DIF: + $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

ANS: = NAT: Analytic *S&: Analytical

Table 5-2 The (ollowing ta,le shows a portion o( the )eman) sche)ule (or a particular goo) at various levels o( income. .)antity &e'anded /Inco'e 0 152 3 + / 2 5 1# 1+ .)antity &e'anded /Inco'e 0 1425 3 2 7 1+ 1! 15 .)antity &e'anded /Inco'e 0 1$ 2 3 / 5 1+ 12 +# +/

#rice A+/ A+# A12 A1+ A5 A/ 3#.

Re%er to Ta-le 5!+* Dsing the mi)point metho)0 when income equals A30!##0 what is the price elasticity o( )eman) ,etween A12 an) A+#@ a. #.!2 ,. #.3! c. 1.-). 1.5# DIF: + $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

ANS: D NAT: Analytic *S&: Analytical 31.

Re%er to Ta-le 5!+* Dsing the mi)point metho)0 when income equals A!0###0 what is the price elasticity o( )eman) ,etween A5 an) A1+@ a. #.!2 ,. #.3! c. 1.-). 1.5#

!-

&hapter ! 9Elasticity an) Its Application

DIF: + $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

ANS: A NAT: Analytic *S&: Analytical 3+.

Re%er to Ta-le 5!+* Dsing the mi)point metho)0 at a price o( A120 what is the income elasticity o( )eman) when income rises (rom A!0### to A1#0###@ a. #.## ,. #.!# c. 1.## ). 1.!# DIF: + $%&: Elasticity EF: T%': !"1 Income elasticity o( )eman)

ANS: & NAT: Analytic *S&: Analytical 3-.

Re%er to Ta-le 5!+* Dsing the mi)point metho)0 at a price o( A50 what is the income elasticity o( )eman) when income rises (rom A30!## to A1#0###@ a. #.## ,. #./1 c. 1.## ). +./! DIF: + $%&: Elasticity EF: T%': !"1 Income elasticity o( )eman)

ANS: & NAT: Analytic *S&: Analytical 3/.

Re%er to Ta-le 5!+* Dsing the mi)point metho)0 at a price o( A1+0 what is the income elasticity o( )eman) when income rises (rom A!0### to A1#0###@ a. #.## ,. #./1 c. 1.## ). +./! DIF: + $%&: Elasticity EF: T%': !"1 Income elasticity o( )eman)

ANS: & NAT: Analytic *S&: Analytical 3!.

Deman) is sai) to ,e price elastic i( a. the price o( the goo) respon)s su,stantially to changes in )eman). ,. )eman) shi(ts su,stantially when income or the e1pecte) (uture price o( the goo) changes. c. ,uyers )o not respon) much to changes in the price o( the goo). ). ,uyers respon) su,stantially to changes in the price o( the goo). DIF: + $%&: Elasticity EF: T%': !"1 Elastic )eman)

ANS: D NAT: Analytic *S&: De(initional 32.

<hen quantity )eman)e) respon)s strongly to changes in price0 )eman) is sai) to ,e a. (lui). ,. elastic. c. )ynamic. ). highly varia,le. DIF: 1 $%&: Elasticity EF: T%': !"1 Elastic )eman)

ANS: = NAT: Analytic *S&: De(initional 33.

Deman) is elastic i( elasticity is a. less than 1. ,. equal to 1. c. equal to #. ). greater than 1.

&hapter ! 9Elasticity an) Its Application

ANS: D NAT: Analytic *S&: De(initional 35. DIF: 1 $%&: Elasticity EF: T%': !"1 Elastic )eman)

!/

For which o( the (ollowing goo)s is )eman) pro,a,ly most inelastic@ a. camcor)ers ,. insulin c. apples ). )evices that remove cores (rom apples DIF: + $%&: Elasticity EF: T%': !"1 Elastic )eman)

ANS: = NAT: Analytic *S&: Interpretive 37.

Deman) is sai) to ,e inelastic i( a. ,uyers respon) su,stantially to changes in the price o( the goo). ,. )eman) shi(ts only slightly when the price o( the goo) changes. c. the quantity )eman)e) changes only slightly when the price o( the goo) changes. ). the price o( the goo) respon)s only slightly to changes in )eman). DIF: + $%&: Elasticity EF: T%': !"1 Inelastic )eman)

ANS: & NAT: Analytic *S&: De(initional 5#.

I( )eman) is price inelastic0 then a. ,uyers )o not respon) much to a change in price. ,. ,uyers respon) su,stantially to a change in price0 ,ut the response is very slow. c. ,uyers )o not alter their quantities )eman)e) much in response to a)vertising0 (a)s0 or general changes in tastes. ). the )eman) curve is very (lat. DIF: + $%&: Elasticity EF: T%': !"1 Inelastic )eman)

ANS: A NAT: Analytic *S&: De(initional 51.

I( the quantity )eman)e) o( a certain goo) respon)s only slightly to a change in the price o( the goo)0 then a. the )eman) (or the goo) is sai) to ,e elastic. ,. the )eman) (or the goo) is sai) to ,e inelastic. c. the law o( )eman) )oes not apply to the goo). ). the )eman) curve (or the goo) shi(ts only slightly in response to a change in price. DIF: 1 $%&: Elasticity EF: T%': !"1 Inelastic )eman)

ANS: = NAT: Analytic *S&: De(initional 5+.

Deman) is inelastic i( elasticity is a. less than 1. ,. equal to 1. c. greater than 1. ). equal to #. DIF: 1 $%&: Elasticity EF: T%': !"1 Inelastic )eman)

ANS: A NAT: Analytic *S&: De(initional 5-.

Deman) is sai) to ,e inelastic i( the a. quantity )eman)e) changes proportionately more than price. ,. price changes proportionately more than income. c. quantity )eman)e) changes proportionately less than price. ). quantity )eman)e) changes proportionately the same as price. DIF: + $%&: Elasticity EF: T%': !"1 Inelastic )eman)

ANS: & NAT: Analytic *S&: De(initional

!!
5/.

&hapter ! 9Elasticity an) Its Application

I( the price elasticity o( )eman) is 1.!0 regar)less o( which two points on the )eman) curve are use) to compute the elasticity0 then a. )eman) is per(ectly inelastic0 an) the )eman) curve is vertical. ,. )eman) is elastic0 an) the )eman) curve is a straight0 )ownwar)"sloping line. c. )eman) is per(ectly elastic0 an) the )eman) curve is hori8ontal. ). )eman) is elastic0 an) the )eman) curve is something other than a straight0 )ownwar)"sloping line. DIF: $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

ANS: D NAT: Analytic *S&: Applicative

Table 5-3 The (ollowing ta,le shows the )eman) sche)ule (or a particular goo). #rice A1! A1+ A7 A2 AA# 5!. .)antity # ! 1# 1! +# +!

Re%er to Ta-le 5!5* Dsing the mi)point metho)0 what is the price elasticity o( )eman) when price rises (rom A7 to A1+@ a. #./,. #.23 c. 1.!# ). +.-DIF: + $%&: Elasticity EF: T%': !"1 *i)point metho) ; 'rice elasticity o( )eman)

ANS: D NAT: Analytic *S&: Analytical 52.

Re%er to Ta-le 5!5* Dsing the mi)point metho)0 when price rises (rom A2 to A70 the price elasticity o( )eman) is a. #./,. #.23 c. 1.## ). 1.! DIF: + $%&: Elasticity EF: T%': !"1 *i)point metho) ; 'rice elasticity o( )eman)

ANS: & NAT: Analytic *S&: Analytical 53.

Re%er to Ta-le 5!5* Dsing the mi)point metho)0 when price (alls (rom A2 to A-0 the price elasticity o( )eman) is a. #./,. #.23 c. 1.!# ). +.-DIF: + $%&: Elasticity EF: T%': !"1 *i)point metho) ; 'rice elasticity o( )eman)

ANS: A NAT: Analytic *S&: Analytical 55.

<hen the price o( ,u,,le gum is A#.!#0 the quantity )eman)e) is /## pac.s per )ay. <hen the price (alls to A#./#0 the quantity )eman)e) increases to 2##. 4iven this in(ormation an) using the mi)point metho)0 we .now that the )eman) (or ,u,,le gum is a. inelastic. ,. elastic. c. unit elastic. ). per(ectly inelastic.

&hapter ! 9Elasticity an) Its Application

ANS: = NAT: Analytic *S&: Applicative 57. DIF: + $%&: Elasticity EF: T%': !"1 *i)point metho) ; 'rice elasticity o( )eman)

!2

The mi)point metho) is use) to compute elasticity ,ecause it a. automatically computes a positive num,er instea) o( a negative num,er. ,. results in an elasticity that is the same as the slope o( the )eman) curve. c. gives the same answer regar)less o( the )irection o( change. ). automatically roun)s quantities to the nearest whole unit. DIF: + $%&: Elasticity EF: T%': !"1 *i)point metho) ; 'rice elasticity o( )eman)

ANS: & NAT: Analytic *S&: Interpretive 7#.

Suppose the price o( Twin.ies )ecreases (rom A1./! to A1.+! an)0 as a result0 the quantity o( Twin.ies )eman)e) increases (rom +0### to +0+##. Dsing the mi)point metho)0 the price elasticity o( )eman) (or Twin.ies in the given price range is a. +.##. ,. 1.!!. c. 1.##. ). #.2/. DIF: + $%&: Elasticity EF: T%': !"1 *i)point metho) ; 'rice elasticity o( )eman)

ANS: D NAT: Analytic *S&: Applicative 71.

Dsing the mi)point metho)0 the price elasticity o( )eman) (or a goo) is compute) to ,e appro1imately #.3!. <hich o( the (ollowing events is consistent with a 1# percent )ecrease in the quantity o( the goo) )eman)e)@ a. a 3.! increase in the price o( the goo) ,. a 1-.-- percent increase in the price o( the goo) c. an increase in the price o( the goo) (rom A3.!# to A1# ). an increase in the price o( the goo) (rom A1# to A13.!# DIF: $%&: Elasticity EF: T%': !"1 *i)point metho) ; 'rice elasticity o( )eman)

ANS: = NAT: Analytic *S&: Applicative 7+.

Dsing the mi)point metho)0 the price elasticity o( )eman) (or a goo) is compute) to ,e appro1imately +. <hich o( the (ollowing events is consistent with a #.1 percent increase in the price o( the goo)@ a. The quantity o( the goo) )eman)e) )ecreases (rom +!# to 1!#. ,. The quantity o( the goo) )eman)e) )ecreases (rom +## to 1##. c. The quantity o( the goo) )eman)e) )ecreases ,y #.#! percent. ). The quantity o( the goo) )eman)e) )ecreases ,y #.+ percent. DIF: $%&: Elasticity EF: T%': !"1 *i)point metho) ; 'rice elasticity o( )eman)

ANS: D NAT: Analytic *S&: Applicative 7-.

<hen the price o( a goo) is A!0 the quantity )eman)e) is 1## units per monthN when the price is A30 the quantity )eman)e) is 5# units per month. Dsing the mi)point metho)0 the price elasticity o( )eman) is a,out a. #.++. ,. #.23. c. 1.--. ). 1.!#. DIF: 1 $%&: Elasticity EF: T%': !"1 *i)point metho) ; 'rice elasticity o( )eman)

ANS: = NAT: Analytic *S&: Applicative

!3
7/.

&hapter ! 9Elasticity an) Its Application

<hen the price o( a goo) is A!0 the quantity )eman)e) is 1+# units per monthN when the price is A30 the quantity )eman)e) is 1## units per month. Dsing the mi)point metho)0 the price elasticity o( )eman) is a,out a. #.!!. ,. 1.5-. c. +. ). 1#. DIF: 1 $%&: Elasticity EF: T%': !"1 *i)point metho) ; 'rice elasticity o( )eman)

ANS: A NAT: Analytic *S&: Applicative 7!.

<hen the price o( a watch was A+! each0 the Hewelry shop sol) +# per month. <hen it raise) the price to A-! each0 it sol) 1/ per month. The price elasticity o( )eman) (or watches is a,out a. 1.22. ,. 1.#2. c. #.7/. ). #.2#. DIF: + $%&: Elasticity EF: T%': !"1 *i)point metho) ; 'rice elasticity o( )eman)

ANS: = NAT: Analytic *S&: Applicative 72.

<hich o( the (ollowing e1pressions is vali) (or the price elasticity o( )eman)@ a. 'rice elasticity o( )eman) O . ,. c. ). 'rice elasticity o( )eman) O 'rice elasticity o( )eman) O 'rice elasticity o( )eman) O DIF: + $%&: Elasticity EF: T%': . . . !"1 *i)point metho) ; 'rice elasticity o( )eman)

ANS: = NAT: Analytic *S&: Applicative 73.

<hich o( the (ollowing e1pressions can ,e use) to compute the price elasticity o( )eman)@ a. 'rice elasticity o( )eman) O P . ,. c. ). 'rice elasticity o( )eman) O 'rice elasticity o( )eman) O 'rice elasticity o( )eman) O DIF: $%&: Elasticity P P EF: T%': P . . !"1 *i)point metho) ; 'rice elasticity o( )eman) .

ANS: & NAT: Analytic *S&: Analytical 75.

Suppose that !# can)y ,ars are )eman)e) at a particular price. I( the price o( can)y ,ars rises (rom that price ,y / percent0 the num,er o( can)y ,ars )eman)e) (alls to /2. Dsing the mi)point approach to calculate the price elasticity o( )eman)0 it (ollows that the a. )eman) (or can)y ,ars in this price range is elastic. ,. )eman) (or can)y ,ars in this price range is inelastic. c. )eman) (or can)y ,ars in this price range is unit elastic. ). price elasticity o( )eman) (or can)y ,ars in this price range is #.

&hapter ! 9Elasticity an) Its Application

ANS: A NAT: Analytic *S&: Applicative 77. DIF: + $%&: Elasticity EF: T%': !"1 *i)point metho) ; 'rice elasticity o( )eman)

!5

<hen the rental price o( DQD movies is A/0 Denise rents (ive per month. <hen the price is A-0 she rents nine per month. Denise?s )eman) (or DQD rentals is a. elastic0 an) her )eman) curve woul) ,e relatively (lat. ,. elastic0 an) her )eman) curve woul) ,e relatively steep. c. inelastic0 an) her )eman) curve woul) ,e relatively (lat. ). inelastic0 an) her )eman) curve woul) ,e relatively steep. DIF: + $%&: Elasticity EF: T%': !"1 *i)point metho) ; 'rice elasticity o( )eman)

ANS: A NAT: Analytic *S&: Applicative Figure 5-3

1# 7 5 3 2 ! / + 1 + / 2 5 Price

Deman)

1#

1+

1/

12

15

+#

++

+/

+2

Quantity

1##. Re%er to Fi()re 5!5. =etween point A an) point =0 a. the slope is equal to "19/ an) the price elasticity o( )eman) is equal to +9-. ,. the slope is equal to "19/ an) the price elasticity o( )eman) is equal to -9+. c. the slope is equal to "-9+ an) the price elasticity o( )eman) is equal to 19/. ). the slope is equal to "+9- an) the price elasticity o( )eman) is equal to -9+. ANS: = NAT: Analytic *S&: Applicative DIF: + $%&: Elasticity EF: T%': !"1 *i)point metho) ; 'rice elasticity o( )eman)

1#1. Re%er to Fi()re 5!5. =etween point A an) point = on the graph0 )eman) is a. per(ectly elastic. ,. inelastic. c. unit elastic. ). elastic0 ,ut not per(ectly elastic. ANS: D NAT: Analytic *S&: Applicative DIF: + $%&: Elasticity EF: T%': !"1 *i)point metho) ; 'rice elasticity o( )eman)

1#+. The mi)point metho) (or calculating elasticities is convenient in that it allows us to a. ignore the percentage change in quantity )eman)e) an) instea) (ocus entirely on the percentage change in price. ,. calculate the same value (or the elasticity0 regar)less o( whether the price increases or )ecreases. c. assume that sellers? total revenue stays constant when the price changes. ). restrict all elasticity values to ,etween # an) 1. ANS: = NAT: Analytic *S&: Interpretive DIF: + $%&: Elasticity EF: T%': !"1 *i)point metho) ; 'rice elasticity o( )eman)

!7

&hapter ! 9Elasticity an) Its Application

Total Re6en)e A1## A1#5 A11+ A11+

Table 5-4 #rice A1# A1+ A1/ A12

1#-. Re%er to Ta-le 5!7* As price rises (rom A1# to A1+0 the price elasticity o( )eman) using the mi)point metho) is appro1imately a. #.#5. ,. #.15. c. #./+. ). #.!5. ANS: D NAT: Analytic *S&: Applicative DIF: $%&: Elasticity EF: T%': !"1 *i)point metho) ; 'rice elasticity o( )eman)

1#/. Re%er to Ta-le 5!7* Deman) is unit elastic when quantity )eman)e) changes (rom a. 1# to 7. ,. 7 to 5. c. 5 to 3. ). There is not enough in(ormation given to )etermine the correct answer. ANS: & NAT: Analytic *S&: Analytical DIF: $%&: Elasticity EF: T%': !"1 *i)point metho) ; 'rice elasticity o( )eman)

1#!. Re%er to Ta-le 5!7* <hen price is ,etween A1# an) A1/0 )eman) is a. elastic. ,. unit elastic. c. inelastic. ). There is not enough in(ormation given to )etermine whether )eman) is elastic0 unit elastic0 or inelastic. ANS: & NAT: Analytic *S&: Analytical DIF: $%&: Elasticity EF: T%': !"1 *i)point metho) ; 'rice elasticity o( )eman)

&hapter ! 9Elasticity an) Its Application

Figure 5-4
A
Price

2#

Deman) &
Quantity

1#2. Re%er to Fi()re 5!7. Suppose the point la,ele) = is the Ihal(way pointJ on the )eman) curve an) it correspon)s to a price o( A!.##. Then0 ,etween prices o( A/.77 an) A!.#10 the price elasticity o( )eman) is a. less than 1 ,ut greater than 8ero. ,. equal to 1. c. greater than 1. ). equal to 8ero. ANS: = NAT: Analytic *S&: Interpretive DIF: + $%&: Elasticity EF: T%': !"1 *i)point metho) ; 'rice elasticity o( )eman)

1#3. Re%er to Fi()re 5!7. The section o( the )eman) curve (rom A to = represents the a. elastic section o( the )eman) curve. ,. inelastic section o( the )eman) curve. c. unit elastic section o( the )eman) curve. ). per(ectly elastic section o( the )eman) curve. ANS: A NAT: Analytic *S&: Interpretive DIF: + $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

1#5. Re%er to Fi()re 5!7. The section o( the )eman) curve (rom = to & represents the a. elastic section o( the )eman) curve. ,. inelastic section o( the )eman) curve. c. unit elastic section o( the )eman) curve. ). per(ectly elastic section o( the )eman) curve. ANS: = NAT: Analytic *S&: Interpretive DIF: + $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

1#7. Re%er to Fi()re 5!7. The section o( the )eman) curve at point = represents the a. elastic section o( the )eman) curve. ,. inelastic section o( the )eman) curve. c. unit elastic section o( the )eman) curve. ). per(ectly elastic section o( the )eman) curve. ANS: & NAT: Analytic *S&: Interpretive DIF: + $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

21

&hapter ! 9Elasticity an) Its Application

11#. Re%er to Fi()re 5!7. Assume the section o( the )eman) curve (rom A to = correspon)s to prices ,etween A5 an) A12. Then0 when the price changes ,etween A7 an) A1#0 a. quantity )eman)e) changes proportionately less than the price. ,. quantity )eman)e) changes proportionately more than the price. c. quantity )eman)e) changes the same amount proportionately as price. ). the price elasticity o( )eman) equals 1. ANS: = NAT: Analytic *S&: Applicative DIF: + $%&: Elasticity EF: T%': !"1 Elastic )eman)

111. Re%er to Fi()re 5!7. Assume the section o( the )eman) curve (rom A to = correspon)s to prices ,etween A2 an) A1+. Then0 when the price increases (rom A5 to A1#0 a. the percent )ecrease in the quantity )eman)e) e1cee)s the percent increase in the price. ,. the percent increase in the price e1cee)s the percent )ecrease in the quantity )eman)e). c. sellersC total revenue increases as a result. ). it is possi,le that the quantity )eman)e) (ell (rom !!# to !## as a result. ANS: A NAT: Analytic *S&: Applicative DIF: $%&: Elasticity EF: T%': !"1 Elastic )eman)

11+. Re%er to Fi()re 5!7. Assume0 (or the goo) in question0 two speci(ic points on the )eman) curve are ER O 10###0 ' O A/#F an) ER O 10!##0 ' O A-#F. Then which o( the (ollowing scenarios is possi,le@ a. =oth o( these points lie on the section o( the )eman) curve (rom = to &. ,. The vertical intercept o( the )eman) curve is the point ER O #0 ' O A2#F. c. The hori8ontal intercept o( the )eman) curve is the point ER O 105##0 ' O A#F. ). Any o( these scenarios is possi,le. ANS: = NAT: Analytic *S&: Analytical DIF: $%&: Elasticity EF: T%': !"1 Elastic )eman)

11-. Re%er to Fi()re 5!7. The section o( the )eman) curve (rom = to & represents the a. elastic section o( the )eman) curve. ,. per(ectly elastic section o( the )eman) curve. c. unit elastic section o( the )eman) curve. ). inelastic section o( the )eman) curve. ANS: D NAT: Analytic *S&: Interpretive DIF: + $%&: Elasticity EF: T%': !"1 Inelastic )eman)

11/. Re%er to Fi()re 5!7. Assume the section o( the )eman) curve (rom = to & correspon)s to prices ,etween A# an) A1!. Then0 when the price changes ,etween A3 an) A70 a. quantity )eman)e) changes proportionately less than the price. ,. quantity )eman)e) changes proportionately more than the price. c. quantity )eman)e) changes the same amount proportionately as price. ). the price elasticity o( )eman) equals 8ero. ANS: A NAT: Analytic *S&: Applicative DIF: + $%&: Elasticity EF: T%': !"1 Inelastic )eman)

11!. Re%er to Fi()re 5!7. Assume0 (or the goo) in question0 two speci(ic points on the )eman) curve are ER O +0###0 ' O A1!F an) ER O +0/##0 ' O A1+F. Then which o( the (ollowing scenarios is possi,le@ a. =oth o( these points lie on section & o( the )eman) curve. ,. The vertical intercept o( the )eman) curve is the point ER O #0 ' O A++F. c. The hori8ontal intercept o( the )eman) curve is the point ER O !0###0 ' O A#F. ). Any o( these scenarios is possi,le. ANS: A NAT: Analytic *S&: Analytical DIF: $%&: Elasticity EF: T%': !"1 Inelastic )eman)

&hapter ! 9Elasticity an) Its Application

2+

112. Re%er to Fi()re 5!7. I( the price )ecreases in the region o( the )eman) curve ,etween points A an) =0 we can e1pect total revenue to a. increase. ,. stay the same. c. )ecrease. ). (irst )ecrease0 then increase until total revenue is ma1imi8e). ANS: A NAT: Analytic *S&: Analytical DIF: $%&: Elasticity EF: T%': !"1 Total revenue ; 'rice elasticity o( )eman)

113. Re%er to Fi()re 5!7. I( the price increases in the region o( the )eman) curve ,etween points A an) =0 we can e1pect total revenue to a. increase. ,. stay the same. c. )ecrease. ). (irst increase0 then )ecrease until total revenue is ma1imi8e). ANS: & NAT: Analytic *S&: Analytical DIF: $%&: Elasticity EF: T%': !"1 Total revenue ; 'rice elasticity o( )eman)

115. Re%er to Fi()re 5!7. I( the price )ecreases in the region o( the )eman) curve ,etween points = an) &0 we can e1pect total revenue to a. increase. ,. stay the same. c. )ecrease. ). (irst increase0 then )ecrease until total revenue is ma1imi8e). ANS: & NAT: Analytic *S&: Analytical DIF: $%&: Elasticity EF: T%': !"1 Total revenue ; 'rice elasticity o( )eman)

117. Re%er to Fi()re 5!7. I( the price increases in the region o( the )eman) curve ,etween points = an) &0 we can e1pect total revenue to a. increase. ,. stay the same. c. )ecrease. ). (irst )ecrease0 then increase until total revenue is ma1imi8e). ANS: A NAT: Analytic *S&: Analytical DIF: $%&: Elasticity EF: T%': !"1 Total revenue ; 'rice elasticity o( )eman)

2-
2# !/ /5 /+ -2 -# +/ 15 1+ 2

&hapter ! 9Elasticity an) Its Application

Price

Figure 5-5

Deman)
2 7 1+ 1! 15 +1 +/ +3 -# -Quantity

1+#. Re%er to Fi()re 5!5. Deman) is unit elastic ,etween prices o( a. A15 an) A+/. ,. A+/ an) A-#. c. A+/ an) A-2. ). A-# an) A-2. ANS: & NAT: Analytic *S&: Applicative DIF: + $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

1+1. Re%er to Fi()re 5!5* Dsing the mi)point metho)0 ,etween prices o( A1+ an) A150 price elasticity o( )eman) is a. #.--. ,. #.23. c. 1.--. ). 1.57. ANS: A NAT: Analytic *S&: Applicative DIF: + $%&: Elasticity EF: T%': !"1 *i)point metho) ; 'rice elasticity o( )eman)

1++. Re%er to Fi()re 5!5* Dsing the mi)point metho)0 ,etween prices o( A/5 an) A!/0 price elasticity o( )eman) is a,out a. #.7+. ,. -.57. c. /.--. ). !.23. ANS: D NAT: Analytic *S&: Applicative DIF: + $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

1+-. Re%er to Fi()re 5!5* Dsing the mi)point metho)0 ,etween prices o( A-# an) A-20 price elasticity o( )eman) is a,out a. #.!. ,. #.5+. c. 1.++. ). +. ANS: & NAT: Analytic *S&: Applicative DIF: + $%&: Elasticity EF: T%': !"1 'rice elasticity o( )eman)

&hapter ! 9Elasticity an) Its Application

1+/. Re%er to Fi()re 5!5. The ma1imum value o( total revenue correspon)s to a price o( a. A15. ,. A-#. c. A/+. ). A/5. ANS: = NAT: Analytic *S&: Applicative DIF: + $%&: Elasticity EF: T%': !"1 Total revenue ; 'rice elasticity o( )eman)

2/

1+!. Re%er to Fi()re 5!5. At a price o( A/5 per unit0 sellers? total revenue amounts to a. A1!#. ,. A+##. c. A+55. ). A-2/. ANS: & NAT: Analytic *S&: De(initional DIF: 1 $%&: Elasticity EF: T%': !"1 Total revenue ; 'rice elasticity o( )eman)

1+2. Re%er to Fi()re 5!5. At a price o( A1+ per unit0 sellers? total revenue amounts to a. A1!#. ,. A+##. c. A+55. ). A-2/. ANS: & NAT: Analytic *S&: De(initional DIF: 1 $%&: Elasticity EF: T%': !"1 Total revenue ; 'rice elasticity o( )eman)

1+3. Re%er to Fi()re 5!5. At a price o( A-# per unit0 sellers? total revenue amounts to a. A1!#. ,. A+##. c. A+55. ). A/!#. ANS: D NAT: Analytic *S&: De(initional DIF: 1 $%&: Elasticity EF: T%': !"1 Total revenue ; 'rice elasticity o( )eman)

2!
++ +# 15 12 1/ 1+ 1# 5 2 / +

&hapter ! 9Elasticity an) Its Application

Price

Figure 5-6

&

Deman)
1## +## -## /## !## 2## 3## 5## 7## Quantity

1+5. Re%er to Fi()re 5!8. Dsing the mi)point metho)0 the price elasticity o( )eman) ,etween point A an) point = is a. 1. ,. 1.!. c. +. ). +.!. ANS: D NAT: Analytic *S&: Applicative DIF: + $%&: Elasticity EF: T%': !"1 *i)point metho) ; 'rice elasticity o( )eman)

1+7. Re%er to Fi()re 5!8. Dsing the mi)point metho)0 the price elasticity o( )eman) ,etween point = an) point & is a. #.!. ,. #.3!. c. 1.#. ). 1.-. ANS: = NAT: Analytic *S&: Applicative DIF: + $%&: Elasticity EF: T%': !"1 *i)point metho) ; 'rice elasticity o( )eman)

1-#. Re%er to Fi()re 5!8. I( the price )ecrease) (rom A15 to A20 a. total revenue woul) increase ,y A10+##0 an) )eman) is elastic ,etween points A an) &. ,. total revenue woul) increase ,y A5##0 an) )eman) is elastic ,etween points A an) &. c. total revenue woul) )ecrease ,y A10+##0 an) )eman) is inelastic ,etween points A an) &. ). total revenue woul) )ecrease ,y A5##0 an) )eman) is inelastic ,etween points A an) &. ANS: A NAT: Analytic *S&: Applicative DIF: + $%&: Elasticity EF: T%': !"1 Total revenue ; 'rice elasticity o( )eman)

1-1. Re%er to Fi()re 5!8. SellersC total revenue woul) increase i( the price a. increase) (rom A/ to A2. ,. increase) (rom A12 to A15. c. )ecrease) (rom A5 to A2. ). All o( the a,ove are correct. ANS: A NAT: Analytic *S&: Applicative DIF: + $%&: Elasticity EF: T%': !"1 Total revenue ; 'rice elasticity o( )eman)

&hapter ! 9Elasticity an) Its Application

1-+. Re%er to Fi()re 5!8. SellersC total revenue woul) increase i( the price a. increase) (rom A2 to A5. ,. )ecrease) (rom A15 to A12. c. )ecrease) (rom A12 to A1!. ). All o( the a,ove are correct. ANS: D NAT: Analytic *S&: Applicative DIF: + $%&: Elasticity EF: T%': !"1 Total revenue ; 'rice elasticity o( )eman)

22

1--. Re%er to Fi()re 5!8. <hich o( the (ollowing price changes woul) result in no change in sellersC total revenue@ a. The price increases (rom A2 to A7. ,. The price increases (rom A7 to A1!. c. The price )ecreases (rom A1+ to A7. ). The price )ecreases (rom A7 to A!. ANS: & NAT: Analytic *S&: Applicative DIF: $%&: Elasticity EF: T%': !"1 Total revenue ; 'rice elasticity o( )eman)

1-/. Suppose )eman) is per(ectly inelastic0 an) the supply o( the goo) in question )ecreases. As a result0 a. the equili,rium quantity )ecreases0 an) the equili,rium price is unchange). ,. the equili,rium price increases0 an) the equili,rium quantity is unchange). c. the equili,rium quantity an) the equili,rium price ,oth are unchange). ). ,uyersC total e1pen)iture on the goo) is unchange). ANS: = NAT: Analytic *S&: Applicative DIF: + $%&: Elasticity EF: T%': !"1 'er(ectly inelastic )eman)

1-!. Suppose )eman) is per(ectly elastic0 an) the supply o( the goo) in question )ecreases. As a result0 a. the equili,rium quantity )ecreases0 an) the equili,rium price is unchange). ,. the equili,rium price increases0 an) the equili,rium quantity is unchange). c. the equili,rium quantity an) the equili,rium price ,oth are unchange). ). ,uyersC total e1pen)iture on the goo) is unchange). ANS: A NAT: Analytic *S&: Applicative DIF: + $%&: Elasticity EF: T%': !"1 'er(ectly elastic )eman)

1-2. A per(ectly elastic )eman) implies that a. ,uyers will not respon) to any change in price. ,. any rise in price a,ove that represente) ,y the )eman) curve will result in a quantity )eman)e) o( 8ero. c. quantity )eman)e) an) price change ,y the same percent as we move along the )eman) curve. ). price will rise ,y an in(inite amount when there is a change in quantity )eman)e). ANS: = NAT: Analytic *S&: Interpretive DIF: + $%&: Elasticity EF: T%': !"1 'er(ectly elastic )eman)

1-3. The case o( per(ectly elastic )eman) is illustrate) ,y a )eman) curve that is a. vertical. ,. hori8ontal. c. )ownwar)"sloping ,ut relatively steep. ). )ownwar)"sloping ,ut relatively (lat. ANS: = NAT: Analytic *S&: Interpretive DIF: 1 $%&: Elasticity EF: T%': !"1 'er(ectly elastic )eman)

23

&hapter ! 9Elasticity an) Its Application

1-5. <hen small changes in price lea) to in(inite changes in quantity )eman)e)0 )eman) is per(ectly a. elastic0 an) the )eman) curve will ,e hori8ontal. ,. inelastic0 an) the )eman) curve will ,e hori8ontal. c. elastic0 an) the )eman) curve will ,e vertical. ). inelastic0 an) the )eman) curve will ,e vertical. ANS: A NAT: Analytic *S&: Interpretive DIF: + $%&: Elasticity EF: T%': !"1 'er(ectly elastic )eman)

1-7. For a hori8ontal )eman) curve0 a. slope is un)e(ine)0 an) price elasticity o( )eman) is equal to #. ,. slope is equal to #0 an) price elasticity o( )eman) is un)e(ine). c. slope an) price elasticity o( )eman) ,oth are un)e(ine). ). slope an) price elasticity o( )eman) ,oth are equal to #. ANS: = NAT: Analytic *S&: Interpretive DIF: + $%&: Elasticity EF: T%': !"1 'er(ectly elastic )eman)

1/#. In the case o( per(ectly inelastic )eman)0 a. the change in quantity )eman)e) equals the change in price. ,. the percentage change in quantity )eman)e) equals the percentage change in price. c. in(initely"large changes in quantity )eman)e) result (rom very small changes in the price. ). quantity )eman)e) stays the same whenever price changes. ANS: D NAT: Analytic *S&: Interpretive DIF: + $%&: Elasticity EF: T%': !"1 'er(ectly inelastic )eman)

1/1. <hen )eman) is per(ectly inelastic0 the )eman) curve will ,e a. negatively slope)0 ,ecause ,uyers )ecrease their purchases when the price rises. ,. vertical0 ,ecause ,uyers purchase the same amount as ,e(ore whenever the price rises or (alls. c. positively slope)0 ,ecause ,uyers increase their purchases when price rises. ). positively slope)0 ,ecause ,uyers increase their total e1pen)itures when price rises. ANS: = NAT: Analytic *S&: Interpretive DIF: + $%&: Elasticity EF: T%': !"1 'er(ectly inelastic )eman)

1/+. <hen )eman) is per(ectly inelastic0 the price elasticity o( )eman) a. is 8ero0 an) the )eman) curve is vertical. ,. is 8ero0 an) the )eman) curve is hori8ontal. c. approaches in(inity0 an) the )eman) curve is vertical. ). approaches in(inity0 an) the )eman) curve is hori8ontal. ANS: A NAT: Analytic *S&: Interpretive DIF: + $%&: Elasticity EF: T%': !"1 'er(ectly inelastic )eman)

1/-. A per(ectly inelastic )eman) implies that ,uyers a. )ecrease their purchases when the price rises. ,. purchase the same amount as ,e(ore when the price rises or (alls. c. increase their purchases only slightly when the price (alls. ). respon) su,stantially to an increase in price. ANS: = NAT: Analytic *S&: Interpretive DIF: + $%&: Elasticity EF: T%': !"1 'er(ectly inelastic )eman)

1//. Alice says that she woul) ,uy one ,anana split a )ay regar)less o( the price. I( she is telling the truth0 a. Alice?s )eman) (or ,anana splits is per(ectly inelastic. ,. Alice?s price elasticity o( )eman) (or ,anana splits is 1. c. Alice?s income elasticity o( )eman) (or ,anana splits is #. ). None o( the a,ove answers is correct.

&hapter ! 9Elasticity an) Its Application

ANS: A NAT: Analytic *S&: Interpretive DIF: + $%&: Elasticity EF: T%': !"1 'er(ectly inelastic )eman)

25

1/!. For a vertical )eman) curve0 a. slope is un)e(ine)0 an) price elasticity o( )eman) is equal to #. ,. slope is equal to #0 an) price elasticity o( )eman) is un)e(ine). c. slope an) price elasticity o( )eman) ,oth are un)e(ine). ). slope an) price elasticity o( )eman) ,oth are equal to #. ANS: A NAT: Analytic *S&: Interpretive DIF: + $%&: Elasticity EF: T%': !"1 'er(ectly inelastic )eman)

1/2. In which o( these instances is )eman) sai) to ,e per(ectly inelastic@ a. An increase in price o( +: causes a )ecrease in quantity )eman)e) o( +:. ,. A )ecrease in price o( +: causes an increase in quantity )eman)e) o( #:. c. A )ecrease in price o( +: causes a )ecrease in total revenue o( #:. ). The )eman) curve is hori8ontal. ANS: = NAT: Analytic *S&: Interpretive DIF: + $%&: Elasticity EF: T%': !"1 'er(ectly inelastic )eman)

1/3. <hen the price o( goo) A is A!#0 the quantity )eman)e) o( goo) A is !## units. <hen the price o( goo) A rises to A3#0 the quantity )eman)e) o( goo) A (alls to /## units. Dsing the mi)point metho)0 a. the price elasticity o( )eman) (or goo) A is 1.!#0 an) an increase in price will result in an increase in total revenue (or goo) A. ,. the price elasticity o( )eman) (or goo) A is 1.!#0 an) an increase in price will result in a )ecrease in total revenue (or goo) A. c. the price elasticity o( )eman) (or goo) A is #.230 an) an increase in price will result in an increase in total revenue (or goo) A. ). the price elasticity o( )eman) (or goo) A is #.230 an) an increase in price will result in a )ecrease in total revenue (or goo) A. ANS: NAT: T%': *S&: & DIF: + EF: !"1 Analytic $%&: Elasticity *i)point metho) ; Total revenue ; 'rice elasticity o( )eman) Analytical

1/5. &onsi)er air(ares on (lights ,etween New >or. an) *inneapolis. <hen the air(are is A+!#0 the quantity )eman)e) o( tic.ets is +0### per wee.. <hen the air(are is A+5#0 the quantity )eman)e) o( tic.ets is 103## per wee.. Dsing the mi)point metho)0 a. the price elasticity o( )eman) is a,out 1./-0 an) an increase in the air(are will cause airlines? total revenue to )ecrease. ,. the price elasticity o( )eman) is a,out 1./-0 an) an increase in the air(are will cause airlines? total revenue to increase. c. the price elasticity o( )eman) is a,out #.3#0 an) an increase in the air(are will cause airlines? total revenue to )ecrease. ). the price elasticity o( )eman) is a,out #.3#0 an) an increase in the air(are will cause airlines? total revenue to increase. ANS: NAT: T%': *S&: A DIF: + EF: !"1 Analytic $%&: Elasticity *i)point metho) ; Total revenue ; 'rice elasticity o( )eman) Applicative

27

&hapter ! 9Elasticity an) Its Application

1/7. <hen the local use) ,oo.store prices economics ,oo.s at A1!.## each0 it generally sells 3# ,oo.s per month. I( it lowers the price to A3.##0 sales increase to 7# ,oo.s per month. 4iven this in(ormation0 we .now that the price elasticity o( )eman) (or economics ,oo.s is a,out a. +.710 an) an increase in price (rom A3.## to A1!.## results in an increase in total revenue. ,. +.710 an) an increase in price (rom A3.## to A1!.## results in a )ecrease in total revenue. c. #.-/0 an) an increase in price (rom A3.## to A1!.## results in an increase in total revenue. ). #.-/0 an) an increase in price (rom A3.## to A1!.## results in a )ecrease in total revenue. ANS: NAT: T%': *S&: & DIF: + EF: !"1 Analytic $%&: Elasticity *i)point metho) ; Total revenue ; 'rice elasticity o( )eman) Applicative

1!#. Barry?s =ar,er Shop increase) its total monthly revenue (rom A10!## to A105## when it raise) the price o( a haircut (rom A! to A7. The price elasticity o( )eman) (or Barry?s Baircuts is a. #.!23. ,. #.3##. c. 1./+7. ). +.+##. ANS: NAT: T%': *S&: = DIF: EF: !"1 Analytic $%&: Elasticity *i)point metho) ; Total revenue ; 'rice elasticity o( )eman) Applicative

1!1. =ar,?s =a.ery earne) A+## in total revenue last month when it sol) 1## loaves o( ,rea). This month it earne) A-## in total revenue when it sol) 2# loaves o( ,rea). The price elasticity o( )eman) (or =ar,?s ,rea) is a. #.+3. ,. #.!5. c. 1.+!. ). 1.31. ANS: NAT: T%': *S&: = DIF: EF: !"1 Analytic $%&: Elasticity *i)point metho) ; Total revenue ; 'rice elasticity o( )eman) Applicative

1!+. Suppose that when the price o( corn is A+ per ,ushel0 (armers can sell 1# million ,ushels. <hen the price o( corn is A- per ,ushel0 (armers can sell 5 million ,ushels. <hich o( the (ollowing statements is true@ a. The )eman) (or corn is income inelastic0 an) so an increase in the price o( corn will increase the total revenue o( corn (armers. ,. The )eman) (or corn is income elastic0 an) so an increase in the price o( corn will increase the total revenue o( corn (armers. c. The )eman) (or corn is price inelastic0 an) so an increase in the price o( corn will increase the total revenue o( corn (armers. ). The )eman) (or corn is price elastic0 an) so an increase in the price o( corn will increase the total revenue o( corn (armers. ANS: NAT: T%': *S&: & DIF: EF: !"1 Analytic $%&: Elasticity *i)point metho) ; Total revenue ; 'rice elasticity o( )eman) Applicative

1!-. Suppose that when the price o( ,eer is A+ per ,ottle0 (irms can sell / million ,ottles. <hen the price o( ,eer is A- per ,ottle0 (irms can sell + million ,ottles. <hich o( the (ollowing statements is true@ a. The )eman) (or ,eer is income inelastic0 an) so an increase in the price o( ,eer will increase the total revenue o( ,eer pro)ucers. ,. The )eman) (or ,eer is income elastic0 an) so an increase in the price o( ,eer will increase the total revenue o( ,eer pro)ucers. c. The )eman) (or ,eer is price inelastic0 an) so an increase in the price o( ,eer will increase the total revenue o( ,eer pro)ucers. ). The )eman) (or ,eer is price elastic0 an) so an increase in the price o( ,eer will increase the total revenue o( ,eer pro)ucers.

&hapter ! 9Elasticity an) Its Application

ANS: NAT: T%': *S&: D DIF: EF: !"1 Analytic $%&: Elasticity *i)point metho) ; Total revenue ; 'rice elasticity o( )eman) Applicative

3#

1!/. Suppose that !# can)y ,ars are )eman)e) at a particular price. I( the price o( can)y ,ars rises (rom that price ,y ! percent0 the num,er o( can)y ,ars )eman)e) (alls to /5. Dsing the mi)point approach to calculate the price elasticity o( )eman)0 it (ollows that the a. )eman) (or can)y ,ars in this price range is unit elastic. ,. price increase will )ecrease the total revenue o( can)y ,ar sellers. c. price elasticity o( )eman) (or can)y ,ars in this price range is a,out 1.++. ). price elasticity o( )eman) (or can)y ,ars in this price range is a,out #.5+. ANS: NAT: T%': *S&: D DIF: EF: !"1 Analytic $%&: Elasticity *i)point metho) ; Total revenue ; 'rice elasticity o( )eman) Applicative

1!!. Suppose that !## can)y ,ars are )eman)e) at a particular price. I( the price o( can)y ,ars rises (rom that price ,y 1# percent0 the num,er o( can)y ,ars )eman)e) (alls to /5#. Dsing the mi)point approach to calculate the price elasticity o( )eman)0 it (ollows that the a. )eman) (or can)y ,ars in this price range is unit elastic. ,. price increase will )ecrease the total revenue o( can)y ,ar sellers. c. price elasticity o( )eman) (or can)y ,ars in this price range is a,out #./1. ). price elasticity o( )eman) (or can)y ,ars in this price range is a,out #.+/. ANS: NAT: T%': *S&: & DIF: EF: !"1 Analytic $%&: Elasticity *i)point metho) ; Total revenue ; 'rice elasticity o( )eman) Applicative

1!2. <hen )eman) is inelastic0 a )ecrease in price will cause a. an increase in total revenue. ,. a )ecrease in total revenue. c. no change in total revenue0 ,ut an increase in quantity )eman)e). ). no change in total revenue0 ,ut a )ecrease in quantity )eman)e). ANS: = NAT: Analytic *S&: Applicative DIF: + $%&: Elasticity EF: T%': !"1 Total revenue ; 'rice elasticity o( )eman)

1!3. <hen )eman) is elastic0 a )ecrease in price will cause a. an increase in total revenue. ,. a )ecrease in total revenue. c. no change in total revenue0 ,ut an increase in quantity )eman)e). ). no change in total revenue0 ,ut a )ecrease in quantity )eman)e). ANS: A NAT: Analytic *S&: Applicative DIF: + $%&: Elasticity EF: T%': !"1 Total revenue ; 'rice elasticity o( )eman)

1!5. <hen )eman) is inelastic0 an increase in price will cause a. an increase in total revenue. ,. a )ecrease in total revenue. c. no change in total revenue0 ,ut an increase in quantity )eman)e). ). no change in total revenue0 ,ut a )ecrease in quantity )eman)e). ANS: A NAT: Analytic *S&: Applicative DIF: + $%&: Elasticity EF: T%': !"1 Total revenue ; 'rice elasticity o( )eman)

31

&hapter ! 9Elasticity an) Its Application

1!7. <hen )eman) is elastic0 an increase in price will cause a. an increase in total revenue. ,. a )ecrease in total revenue. c. no change in total revenue0 ,ut an increase in quantity )eman)e). ). no change in total revenue0 ,ut a )ecrease in quantity )eman)e). ANS: = NAT: Analytic *S&: Applicative DIF: + $%&: Elasticity EF: T%': !"1 Total revenue ; 'rice elasticity o( )eman)

12#. <hich o( the (ollowing coul) ,e the price elasticity o( )eman) (or a goo) (or which a )ecrease in price woul) increase revenue@ a. # ,. #.+ c. 1 ). +.1 ANS: D NAT: Analytic *S&: Interpretive DIF: + $%&: Elasticity EF: T%': !"1 Total revenue ; 'rice elasticity o( )eman)

121. <hich o( the (ollowing coul) ,e the price elasticity o( )eman) (or a goo) (or which an increase in price woul) increase revenue@ a. #.+ ,. 1 c. 1.! ). All o( the a,ove coul) ,e correct. ANS: A NAT: Analytic *S&: Interpretive DIF: + $%&: Elasticity EF: T%': !"1 Total revenue ; 'rice elasticity o( )eman)

12+. <hich o( the (ollowing coul) ,e the price elasticity o( )eman) (or a goo) (or which a )ecrease in price woul) )ecrease revenue@ a. #.! ,. 1 c. 1.! ). All o( the a,ove coul) ,e correct. ANS: A NAT: Analytic *S&: Interpretive DIF: + $%&: Elasticity EF: T%': !"1 Total revenue ; 'rice elasticity o( )eman)

12-. <hich o( the (ollowing coul) ,e the price elasticity o( )eman) (or a goo) (or which an increase in price woul) )ecrease revenue@ a. # ,. #.! c. 1 ). 1.! ANS: D NAT: Analytic *S&: Interpretive DIF: + $%&: Elasticity EF: T%': !"1 Total revenue ; 'rice elasticity o( )eman)

12/. <hich o( the (ollowing is not possi,le@ a. Deman) is elastic0 an) a )ecrease in price causes an increase in revenue. ,. Deman) is unit elastic0 an) a )ecrease in price causes an increase in revenue. c. Deman) is inelastic0 an) an increase in price causes an increase in revenue. ). Deman) is per(ectly inelastic0 an) an increase in price causes an increase in revenue. ANS: = NAT: Analytic *S&: Applicative DIF: + $%&: Elasticity EF: T%': !"1 Total revenue ; 'rice elasticity o( )eman)

&hapter ! 9Elasticity an) Its Application

12!. I( )eman) is price inelastic0 then when price rises0 a. total revenue will (all. ,. total revenue will rise. c. total revenue will remain unchange). ). total revenue may rise0 (all0 or remain unchange). *ore in(ormation is nee) to )etermine the change in total revenue with certainty. ANS: = NAT: Analytic *S&: Analytical DIF: + $%&: Elasticity EF: T%': !"1 Total revenue ; 'rice elasticity o( )eman)

3+

Figure 5-7 The (ollowing graph shows the linear )eman) curve (or a particular goo).
+# 15 12 1/ 1+ 1# 5 2 / + + / 2 5 1# 1+ 1/ Price

D
12 Quantity

122. Re%er to Fi()re 5!4* For prices a,ove A50 )eman) is price a. elastic0 an) total revenue will rise as price rises. ,. inelastic0 an) total revenue will rise as price rises. c. elastic0 an) total revenue will (all as price rises. ). inelastic0 an) total revenue will (all as price rises. ANS: & NAT: Analytic *S&: Applicative DIF: + $%&: Elasticity EF: T%': !"1 Total revenue ; 'rice elasticity o( )eman)

123. Re%er to Fi()re 5!4* For prices ,elow A20 )eman) is price a. elastic0 an) total revenue will rise as price rises. ,. inelastic0 an) total revenue will rise as price rises. c. elastic0 an) total revenue will (all as price rises. ). inelastic0 an) total revenue will (all as price rises. ANS: = NAT: Analytic *S&: Applicative DIF: + $%&: Elasticity EF: T%': !"1 Total revenue ; 'rice elasticity o( )eman)

3-
1# 7 5 3 2 ! / + 1

&hapter ! 9Elasticity an) Its Application

Price

Figure 5-8

D
1 + / ! 2 3 5 Quantity

125. Re%er to Fi()re 5!9* For prices a,ove A!0 )eman) is price a. elastic0 an) raising price will increase total revenue. ,. inelastic0 an) raising price will increase total revenue. c. elastic0 an) lowering price will increase total revenue. ). inelastic0 an) lowering price will increase total revenue. ANS: & NAT: Analytic *S&: Interpretive DIF: + $%&: Elasticity EF: T%': !"1 Total revenue ; 'rice elasticity o( )eman)

127. Re%er to Fi()re 5!9* For prices ,elow A!0 )eman) is price a. elastic0 an) raising price will increase total revenue. ,. inelastic0 an) raising price will increase total revenue. c. elastic0 an) lowering price will increase total revenue. ). inelastic0 an) lowering price will increase total revenue. ANS: = NAT: Analytic *S&: Interpretive DIF: + $%&: Elasticity EF: T%': !"1 Total revenue ; 'rice elasticity o( )eman)

&hapter ! 9Elasticity an) Its Application

Figure 5-9
Price +1 +# 17 15 13 12 1! 1/ 11+ 11 1# 7 5 3 2 ! / + 1 1 + / ! 2 3 5 7 1# 11

3/

Deman)

1+

Quantity

13#. Re%er to Fi()re 5!:. Suppose this )eman) curve is a straight0 )ownwar)"sloping line all the way (rom the hori8ontal intercept to the vertical intercept. <e choose two prices0 P1 an) P+0 an) the correspon)ing quantities )eman)e)0 Q1 an) Q+0 (or the purpose o( calculating the price elasticity o( )eman). Also suppose P+ S P1. In which o( the (ollowing cases coul) we possi,ly (in) that EiF )eman) is elastic an) EiiF an increase in price (rom P1 to P+ causes an increase in total revenue@ a. # T P1 T P+ T A1#. ,. A1# T P1 T P+ T A1!. c. P1 S A1!. ). None o( the a,ove is correct. ANS: D NAT: Analytic *S&: Analytical DIF: $%&: Elasticity EF: T%': !"1 Total revenue ; 'rice elasticity o( )eman)

131. Re%er to Fi()re 5!:. I( price increases (rom A1# to A1!0 total revenue will a. increase ,y A+#0 so )eman) must ,e inelastic in this price range. ,. increase ,y A!0 so )eman) must ,e inelastic in this price range. c. )ecrease ,y A+#0 so )eman) must ,e elastic in this price range. ). )ecrease ,y A1#0 so )eman) must ,e elastic in this price range. ANS: A NAT: Analytic *S&: Applicative DIF: + $%&: Elasticity EF: T%': !"1 Total revenue ; 'rice elasticity o( )eman)

13+. Re%er to Fi()re 5!:. A )ecrease in price (rom A1! to A1# lea)s to a. a )ecrease in total revenue o( A1#0 so the price elasticity o( )eman) is greater than 1 in this price range. ,. a )ecrease in total revenue o( A1#0 so the price elasticity o( )eman) is less than 1 in this price range. c. a )ecrease in total revenue o( A+#0 so the price elasticity o( )eman) is less than 1 in this price range. ). a )ecrease in total revenue o( A+#0 so )eman) is elastic in this price range. ANS: & NAT: Analytic *S&: Applicative DIF: + $%&: Elasticity EF: T%': !"1 Total revenue ; 'rice elasticity o( )eman)

3!

&hapter ! 9Elasticity an) Its Application

Price

Figure 5-10

'+

A
'1

&

D Deman)
R+ R1 Quantity

13-. Re%er to Fi()re 5!$ . I( rectangle D is larger than rectangle A0 then a. )eman) is elastic ,etween prices P1 an) P+. ,. a )ecrease in price (rom P+ to P1 will cause an increase in total revenue. c. the magnitu)e o( the percent change in price ,etween P1 an) P+ is smaller than the magnitu)e o( the correspon)ing percent change in quantity )eman)e). ). All o( the a,ove are correct. ANS: D NAT: Analytic *S&: Analytical DIF: $%&: Elasticity EF: T%': !"1 Total revenue ; 'rice elasticity o( )eman)

13/. Re%er to Fi()re 5!$ . Total revenue when the price is P1 is represente) ,y the areaEsF a. = U D. ,. A U =. c. & U D. ). D. ANS: A NAT: Analytic *S&: Applicative DIF: + $%&: Elasticity EF: T%': !"1 Total revenue ; 'rice elasticity o( )eman)

13!. Re%er to Fi()re 5!$ . Total revenue when the price is P+ is represente) ,y the areaEsF a. = U D. ,. A U =. c. & U D. ). D. ANS: = NAT: Analytic *S&: Applicative DIF: + $%&: Elasticity EF: T%': !"1 Total revenue ; 'rice elasticity o( )eman)

132. I( the price elasticity o( )eman) (or tuna is #.30 then a 1.!: increase in the price o( tuna will )ecrease the quantity )eman)e) o( tuna ,y a. 1.#!:0 an) tuna sellers? total revenue will increase as a result. ,. 1.#!:0 an) tuna sellers? total revenue will )ecrease as a result. c. +.1/:0 an) tuna sellers? total revenue will increase as a result. ). +.1/:0 an) tuna sellers? total revenue will )ecrease as a result. ANS: A NAT: Analytic *S&: Analytical DIF: $%&: Elasticity EF: T%': !"1 Total revenue ; 'rice elasticity o( )eman)

&hapter ! 9Elasticity an) Its Application

32

133. I( the price elasticity o( )eman) (or aluminum (oil is 1./!0 then a +./: )ecrease in the price o( aluminum (oil will increase the quantity )eman)e) o( aluminum (oil ,y a. 1.22:0 an) aluminum (oil sellers? total revenue will increase as a result. ,. 1.22:0 an) aluminum (oil sellers? total revenue will )ecrease as a result. c. -./5:0 an) aluminum (oil sellers? total revenue will increase as a result. ). -./5:0 an) aluminum (oil sellers? total revenue will )ecrease as a result. ANS: & NAT: Analytic *S&: Analytical DIF: $%&: Elasticity EF: T%': !"1 Total revenue ; 'rice elasticity o( )eman)

135. I( a change in the price o( a goo) results in no change in total revenue0 then a. the )eman) (or the goo) must ,e elastic. ,. the )eman) (or the goo) must ,e inelastic. c. the )eman) (or the goo) must ,e unit elastic. ). ,uyers must not respon) very much to a change in price. ANS: & NAT: Analytic *S&: Interpretive DIF: + $%&: Elasticity EF: T%': !"1 Total revenue ; 'rice elasticity o( )eman)

137. <hen )eman) is unit elastic0 price elasticity o( )eman) a. equals 10 an) total revenue an) price move in the same )irection. ,. equals 10 an) total revenue an) price move in opposite )irections. c. equals 10 an) total revenue )oes not change when price changes. ). equals #0 an) total revenue )oes not change when price changes. ANS: & NAT: Analytic *S&: Interpretive DIF: + $%&: Elasticity EF: T%': !"1 Total revenue ; 'rice elasticity o( )eman)

15#. I( the )eman) curve is linear an) )ownwar) sloping0 which o( the (ollowing statements is not correct@ a. Deman) is more elastic on the lower part o( the )eman) curve than on the upper part. ,. Di((erent pairs o( points on the )eman) curve can result in )i((erent values o( the price elasticity o( )eman). c. Di((erent pairs o( points on the )eman) curve result in i)entical values o( the slope o( the )eman) curve. ). Starting (rom a point on the upper part o( the )eman) curve0 an increase in price lea)s to a )ecrease in total revenue. ANS: A NAT: Analytic *S&: Analytical DIF: $%&: Elasticity EF: T%': !"1 Total revenue ; 'rice elasticity o( )eman)

151. Total revenue a. always increases as price increases. ,. increases as price increases0 as long as )eman) is elastic. c. )ecreases as price increases0 as long as )eman) is inelastic. ). remains unchange) as price increases when )eman) is unit elastic. ANS: D NAT: Analytic *S&: Applicative DIF: + $%&: Elasticity EF: T%': !"1 Total revenue ; 'rice elasticity o( )eman)

15+. In which o( the (ollowing situations will total revenue increase@ a. 'rice elasticity o( )eman) is 1.+0 an) the price o( the goo) )ecreases. ,. 'rice elasticity o( )eman) is #.!0 an) the price o( the goo) increases. c. 'rice elasticity o( )eman) is -.#0 an) the price o( the goo) )ecreases. ). All o( the a,ove are correct. ANS: D NAT: Analytic *S&: Analytical DIF: + $%&: Elasticity EF: T%': !"1 Total revenue ; 'rice elasticity o( )eman)

33

&hapter ! 9Elasticity an) Its Application

15-. >ou have Hust ,een hire) as a ,usiness consultant to )etermine what pricing policy woul) ,e appropriate in or)er to increase the total revenue o( a maHor shoe store. The (irst step you woul) ta.e woul) ,e to a. increase the price o( every shoe in the store. ,. loo. (or ways to cut costs an) increase pro(it (or the store. c. )etermine the price elasticity o( )eman) (or the store?s pro)ucts. ). )etermine the price elasticity o( supply (or the storeCs pro)ucts. ANS: & NAT: Analytic *S&: Interpretive DIF: + $%&: Elasticity EF: T%': !"1 Total revenue ; 'rice elasticity o( )eman)

15/. >ou are in charge o( the local city"owne) gol( course. >ou nee) to increase the revenue generate) ,y the gol( course in or)er to meet e1penses. The mayor a)vises you to increase the price o( a roun) o( gol(. The city manager recommen)s re)ucing the price o( a roun) o( gol(. >ou reali8e that a. the mayor thin.s )eman) is elastic0 an) the city manager thin.s )eman) is inelastic. ,. ,oth the mayor an) the city manager thin. that )eman) is elastic. c. ,oth the mayor an) the city manager thin. that )eman) is inelastic. ). the mayor thin.s )eman) is inelastic0 an) the city manager thin.s )eman) is elastic. ANS: D NAT: Analytic *S&: Applicative DIF: + $%&: Elasticity EF: T%': !"1 Total revenue ; 'rice elasticity o( )eman)

15!. >ou are in charge o( the local city"owne) gol( course. >ou nee) to increase the revenue generate) ,y the gol( course in or)er to meet e1penses. The mayor a)vises you to )ecrease the price o( a roun) o( gol(. The city manager recommen)s increasing the price o( a roun) o( gol(. >ou reali8e that a. the mayor thin.s )eman) is elastic0 an) the city manager thin.s )eman) is inelastic. ,. ,oth the mayor an) the city manager thin. that )eman) is elastic. c. ,oth the mayor an) the city manager thin. that )eman) is inelastic. ). the mayor thin.s )eman) is inelastic0 an) the city manager thin.s )eman) is elastic. ANS: A NAT: Analytic *S&: Applicative DIF: + $%&: Elasticity EF: T%': !"1 Total revenue ; 'rice elasticity o( )eman)

152. 4et Smart Dniversity is contemplating an increase in tuition to enhance revenue. I( 4SD (eels that raising tuition woul) enhance revenue0 it is a. ignoring the law o( )eman). ,. assuming that the )eman) (or university e)ucation is elastic. c. assuming that the )eman) (or university e)ucation is inelastic. ). assuming that the supply o( university e)ucation is elastic. ANS: & NAT: Analytic *S&: Applicative DIF: + $%&: Elasticity EF: T%': !"1 Total revenue ; 'rice elasticity o( )eman)

&hapter ! 9Elasticity an) Its Application

Figure 5-11
Price !! !# /! /# -! -# +! +# 1! 1# ! !# 1## 1!# +## +!# -## -!# /## /!# !## !!#

35

Deman)
Quantity

153. Re%er to Fi()re 5!$$. <hen the price is A-#0 total revenue is a. A-0###. ,. A!0###. c. A30###. ). A70###. ANS: D NAT: Analytic *S&: Interpretive DIF: 1 $%&: Elasticity EF: T%': !"1 Total revenue ; 'rice elasticity o( )eman)

155. Re%er to Fi()re 5!$$. <hen price (alls (rom A!# to A/#0 it can ,e in(erre) that )eman) ,etween those two prices is a. inelastic0 since total revenue )ecreases (rom A50### to A!0###. ,. inelastic0 since total revenue increases (rom A!0### to A50###. c. elastic0 since total revenue increases (rom A!0### to A50###. ). unit elastic0 since total revenue )oes not change. ANS: & NAT: Analytic *S&: Applicative DIF: + $%&: Elasticity EF: T%': !"1 Total revenue ; 'rice elasticity o( )eman)

157. Re%er to Fi()re 5!$$. An increase in price (rom A+# to A-# woul) a. increase total revenue ,y A+0###. ,. )ecrease total revenue ,y A+0###. c. increase total revenue ,y A10###. ). )ecrease total revenue ,y A10###. ANS: & NAT: Analytic *S&: Applicative DIF: + $%&: Elasticity EF: T%': !"1 Total revenue ; 'rice elasticity o( )eman)

17#. Re%er to Fi()re 5!$$. An increase in price (rom A-# to A-! woul) a. increase total revenue ,y A+!# ,. )ecrease total revenue ,y A+!#. c. increase total revenue ,y A!##. ). )ecrease total revenue ,y A!##. ANS: = NAT: Analytic *S&: Applicative DIF: + $%&: Elasticity EF: T%': !"1 Total revenue ; 'rice elasticity o( )eman)

37

&hapter ! 9Elasticity an) Its Application

171. I( the )eman) (or )onuts is elastic0 then a )ecrease in the price o( )onuts will a. increase total revenue o( )onut sellers. ,. )ecrease total revenue o( )onut sellers. c. not change total revenue o( )onut sellers. ). There is not enough in(ormation to answer this question. ANS: A NAT: Analytic *S&: Applicative DIF: + $%&: Elasticity EF: T%': !"1 Total revenue ; 'rice elasticity o( )eman)

17+. I( the )eman) (or )onuts is elastic0 then an increase in the price o( )onuts will a. increase total revenue o( )onut sellers. ,. )ecrease total revenue o( )onut sellers. c. not change total revenue o( )onut sellers. ). There is not enough in(ormation to answer this question. ANS: = NAT: Analytic *S&: Applicative DIF: + $%&: Elasticity EF: T%': !"1 Total revenue ; 'rice elasticity o( )eman)

17-. I( the )eman) (or te1t,oo.s is inelastic0 then a )ecrease in the price o( te1t,oo.s will a. increase total revenue o( te1t,oo. sellers. ,. )ecrease total revenue o( te1t,oo. sellers. c. not change total revenue o( te1t,oo. sellers. ). There is not enough in(ormation to answer this question. ANS: = NAT: Analytic *S&: Applicative DIF: + $%&: Elasticity EF: T%': !"1 Total revenue ; 'rice elasticity o( )eman)

17/. I( the )eman) (or te1t,oo.s is inelastic0 then an increase in the price o( te1t,oo.s will a. increase total revenue o( te1t,oo. sellers. ,. )ecrease total revenue o( te1t,oo. sellers. c. not change total revenue o( te1t,oo. sellers. ). There is not enough in(ormation to answer this question. ANS: A NAT: Analytic *S&: Applicative DIF: + $%&: Elasticity EF: T%': !"1 Total revenue ; 'rice elasticity o( )eman)

17!. Eric pro)uces Hewelry ,o1es. I( the )eman) (or Hewelry ,o1es is elastic an) Eric wants to increase his total revenue0 he shoul) a. increase the price o( his Hewelry ,o1es. ,. )ecrease the price o( his Hewelry ,o1es. c. not change the price o( his Hewelry ,o1es. ). None o( the a,ove answers is correct. ANS: = NAT: Analytic *S&: Interpretive DIF: + $%&: Elasticity EF: T%': !"1 Total revenue ; 'rice elasticity o( )eman)

172. Bol)ing all other (orces constant0 i( increasing the price o( a goo) lea)s to an increase in total revenue0 then the )eman) (or the goo) must ,e a. unit elastic. ,. inelastic. c. elastic. ). None o( the a,ove is correct0 since a price increase always lea)s to an increase in total revenue. ANS: = NAT: Analytic *S&: Applicative DIF: + $%&: Elasticity EF: T%': !"1 Total revenue ; 'rice elasticity o( )eman)

&hapter ! 9Elasticity an) Its Application

5#

173. Bol)ing all other (orces constant0 i( increasing the price o( a goo) lea)s to a )ecrease in total revenue0 then the )eman) (or the goo) must ,e a. unit elastic. ,. inelastic. c. elastic. ). None o( the a,ove is correct0 since a price increase always lea)s to an increase in total revenue. ANS: & NAT: Analytic *S&: Applicative DIF: + $%&: Elasticity EF: T%': !"1 Total revenue ; 'rice elasticity o( )eman)

175. Bol)ing all other (orces constant0 i( )ecreasing the price o( a goo) lea)s to an increase in total revenue0 then the )eman) (or the goo) must ,e a. unit elastic. ,. inelastic. c. elastic. ). None o( the a,ove is correct0 since a price increase always lea)s to an increase in total revenue. ANS: & NAT: Analytic *S&: Applicative DIF: + $%&: Elasticity EF: T%': !"1 Total revenue ; 'rice elasticity o( )eman)

177. Bol)ing all other (orces constant0 i( )ecreasing the price o( a goo) lea)s to a )ecrease in total revenue0 then the )eman) (or the goo) must ,e a. unit elastic. ,. inelastic. c. elastic. ). None o( the a,ove is correct0 since a price increase always lea)s to an increase in total revenue. ANS: = NAT: Analytic *S&: Applicative DIF: + $%&: Elasticity EF: T%': !"1 Total revenue ; 'rice elasticity o( )eman)

+##. Suppose you are in charge o( setting prices at a local san)wich shop. The ,usiness nee)s to increase its total revenue an) your Ho, is on the line. I( the )eman) (or san)wiches is elastic0 you a. shoul) increase the price o( san)wiches. ,. shoul) )ecrease the price o( san)wiches. c. shoul) not change the price o( san)wiches. ). coul) not )etermine what to )o with price until you )etermine whether supply is elastic or inelastic. ANS: = NAT: Analytic *S&: Applicative DIF: + $%&: Elasticity EF: T%': !"1 Total revenue ; 'rice elasticity o( )eman)

+#1. Suppose a pro)ucer is a,le to separate customers into two groups0 one having an inelastic )eman) an) the other having an elastic )eman). I( the pro)ucer?s o,Hective is to increase total revenue0 she shoul) a. increase the price charge) to customers with the elastic )eman) an) )ecrease the price charge) to customers with the inelastic )eman). ,. )ecrease the price charge) to customers with the elastic )eman) an) increase the price charge) to customers with the inelastic )eman). c. )ecrease the price to ,oth groups o( customers. ). increase the price (or ,oth groups o( customers. ANS: = NAT: Analytic *S&: Analytical DIF: $%&: Elasticity EF: T%': !"1 Total revenue ; 'rice elasticity o( )eman)

51

&hapter ! 9Elasticity an) Its Application

+#+. >our younger sister nee)s A!# to ,uy a new ,i.e. She has opene) a lemona)e stan) to ma.e the money she nee)s. >our mother is paying (or all o( the ingre)ients. She currently is charging +! cents per cup0 ,ut she wants to a)Hust her price to earn the A!# (aster. I( you .now that the )eman) (or lemona)e is elastic0 what is your a)vice to her@ a. $eave the price at +! cents an) ,e patient. ,. aise the price to increase total revenue. c. $ower the price to increase total revenue. ). There isn?t enough in(ormation given to answer this question. ANS: & NAT: Analytic *S&: Applicative DIF: + $%&: Elasticity EF: T%': !"1 Total revenue ; 'rice elasticity o( )eman)

+#-. An increase in price causes an increase in total revenue when a. )eman) is elastic. ,. )eman) is inelastic. c. )eman) is unit elastic. ). All o( the a,ove are possi,le. ANS: = NAT: Analytic *S&: Applicative DIF: + $%&: Elasticity EF: T%': !"1 Total revenue

+#/. The local pi88a restaurant ma.es such great ,rea) stic.s that consumers )o not respon) much at all to a change in the price. I( the owner is only intereste) in increasing revenue0 he shoul) a. lower the price o( the ,rea) stic.s. ,. leave the price o( the ,rea) stic.s alone. c. raise the price o( the ,rea) stic.s. ). re)uce costs. ANS: & NAT: Analytic *S&: Interpretive DIF: + $%&: Elasticity EF: T%': !"1 Total revenue

+#!. <hen )eman) is inelastic within a certain price range0 then within that price range0 a. an increase in price woul) increase total revenue ,ecause the )ecrease in quantity )eman)e) is proportionately less than the increase in price. ,. an increase in price woul) )ecrease total revenue ,ecause the )ecrease in quantity )eman)e) is proportionately greater than the increase in price. c. a )ecrease in price woul) increase total revenue ,ecause the increase in quantity )eman)e) is proportionately smaller than the )ecrease in price. ). a )ecrease in price woul) not a((ect total revenue. ANS: A NAT: Analytic *S&: Applicative DIF: $%&: Elasticity EF: T%': !"1 Total revenue

+#2. <hen )eman) is inelastic the price elasticity o( )eman) is a. less than 10 an) price an) total revenue will move in the same )irection. ,. less than 10 an) price an) total revenue will move in opposite )irections. c. greater than 10 an) price an) total revenue will move in the same )irection. ). greater than 10 an) price an) total revenue will move in opposite )irections. ANS: A NAT: Analytic *S&: Applicative DIF: + $%&: Elasticity EF: T%': !"1 Total revenue

+#3. Bow )oes total revenue change as one moves )ownwar) an) to the right along a linear )eman) curve@ a. It always increases. ,. It always )ecreases. c. It (irst increases0 then )ecreases. ). It is una((ecte) ,y a movement along the )eman) curve.

&hapter ! 9Elasticity an) Its Application

ANS: & NAT: Analytic *S&: Analytical DIF: $%&: Elasticity EF: T%': !"1 Total revenue

5+

+#5. %n a )ownwar)"sloping linear )eman) curve0 total revenue reaches its ma1imum value at the a. mi)point o( the )eman) curve. ,. lower en) o( the )eman) curve. c. upper en) o( the )eman) curve. ). It is impossi,le to tell without .nowing prices an) quantities )eman)e). ANS: A NAT: Analytic *S&: Analytical DIF: $%&: Elasticity EF: T%': !"1 Total revenue

+#7. Suppose the point ER O +0###0 ' O A2#F is the mi)point on a certain )ownwar)"sloping0 linear )eman) curve. Then a. an increase in price (rom A/# to A/+ will increase total revenue. ,. a )ecrease in price (rom A21 to A!7 will leave total revenue unchange). c. the ma1imum value o( total revenue is A1+#0###. ). All o( the a,ove are correct. ANS: D NAT: Analytic *S&: Analytical DIF: $%&: Elasticity EF: T%': !"1 Total revenue ; 'rice elasticity o( )eman)

+1#. *oving )ownwar) an) to the right along a linear )eman) curve0 we .now that total revenue a. (irst increases0 then )ecreases. ,. (irst )ecreases0 then increases. c. always increases. ). always )ecreases. ANS: A NAT: Analytic *S&: Interpretive DIF: + $%&: Elasticity EF: T%': !"1 Total revenue ; 'rice elasticity o( )eman)

+11. Total revenue will ,e at its largest value on a linear )eman) curve at a. the top o( the curve0 where prices are highest. ,. the mi)point o( the curve. c. the low en) o( the curve0 where quantity )eman)e) is highest. ). None o( the a,ove is correct. ANS: = NAT: Analytic *S&: Interpretive DIF: + $%&: Elasticity EF: T%': !"1 Total revenue ; 'rice elasticity o( )eman)

+1+. $ast year0 Sheila ,ought 2 pairs o( shoes when her income was A/#0###. This year0 her income is A!#0### an) she purchase) 1# pairs o( shoes. Bol)ing other (actors constant0 it (ollows that Sheila a. consi)ers shoes to ,e a necessity. ,. consi)ers shoes to ,e an in(erior goo). c. consi)ers shoes to ,e a normal goo). ). has a low price elasticity o( )eman) (or shoes. ANS: & NAT: Analytic *S&: Interpretive DIF: + $%&: Elasticity EF: T%': !"1 Income elasticity o( )eman)

+1-. $ast year0 Sheila ,ought 2 pairs o( shoes when her income was A/#0###. This year0 her income is A!+0### an) she purchase) 3 pairs o( shoes. Bol)ing other (actors constant an) using the mi)point metho)0 it (ollows that SheilaCs income elasticity o( )eman) is a,out a. #.!70 an) Sheila regar)s shoes as an in(erior goo). ,. #.!70 an) Sheila regar)s shoes as a normal goo). c. 1.30 an) Sheila regar)s shoes as an in(erior goo). ). 1.30 an) Sheila regar)s shoes as a normal goo).

5-

&hapter ! 9Elasticity an) Its Application

DIF: + $%&: Elasticity EF: T%': !"1 Income elasticity o( )eman)

ANS: = NAT: Analytic *S&: Applicative

+1/. Necessities such as (oo) an) clothing ten) to have a. high price elasticities o( )eman) an) high income elasticities o( )eman). ,. high price elasticities o( )eman) an) low income elasticities o( )eman). c. low price elasticities o( )eman) an) high income elasticities o( )eman). ). low price elasticities o( )eman) an) low income elasticities o( )eman). ANS: D NAT: Analytic *S&: Interpretive DIF: + $%&: Elasticity EF: T%': !"1 Income elasticity o( )eman)

+1!. Income elasticity o( )eman) measures how a. the quantity )eman)e) changes as consumer income changes. ,. consumer purchasing power is a((ecte) ,y a change in the price o( a goo). c. the price o( a goo) is a((ecte) when there is a change in consumer income. ). many units o( a goo) a consumer can ,uy given a certain income level. ANS: A NAT: Analytic *S&: De(initional DIF: 1 $%&: Elasticity EF: T%': !"1 Income elasticity o( )eman)

+12. For Susie0 a 3 percent increase in income results in a 1+ percent increase in the quantity )eman)e) o( pi88a. For Susie0 the income elasticity o( )eman) (or pi88a is a. negative0 an) pi88a is an normal goo). ,. negative0 an) pi88a is a in(erior goo). c. positive0 an) pi88a is an in(erior goo). ). positive0 an) pi88a is a normal goo). ANS: D NAT: Analytic *S&: Applicative DIF: + $%&: Elasticity EF: T%': !"1 Income elasticity o( )eman)

+13. For which o( the (ollowing goo)s is the income elasticity o( )eman) li.ely highest@ a. water ,. )iamon)s c. ham,urgers ). housing ANS: = NAT: Analytic *S&: Interpretive DIF: + $%&: Elasticity EF: T%': !"1 Income elasticity o( )eman)

+15. $ast year0 Loan ,ought !# poun)s o( ham,urger when her househol)Cs income was A/#0###. This year0 her househol) income was only A-#0### an) Loan ,ought 2# poun)s o( ham,urger. All else constant0 Loan?s income elasticity o( )eman) (or ham,urger is a. positive0 so Loan consi)ers ham,urger to ,e an in(erior goo). ,. positive0 so Loan consi)ers ham,urger to ,e a normal goo) an) a necessity. c. negative0 so Loan consi)ers ham,urger to ,e an in(erior goo). ). negative0 so Loan consi)ers ham,urger to ,e a normal goo) ,ut not a necessity. ANS: & NAT: Analytic *S&: Interpretive DIF: + $%&: Elasticity EF: T%': !"1 Income elasticity o( )eman)

+17. I( an increase in income results in a )ecrease in the quantity )eman)e) o( a goo)0 then (or that goo)0 the a. cross"price elasticity o( )eman) is negative. ,. price elasticity o( )eman) is elastic. c. income elasticity o( )eman) is negative. ). income elasticity o( )eman) is positive.

&hapter ! 9Elasticity an) Its Application

ANS: & NAT: Analytic *S&: Interpretive DIF: + $%&: Elasticity EF: T%': !"1 Income elasticity o( )eman)

5/

++#. To )etermine whether a goo) is consi)ere) normal or in(erior0 one coul) e1amine the value o( the a. income elasticity o( )eman) (or that goo). ,. price elasticity o( )eman) (or that goo). c. price elasticity o( supply (or that goo). ). cross"price elasticity o( )eman) (or that goo). ANS: A NAT: Analytic *S&: Interpretive DIF: 1 $%&: Elasticity EF: T%': !"1 Income elasticity o( )eman)

++1. >ou an) your college roommate eat three pac.ages o( amen noo)les each wee.. A(ter gra)uation last month0 ,oth o( you were hire) at several times your college income. >ou still enHoy amen noo)les very much an) ,uy even more0 ,ut your roommate plans to ,uy (ewer amen noo)les in (avor o( (oo)s she pre(ers more. <hen loo.ing at income elasticity o( )eman) (or amen noo)les0 a. yours woul) ,e negative an) your roommate?s woul) ,e positive. ,. yours woul) ,e positive an) your roommate?s woul) ,e negative. c. yours woul) ,e 8ero an) your roommate?s woul) approach in(inity. ). yours woul) approach in(inity an) your roommate?s woul) ,e 8ero. ANS: = NAT: Analytic *S&: Interpretive DIF: + $%&: Elasticity EF: T%': !"1 Income elasticity o( )eman)

+++. >ou an) your college roommate eat three pac.ages o( amen noo)les each wee.. A(ter gra)uation last month0 ,oth o( you were hire) at several times your college income. >our roommate still enHoys amen noo)les very much an) ,uys even more0 ,ut you plan to ,uy (ewer amen noo)les in (avor o( (oo)s you pre(er more. <hen loo.ing at income elasticity o( )eman) (or amen noo)les0 a. yours woul) ,e negative an) your roommate?s woul) ,e positive. ,. yours woul) ,e positive an) your roommate?s woul) ,e negative. c. yours woul) ,e 8ero an) your roommate?s woul) approach in(inity. ). yours woul) approach in(inity an) your roommate?s woul) ,e 8ero. ANS: A NAT: Analytic *S&: Interpretive DIF: + $%&: Elasticity EF: T%': !"1 Income elasticity o( )eman)

++-. Suppose goo) K has a negative income elasticity o( )eman). This implies that goo) K is a. a normal goo). ,. a necessity. c. an in(erior goo). ). a lu1ury. ANS: & NAT: Analytic *S&: Interpretive DIF: 1 $%&: Elasticity EF: T%': !"1 Income elasticity o( )eman)

++/. For which o( the (ollowing types o( goo)s woul) the income elasticity o( )eman) ,e positive an) relatively large@ a. all in(erior goo)s ,. all normal goo)s c. goo)s (or which there are many complements ). lu1uries ANS: D NAT: Analytic *S&: Interpretive DIF: + $%&: Elasticity EF: T%': !"1 Income elasticity o( )eman)

5!

&hapter ! 9Elasticity an) Its Application

++!. Assume that a / percent increase in income results in a + percent increase in the quantity )eman)e) o( a goo). The income elasticity o( )eman) (or the goo) is a. negative an) there(ore the goo) is an in(erior goo). ,. negative an) there(ore the goo) is a normal goo). c. positive an) there(ore the goo) is a normal goo). ). positive an) there(ore the goo) is an in(erior goo). ANS: & NAT: Analytic *S&: Applicative DIF: + $%&: Elasticity EF: T%': !"1 Income elasticity o( )eman)

++2. Assume that a / percent )ecrease in income results in a 2 percent increase in the quantity )eman)e) o( a goo). The income elasticity o( )eman) (or the goo) is a. negative an) there(ore the goo) is an in(erior goo). ,. negative an) there(ore the goo) is a normal goo). c. positive an) there(ore the goo) is an in(erior goo). ). positive an) there(ore the goo) is a normal goo). ANS: A NAT: Analytic *S&: Applicative DIF: + $%&: Elasticity EF: T%': !"1 Income elasticity o( )eman)

++3. *uriel?s income elasticity o( )eman) (or (oot,all tic.ets is 1.!#. All else equal0 this means that i( her income increases ,y +# percent0 she will ,uy a. 1!# percent more (oot,all tic.ets. ,. !# percent more (oot,all tic.ets. c. -# percent more (oot,all tic.ets. ). +# percent more (oot,all tic.ets. ANS: & NAT: Analytic *S&: Applicative DIF: + $%&: Elasticity EF: T%': !"1 Income elasticity o( )eman)

++5. <hen her income increase) (rom A1#0### to A+#0###0 Beather?s consumption o( macaroni )ecrease) (rom 1# poun)s to ! poun)s an) her consumption o( soy",urgers increase) (rom + poun)s to / poun)s. <e can conclu)e that (or Beather0 a. macaroni an) soy",urgers are ,oth normal goo)s with income elasticities equal to 1. ,. macaroni is an in(erior goo) an) soy",urgers are normal goo)sN ,oth have income elasticities o( 1. c. macaroni is an in(erior goo) with an income elasticity o( "1 an) soy",urgers are normal goo)s with an income elasticity o( 1. ). macaroni an) soy",urgers are ,oth in(erior goo)s with income elasticities equal to "1. ANS: & NAT: Analytic *S&: Applicative DIF: $%&: Elasticity EF: T%': !"1 Income elasticity o( )eman)

++7. <hich o( the (ollowing shoul) ,e hel) constant when calculating an income elasticity o( )eman)@ a. the quantity o( the goo) )eman)e) ,. the price o( the goo) c. income ). All o( the a,ove shoul) ,e hel) constant. ANS: = NAT: Analytic *S&: Interpretive DIF: + $%&: Elasticity EF: T%': !"1 Income elasticity o( )eman)

+-#. <hich o( the (ollowing shoul) ,e hel) constant when calculating an income elasticity o( )eman)@ a. the price o( the goo) ,. prices o( relate) goo)s c. tastes ). All o( the a,ove shoul) ,e hel) constant. ANS: D NAT: Analytic *S&: Interpretive DIF: + $%&: Elasticity EF: T%': !"1 Income elasticity o( )eman)

&hapter ! 9Elasticity an) Its Application

Table 5-5 Inco'e A-#0### A/#0### .)antity o% ,ood ; #)rchased + 2 .)antity o% ,ood < #)rchased +# 1#

52

+-1. Re%er to Ta-le 5!5. Dsing the mi)point metho)0 what is the income elasticity o( )eman) (or goo) K@ a. "-.! ,. "#.+7 c. #.+7 ). -.! ANS: D NAT: Analytic *S&: Applicative DIF: + $%&: Elasticity EF: T%': !"1 Income elasticity o( )eman)

+-+. Re%er to Ta-le 5!5. Dsing the mi)point metho)0 the income elasticity o( )eman) (or goo) > is a. +.--0 an) goo) > is a normal goo). ,. "+.--0 an) goo) > is an in(erior goo). c. "#./-0 an) goo) > is a normal goo). ). "#./-0 an) goo) > is an in(erior goo). ANS: = NAT: Analytic *S&: Applicative DIF: + $%&: Elasticity EF: T%': !"1 Income elasticity o( )eman)

+--. Foo) an) clothing ten) to have a. small income elasticities ,ecause consumers0 regar)less o( their incomes0 choose to ,uy relatively constant quantities o( these goo)s. ,. small income elasticities ,ecause consumers ,uy proportionately more o( ,oth goo)s at higher income levels than they ,uy at low income levels. c. large income elasticities ,ecause they are necessities. ). large income elasticities ,ecause they are relatively ine1pensive. ANS: A NAT: Analytic *S&: Applicative DIF: + $%&: Elasticity EF: T%': !"1 Income elasticity o( )eman)

+-/. The income elasticity o( )eman) (or caviar ten)s to ,e a. high ,ecause caviar is relatively e1pensive. ,. low ,ecause caviar is pac.age) in small containers. c. high ,ecause ,uyers generally (eel that they can )o without it. ). low ,ecause it is almost always in short supply. ANS: & NAT: Analytic *S&: Interpretive DIF: + $%&: Elasticity EF: T%': !"1 Income elasticity o( )eman)

+-!. Suppose goo)s A an) = are su,stitutes (or each other. <e woul) e1pect the cross"price elasticity ,etween these two goo)s to ,e a. positive. ,. negative. c. either positive or negative. It )epen)s whether A an) = are normal goo)s or in(erior goo)s. ). either positive or negative. It )epen)s whether the current price level is on the elastic or inelastic portion o( the )eman) curve. ANS: A NAT: Analytic *S&: Interpretive DIF: + $%&: Elasticity EF: T%': !"1 &ross"price elasticity o( )eman)

53

&hapter ! 9Elasticity an) Its Application

+-2. $ast month0 sellers o( goo) > too. in A1## in total revenue on sales o( !# units o( goo) >. This month sellers o( goo) > raise) their price an) too. in A1+# in total revenue on sales o( /# units o( goo) >. At the same time0 the price o( goo) K staye) the same0 ,ut sales o( goo) K increase) (rom +# units to /# units. <e can conclu)e that goo)s K an) > are a. su,stitutes0 an) have a cross"price elasticity o( #.2#. ,. complements0 an) have a cross"price elasticity o( #.2#. c. su,stitutes0 an) have a cross"price elasticity o( 1.23. ). complements0 an) have a cross"price elasticity o( 1.23. ANS: & NAT: Analytic *S&: Applicative DIF: $%&: Elasticity EF: T%': !"1 &ross"price elasticity o( )eman)

+-3. <hich o( the (ollowing coul) ,e the cross"price elasticity o( )eman) (or two goo)s that are complements@ a. "1.,. # c. #.+ ). 1./ ANS: A NAT: Analytic *S&: Interpretive DIF: + $%&: Elasticity EF: T%': !"1 &ross"price elasticity o( )eman)

+-5. Suppose that when the price o( goo) K (alls (rom A1# to A50 the quantity )eman)e) o( goo) > rises (rom +# units to +! units. Dsing the mi)point metho)0 a. the cross"price elasticity o( )eman) is "1.#0 an) K an) > are complements. ,. the cross"price elasticity o( )eman) is "1.#0 an) K an) > are su,stitutes. c. the cross"price elasticity o( )eman) is 1.#0 an) K an) > are complements. ). the cross"price elasticity o( )eman) is 1.#0 an) K an) > are su,stitutes. ANS: A NAT: Analytic *S&: Applicative DIF: + $%&: Elasticity EF: T%': !"1 &ross"price elasticity o( )eman)

+-7. <hich o( the (ollowing e1pressions represents a cross"price elasticity o( )eman)@ a. percentage change in quantity )eman)e) o( ,rea) )ivi)e) ,y percentage change in quantity supplie) o( ,rea) ,. percentage change in quantity )eman)e) o( ,rea) )ivi)e) ,y percentage change in price o( ,utter c. percentage change in price o( ,rea) )ivi)e) ,y percentage change in quantity )eman)e) o( ,rea) ). percentage change in quantity )eman)e) o( ,rea) )ivi)e) ,y percentage change in income ANS: = NAT: Analytic *S&: De(initional DIF: 1 $%&: Elasticity EF: T%': !"1 &ross"price elasticity o( )eman)

+/#. &ross"price elasticity o( )eman) measures how a. the price o( one goo) changes in response to a change in the price o( another goo). ,. the quantity )eman)e) o( one goo) changes in response to a change in the quantity )eman)e) o( another goo). c. the quantity )eman)e) o( one goo) changes in response to a change in the price o( another goo). ). strongly normal or in(erior a goo) is. ANS: & NAT: Analytic *S&: De(initional DIF: + $%&: Elasticity EF: T%': !"1 &ross"price elasticity o( )eman)

+/1. The cross"price elasticity o( )eman) can tell us whether goo)s are a. normal or in(erior. ,. elastic or inelastic. c. lu1uries or necessities. ). complements or su,stitutes. ANS: D NAT: Analytic *S&: Interpretive DIF: + $%&: Elasticity EF: T%': !"1 &ross"price elasticity o( )eman)

&hapter ! 9Elasticity an) Its Application

+/+. I( the cross"price elasticity o( two goo)s is negative0 then those two goo)s are a. necessities. ,. complements. c. normal goo)s. ). in(erior goo)s. ANS: = NAT: Analytic *S&: Interpretive DIF: + $%&: Elasticity EF: T%': !"1 &ross"price elasticity o( )eman)

55

+/-. I( the cross"price elasticity o( two goo)s is positive0 then those two goo)s are a. su,stitutes. ,. complements. c. normal goo)s. ). in(erior goo)s. ANS: A NAT: Analytic *S&: Interpretive DIF: + $%&: Elasticity EF: T%': !"1 &ross"price elasticity o( )eman)

+//. Suppose the cross"price elasticity o( )eman) ,etween hot )ogs an) mustar) is "+.##. This implies that a +# percent increase in the price o( hot )ogs will cause the quantity o( mustar) purchase) to a. (all ,y +## percent. ,. (all ,y /# percent. c. rise ,y +## percent. ). rise ,y /# percent. ANS: = NAT: Analytic *S&: Applicative DIF: + $%&: Elasticity EF: T%': !"1 &ross"price elasticity o( )eman)

+/!. I( two goo)s are su,stitutes0 their cross"price elasticity will ,e a. positive. ,. negative. c. 8ero. ). equal to the )i((erence ,etween the income elasticities o( )eman) (or the two goo)s. ANS: A NAT: Analytic *S&: Interpretive DIF: + $%&: Elasticity EF: T%': !"1 &ross"price elasticity o( )eman)

+/2. I( two goo)s are complements0 their cross"price elasticity will ,e a. positive. ,. negative. c. 8ero. ). equal to the )i((erence ,etween the income elasticities o( )eman) (or the two goo)s. ANS: = NAT: Analytic *S&: Interpretive DIF: + $%&: Elasticity EF: T%': !"1 &ross"price elasticity o( )eman)

+/3. I(0 (or two goo)s0 the cross"price elasticity o( )eman) is 1.+!0 then a. the two goo)s are lu1uries. ,. the two goo)s are su,stitutes. c. one o( the goo)s is normal an) the other goo) is in(erior. ). the )eman) (or one o( the goo)s con(orms to the law o( )eman)0 ,ut the )eman) (or the other goo) violates the law o( )eman). ANS: = NAT: Analytic *S&: Interpretive DIF: + $%&: Elasticity EF: T%': !"1 &ross"price elasticity o( )eman)

57

&hapter ! 9Elasticity an) Its Application

Sec + ! Elasticity and Its Application ! The Elasticity o% S)pply

"ULTI#LE CHOICE 1. A .ey )eterminant o( the price elasticity o( supply is the a. time hori8on. ,. income o( consumers. c. price elasticity o( )eman). ). importance o( the goo) in a consumerCs ,u)get. DIF: 1 $%&: Elasticity EF: T%': !"+ 'rice elasticity o( supply

ANS: A NAT: Analytic *S&: Interpretive +.

A .ey )eterminant o( the price elasticity o( supply is the a. num,er o( close su,stitutes (or the goo) in question. ,. )e(inition o( the mar.et. c. length o( the time perio). ). e1tent to which ,uyers alter their quantities )eman)e) in response to changes in their incomes. DIF: + $%&: Elasticity EF: T%': !"+ 'rice elasticity o( supply

ANS: & NAT: Analytic *S&: Interpretive -.

A .ey )eterminant o( the price elasticity o( supply is a. the a,ility o( sellers to change the price o( the goo) they pro)uce. ,. the a,ility o( sellers to change the amount o( the goo) they pro)uce. c. how responsive ,uyers are to changes in sellers? prices. ). the slope o( the )eman) curve. DIF: + $%&: Elasticity EF: T%': !"+ 'rice elasticity o( supply

ANS: = NAT: Analytic *S&: Interpretive /.

The supply o( a goo) will ,e more elastic0 the a. more the goo) is consi)ere) a lu1ury. ,. ,roa)er is the )e(inition o( the mar.et (or the goo). c. larger the num,er o( close su,stitutes (or the goo). ). longer the time perio) ,eing consi)ere). DIF: + $%&: Elasticity EF: T%': !"+ 'rice elasticity o( supply

ANS: D NAT: Analytic *S&: Interpretive !.

The price elasticity o( supply measures how much a. the quantity supplie) respon)s to changes in input prices. ,. the quantity supplie) respon)s to changes in the price o( the goo). c. the price o( the goo) respon)s to changes in supply. ). sellers respon) to changes in technology. DIF: 1 $%&: Elasticity EF: T%': !"+ 'rice elasticity o( supply

ANS: = NAT: Analytic *S&: De(initional 2.

The price elasticity o( supply measures how responsive a. sellers are to a change in price. ,. sellers are to a change in ,uyers? income. c. ,uyers are to a change in pro)uction costs. ). equili,rium price is to a change in supply. DIF: 1 $%&: Elasticity EF: T%': !"+ 'rice elasticity o( supply

ANS: A NAT: Analytic *S&: De(initional

&hapter ! 9Elasticity an) Its Application

3. The price elasticity o( supply measures how responsive a. equili,rium price is to equili,rium quantity. ,. sellers are to a change in ,uyers? income. c. sellers are to a change in price. ). consumers are to the num,er o( su,stitutes. DIF: 1 $%&: Elasticity EF: T%': !"+ 'rice elasticity o( supply

7#

ANS: & NAT: Analytic *S&: De(initional 5.

I( the quantity supplie) respon)s only slightly to changes in price0 then a. supply is sai) to ,e elastic. ,. supply is sai) to ,e inelastic. c. an increase in price will not shi(t the supply curve very much. ). even a large )ecrease in )eman) will change the equili,rium price only slightly. DIF: + $%&: Elasticity EF: T%': !"+ 'rice elasticity o( supply

ANS: = NAT: Analytic *S&: Interpretive 7.

Frequently0 in the short run0 the quantity supplie) o( a goo) is a. impossi,le0 or nearly impossi,le0 to measure. ,. not very responsive to price changes. c. )etermine) ,y the quantity )eman)e) o( the goo). ). )etermine) ,y psychological (orces an) other non"economic (orces. DIF: + $%&: Elasticity EF: T%': !"+ 'rice elasticity o( supply

ANS: = NAT: Analytic *S&: Interpretive 1#.

In the long run0 the quantity supplie) o( most goo)s a. will increase in almost all cases0 regar)less o( what happens to price. ,. cannot respon) at all to a change in price. c. can respon) to a change in price0 ,ut the change is almost always inconsequential. ). can respon) su,stantially to a change in price. DIF: + $%&: Elasticity EF: T%': !"+ 'rice elasticity o( supply

ANS: D NAT: Analytic *S&: Interpretive 11.

<hen a supply curve is relatively (lat0 a. sellers are not at all responsive to a change in price. ,. the equili,rium price changes su,stantially when the )eman) (or the goo) changes. c. the supply is relatively elastic. ). the supply is relatively inelastic. DIF: + $%&: Elasticity EF: T%': !"+ 'rice elasticity o( supply

ANS: & NAT: Analytic *S&: Interpretive 1+.

<hen a supply curve is relatively (lat0 a. sellers are not very responsive to changes in price. ,. the supply is relatively inelastic. c. the supply is relatively elastic. ). =oth a an) , are correct. DIF: + $%&: Elasticity EF: T%': !"+ 'rice elasticity o( supply

ANS: & NAT: Analytic *S&: Interpretive 1-.

I( the price elasticity o( supply (or wheat is less than 10 then the supply o( wheat is a. inelastic. ,. elastic. c. unit elastic. ). quite sensitive to changes in income.

71

&hapter ! 9Elasticity an) Its Application

DIF: + $%&: Elasticity EF: T%': !"+ 'rice elasticity o( supply

ANS: A NAT: Analytic *S&: Interpretive 1/.

A linear0 upwar)"sloping supply curve has a. a constant slope an) a changing elasticity o( supply. ,. a changing slope an) a constant elasticity o( supply. c. ,oth a constant slope an) a constant elasticity o( supply. ). ,oth a changing slope an) a changing elasticity o( supply. DIF: + $%&: Elasticity EF: T%': !"+ 'rice elasticity o( supply

ANS: A NAT: Analytic *S&: Interpretive 1!.

As price elasticity o( supply increases0 the supply curve a. ,ecomes (latter. ,. ,ecomes steeper. c. ,ecomes )ownwar) sloping. ). shi(ts to the right. DIF: + $%&: Elasticity EF: T%': !"+ 'rice elasticity o( supply

ANS: A NAT: Analytic *S&: Interpretive 12.

A .ey )eterminant o( the price elasticity o( supply is the time perio) un)er consi)eration. <hich o( the (ollowing statements ,est e1plains this (act@ a. Supply curves are steeper over long perio)s o( time than over short perio)s o( time. ,. =uyers o( goo)s ten) to ,e more responsive to price changes over long perio)s o( time than over short perio)s o( time. c. The num,er o( (irms in a mar.et ten)s to ,e more varia,le over long perio)s o( time than over short perio)s o( time. ). Firms pre(er to change their prices in the short run rather than in the long run. DIF: + $%&: Elasticity EF: T%': !"+ 'rice elasticity o( supply

ANS: & NAT: Analytic *S&: Interpretive 13.

Some (irms eventually e1perience pro,lems with their capacity to pro)uce output as their output levels increase. For these (irms0 a. mar.et power is su,stantial. ,. supply is per(ectly inelastic. c. supply is more elastic at low levels o( output an) less elastic at high levels o( output. ). supply is less elastic at low levels o( output an) more elastic at high levels o( output. DIF: $%&: Elasticity EF: T%': !"+ 'rice elasticity o( supply

ANS: & NAT: Analytic *S&: Applicative 15.

4enerally0 a (irm is more willing an) a,le to increase quantity supplie) in response to a price change when a. the relevant time perio) is short rather than long. ,. the relevant time perio) is long rather than short. c. supply is inelastic. ). the (irm is e1periencing capacity pro,lems. DIF: + $%&: Elasticity EF: T%': !"+ 'rice elasticity o( supply

ANS: = NAT: Analytic *S&: Applicative

&hapter ! 9Elasticity an) Its Application

17.

7+

I( two supply curves pass through the same point an) one is steep an) the other is (lat0 which o( the (ollowing statements is correct@ a. The (latter supply curve represents a supply that is inelastic relative to the supply represente) ,y the steeper supply curve. ,. The steeper supply curve represents a supply that is inelastic relative to the supply represente) ,y the (latter supply curve. c. 4iven two prices with which to calculate the price elasticity o( supply0 that elasticity is the same (or ,oth curves. ). A )ecrease in )eman) will increase total revenue i( the steeper supply curve is relevant0 while a )ecrease in )eman) will )ecrease total revenue i( the (latter supply cure is relevant. DIF: + $%&: Elasticity EF: T%': !"+ 'rice elasticity o( supply

ANS: = NAT: Analytic *S&: Interpretive

Scenario 5-1 The supply o( age) che))ar cheese is inelastic an) the supply o( ,rea) is elastic. =oth goo)s are consi)ere) to ,e normal goo)s ,y a maHority o( consumers. Suppose that a large income ta1 increase )ecreases the )eman) (or ,oth goo)s ,y 1#:. +#. Re%er to Scenario 5!$* The price elasticity o( supply (or age) che))ar cheese coul) ,e a. "1. ,. #. c. #.!. ). 1.!. DIF: $%&: Elasticity EF: T%': !"+ 'rice elasticity o( supply

ANS: & NAT: Analytic *S&: Interpretive +1.

Re%er to Scenario 5!$* The price elasticity o( supply (or ,rea) coul) ,e a. "1. ,. #. c. #.!. ). 1.!. DIF: $%&: Elasticity EF: T%': !"+ 'rice elasticity o( supply

ANS: D NAT: Analytic *S&: Interpretive ++.

I( a +!: change in price results in a /#: change in quantity supplie)0 then the price elasticity o( supply is a. #.2-0 an) supply is elastic. ,. #.2-0 an) supply is inelastic. c. 1.2#0 an) supply is elastic. ). 1.2#0 an) supply is inelastic. DIF: + $%&: Elasticity EF: T%': !"+ 'rice elasticity o( supply

ANS: & NAT: Analytic *S&: Analytical +-.

I( a /#: change in price results in a +!: change in quantity supplie)0 then the price elasticity o( supply is a. #.2-0 an) supply is elastic. ,. #.2-0 an) supply is inelastic. c. 1.2#0 an) supply is elastic. ). 1.2#0 an) supply is inelastic. DIF: + $%&: Elasticity EF: T%': !"+ 'rice elasticity o( supply

ANS: = NAT: Analytic *S&: Analytical

7-
+/.

&hapter ! 9Elasticity an) Its Application

I( the price elasticity o( supply is 1.!0 an) a price increase le) to a 1.5: increase in quantity supplie)0 then the price increase amounte) to a. #.23:. ,. #.5-:. c. 1.+#:. ). +.3#:. DIF: + $%&: Elasticity EF: T%': !"+ 'rice elasticity o( supply

ANS: & NAT: Analytic *S&: Analytical +!.

I( the price elasticity o( supply is 1.!0 an) a price increase le) to a -: increase in quantity supplie)0 then the price increase amounte) to a. #.+:. ,. #.!:. c. +:. ). /.!:. DIF: + $%&: Elasticity EF: T%': !"+ 'rice elasticity o( supply

ANS: & NAT: Analytic *S&: Analytical +2.

I( a -# percent change in price causes a 1! percent change in quantity supplie)0 then the price elasticity o( supply is a. #.!0 an) supply is elastic. ,. #.!0 an) supply is inelastic. c. +0 an) supply is inelastic. ). +0 an) supply is elastic. DIF: $%&: Elasticity EF: T%': !"+ 'rice elasticity o( supply

ANS: = NAT: Analytic *S&: Applicative +3.

Suppose the price elasticity o( supply (or how"to ,oo.s is #.- in the short run an) 1.+ in the long run. I( an increase in the )eman) (or how"to ,oo.s causes the price o( how"to ,oo.s to increase ,y -2:0 then the quantity supplie) o( how"to ,oo.s will increase ,y a. #.5: in the short run an) -.-: in the long run. ,. 1.+: in the short run an) #.-: in the long run. c. 1#.5: in the short run an) /-.+: in the long run. ). 1+#: in the short run an) -#: in the long run. DIF: + $%&: Elasticity EF: T%': !"+ 'rice elasticity o( supply

ANS: & NAT: Analytic *S&: Analytical +5.

Suppose the price elasticity o( supply (or how"to ,oo.s is #.- in the short run an) 1.+ in the long run. I( an increase in the )eman) (or how"to ,oo.s causes the price o( how"to ,oo.s to increase ,y +#:0 then the quantity supplie) o( how"to ,oo.s will increase ,y a. #.23: in the short run an) #.13: in the long run. ,. -: in the short run an) 1.+: in the long run. c. 2: in the short run an) +/: in the long run. ). 22.3: in the short run an) 12.3: in the long run. DIF: + $%&: Elasticity EF: T%': !"+ 'rice elasticity o( supply

ANS: & NAT: Analytic *S&: Analytical +7.

Suppose the price elasticity o( supply (or how"to ,oo.s is #.- in the short run an) 1.+ in the long run. I( an increase in the )eman) (or how"to ,oo.s causes the price o( how"to ,oo.s to increase ,y !:0 then the quantity supplie) o( how"to ,oo.s will increase ,y a. 1.!: in the short run an) 2: in the long run. ,. 2: in the short run an) 1.!: in the long run. c. 12.3: in the short run an) /.+: in the long run. ). /.+: in the short run an) 12.3: in the long run.

&hapter ! 9Elasticity an) Its Application

ANS: A NAT: Analytic *S&: Analytical DIF: + $%&: Elasticity EF: T%': !"+ 'rice elasticity o( supply

7/

Figure 5-12 The (ollowing (igure shows the supply curve (or a particular goo).
Price

/-#

Supply

++#

1## /# 12 + ! 7 1/ +# Quantity

-#.

Re%er to Fi()re 5!$+* %ver which range is the supply curve in this (igure the most elastic@ a. =etween A12 an) A/# ,. =etween A/# an) A1## c. =etween A1## an) A++# ). =etween A++# an) A/-# DIF: + $%&: Elasticity EF: T%': !"+ 'rice elasticity o( supply

ANS: A NAT: Analytic *S&: Applicative -1.

Re%er to Fi()re 5!$+* %ver which range is the supply curve in this (igure the least elastic@ a. =etween A12 an) A/# ,. =etween A/# an) A1## c. =etween A1## an) A++# ). =etween A++# an) A/-# DIF: + $%&: Elasticity EF: T%': !"+ 'rice elasticity o( supply

ANS: D NAT: Analytic *S&: Applicative -+.

Re%er to Fi()re 5!$+* Dsing the mi)point metho)0 what is the price elasticity o( supply ,etween A12 an) A/#@ a. #.1+! ,. #.52 c. 1.# ). +.! DIF: + $%&: Elasticity EF: T%': !"+ *i)point metho) ; 'rice elasticity o( supply

ANS: & NAT: Analytic *S&: Analytical --.

Re%er to Fi()re 5!$+* Dsing the mi)point metho)0 what is the price elasticity o( supply ,etween A1## an) A++#@ a. #.!5 ,. #.23 c. 1.## ). 1.3-

7!

&hapter ! 9Elasticity an) Its Application

DIF: + $%&: Elasticity EF: T%': !"+ *i)point metho) ; 'rice elasticity o( supply

ANS: A NAT: Analytic *S&: Analytical Figure 5-13

Price 1! 1/ 11+ 11 1# 7 5 3 2 ! / + 1 +! !# A

Supply
B

&

3! 1## 1+! 1!# 13! +## ++! +!# +3! -## -+! -!# -3! /## /+! /!# /3! !## !+! !!# !3!

Quantity

-/.

Re%er to Fi()re 5!$5. Along which o( these segments o( the supply curve is supply least elastic@ a. ,etween 4 an) B ,. ,etween & an) D c. ,etween A an) & ). ,etween A an) = DIF: + $%&: Elasticity EF: T%': !"+ 'rice elasticity o( supply

ANS: A NAT: Analytic *S&: Applicative -!.

Re%er to Fi()re 5!$5. Along which o( these segments o( the supply curve is supply most elastic@ a. ,etween A an) = ,. ,etween & an) D c. ,etween D an) B ). ,etween 4 an) B DIF: + $%&: Elasticity EF: T%': !"+ 'rice elasticity o( supply

ANS: A NAT: Analytic *S&: Applicative -2.

Re%er to Fi()re 5!$5. Dsing the mi)point metho)0 what is the price elasticity o( supply ,etween points A an) =@ a. +.-,. 1.# c. #./). #.1 DIF: + $%&: Elasticity EF: T%': !"+ *i)point metho) ; 'rice elasticity o( supply

ANS: A NAT: Analytic *S&: Analytical

&hapter ! 9Elasticity an) Its Application

-3.

72

Re%er to Fi()re 5!$5. Dsing the mi)point metho)0 what is the price elasticity o( supply ,etween points = an) &@ a. 1.23 ,. 1.17 c. #.5/ ). #.21 DIF: + $%&: Elasticity EF: T%': !"+ *i)point metho) ; 'rice elasticity o( supply

ANS: = NAT: Analytic *S&: Analytical -5.

Re%er to Fi()re 5!$5. Dsing the mi)point metho)0 what is the price elasticity o( supply ,etween points D an) 4@ a. 1.57 ,. 1.+2 c. #.!). #.-/ DIF: + $%&: Elasticity EF: T%': !"+ *i)point metho) ; 'rice elasticity o( supply

ANS: & NAT: Analytic *S&: Analytical Figure 5-14

1# 7 5 3 2 ! / + 1 ! 1# 1! +# Price

Supply

+!

-#

-!

/#

Quantity

-7.

Re%er to Fi()re 5!$7* Dsing the mi)point metho)0 what is the price elasticity o( supply ,etween A/ an) A2@ a. #.3! ,. 1.## c. 1.+# ). 1.+! DIF: $%&: Elasticity EF: T%': !"+ *i)point metho) ; 'rice elasticity o( supply

ANS: D NAT: Analytic *S&: Analytical /#.

Re%er to Fi()re 5!$7* Dsing the mi)point metho)0 what is the price elasticity o( supply ,etween A2 an) A5@ a. #.52 ,. 1.## c. 1.13 ). 1.+! DIF: $%&: Elasticity EF: T%': !"+ *i)point metho) ; 'rice elasticity o( supply

ANS: & NAT: Analytic *S&: Analytical

73

&hapter ! 9Elasticity an) Its Application

Price

Figure 5-15
Supply
5

&

+!

!#

3!

1##

1+!

1!#

13!

+##

++!

+!#

+3!

-##

Quantity

/1.

Re%er to Fi()re 5!$5. Dsing the mi)point metho)0 what is the price elasticity o( supply ,etween point A an) point =@ a. #.!5 ,. #.31 c. 1.#2 ). 1./ DIF: + $%&: Elasticity EF: T%': !"+ *i)point metho) ; 'rice elasticity o( supply

ANS: = NAT: Analytic *S&: Analytical /+.

Re%er to Fi()re 5!$5. Dsing the mi)point metho)0 what is the price elasticity o( supply ,etween point = an) point &@ a. 1.// ,. 1.+7 c. #.72 ). #.35 DIF: + $%&: Elasticity EF: T%': !"+ *i)point metho) ; 'rice elasticity o( supply

ANS: D NAT: Analytic *S&: Analytical /-.

Re%er to Fi()re 5!$5. I(0 hol)ing the supply curve (i1e)0 there were an increase in )eman) that cause) the equili,rium price to increase (rom A2 to A50 then sellersC total revenue woul) a. increase. ,. )ecrease. c. remain unchange). ). The e((ect on total revenue cannot ,e )etermine) (rom the given in(ormation. DIF: + $%&: Elasticity EF: T%': !"+ Total revenue ; 'rice elasticity o( supply

ANS: A NAT: Analytic *S&: Applicative

Table 5-6
'rice Ruantity Supplie) S)pply C)r6e A A1.## A+.## !## 2## S)pply C)r6e = A1.## A-.## 2## 7## S)pply C)r6e C A+.## A!.## /## 3##

&hapter ! 9Elasticity an) Its Application

//. Re%er to Ta-le 5!8. <hich o( the three supply curves represents the least elastic supply@ a. supply curve A ,. supply curve = c. supply curve & ). There is no )i((erence in the elasticity o( the three supply curves. DIF: + $%&: Elasticity EF: T%': !"+ *i)point metho) ; 'rice elasticity o( supply

75

ANS: A NAT: Analytic *S&: Applicative /!.

Re%er to Ta-le 5!8. <hich o( the three supply curves represents the most elastic supply@ a. supply curve A ,. supply curve = c. supply curve & ). There is no )i((erence in the elasticity o( the three supply curves. DIF: + $%&: Elasticity EF: T%': !"+ *i)point metho) ; 'rice elasticity o( supply

ANS: & NAT: Analytic *S&: Applicative /2.

Re%er to Ta-le 5!8. Along which o( the supply curves )oes quantity supplie) move proportionately more than the price@ a. along supply curve = only ,. along supply curves = an) & c. along all three supply curves ). Ruantity supplie) moves proportionately more than the price along none o( the three supply curves. DIF: $%&: Elasticity EF: T%': !"+ *i)point metho) ; 'rice elasticity o( supply

ANS: D NAT: Analytic *S&: Applicative /3.

At a price o( A1.##0 a local co((ee shop is willing to supply 1## cinnamon rolls per )ay. At a price o( A1.+#0 the co((ee shop woul) ,e willing to supply 1!# cinnamon rolls per )ay. Dsing the mi)point metho)0 the price elasticity o( supply is a. #./! ,. #.7# c. 1.11 ). +.+# DIF: + $%&: Elasticity EF: T%': !"+ *i)point metho) ; 'rice elasticity o( supply

ANS: D NAT: Analytic *S&: Analytical /5.

At a price o( A1.+#0 a local co((ee shop is willing to supply 1## cinnamon rolls per )ay. At a price o( A1./#0 the co((ee shop woul) ,e willing to supply 1!# cinnamon rolls per )ay. Dsing the mi)point metho)0 the price elasticity o( supply is a. #.1! ,. #.-3! c. +.! ). +.2# DIF: + $%&: Elasticity EF: T%': !"+ *i)point metho) ; 'rice elasticity o( supply

ANS: D NAT: Analytic *S&: Analytical /7.

%n a certain supply curve0 one point is Equantity supplie) O +##0 price O A/.##F an) another point is Equantity supplie) O +!#0 price O A/.!#F. Dsing the mi)point metho)0 the price elasticity o( supply is a,out a. #.++. ,. #.!-. c. 1.##. ). 1.57.

77

&hapter ! 9Elasticity an) Its Application

DIF: + $%&: Elasticity EF: T%': !"+ *i)point metho) ; 'rice elasticity o( supply

ANS: D NAT: Analytic *S&: Analytical !#.

%n a certain supply curve0 one point is Equantity supplie) O +##0 price O A+.##F an) another point is Equantity supplie) O +!#0 price O A+.!#F. Dsing the mi)point metho)0 the price elasticity o( supply is a,out a. #.+. ,. #.!. c. 1.#. ). +.!. DIF: + $%&: Elasticity EF: T%': !"+ *i)point metho) ; 'rice elasticity o( supply

ANS: & NAT: Analytic *S&: Analytical !1.

Bol)ing all other (actors constant an) using the mi)point metho)0 i( a pencil manu(acturer increases pro)uction ,y +# percent when the mar.et price o( pencils increases (rom A#.!# to A#.2#0 then supply is a. inelastic0 since the price elasticity o( supply is equal to .71. ,. inelastic0 since the price elasticity o( supply is equal to 1.1. c. elastic0 since the price elasticity o( supply is equal to #.71. ). elastic0 since the price elasticity o( supply is equal to 1.1. DIF: + $%&: Elasticity EF: T%': !"+ *i)point metho) ; 'rice elasticity o( supply

ANS: D NAT: Analytic *S&: Analytical !+.

Bol)ing all other (actors constant an) using the mi)point metho)0 i( a pencil manu(acturer increases pro)uction (rom /# to !# ,o1es when price increases ,y +# percent0 then supply is a. inelastic0 since the price elasticity o( supply is equal to .71. ,. inelastic0 since the price elasticity o( supply is equal to 1.1. c. elastic0 since the price elasticity o( supply is equal to #.71. ). elastic0 since the price elasticity o( supply is equal to 1.1. DIF: + $%&: Elasticity EF: T%': !"+ *i)point metho) ; 'rice elasticity o( supply

ANS: D NAT: Analytic *S&: Analytical !-.

Suppose that an increase in the price o( carrots (rom A1.-# to A1.5# per poun) increases the quantity o( carrots that carrot (armers pro)uce (rom 1.+ million poun)s to 1.2 million poun)s. Dsing the mi)point metho)0 what is the appro1imate value o( the price elasticity o( supply@ a. #.23 ,. #.57 c. 1.## ). 1.1DIF: + $%&: Elasticity EF: T%': !"+ *i)point metho) ; 'rice elasticity o( supply

ANS: = NAT: Analytic *S&: Analytical !/.

An increase in the price o( pure chocolate morsels (rom A+.+! to A+./! causes suppliers o( chocolate morsels to increase their quantity supplie) (rom 1+! ,ags per minute to 1/! ,ags per minute. Supply is a. elastic0 an) the price elasticity o( supply is 1.3/. ,. elastic0 an) the price elasticity o( supply is #.!3. c. inelastic0 an) the price elasticity o( supply is 1.3/. ). inelastic0 an) the price elasticity o( supply is #.!3. DIF: $%&: Elasticity EF: T%': !"+ *i)point metho) ; 'rice elasticity o( supply

ANS: A NAT: Analytic *S&: Analytical

&hapter ! 9Elasticity an) Its Application

!!.

1##

A ,a.ery woul) ,e willing to supply !## ,agels per )ay at a price o( A#.!# each. At a price o( A#.5#0 the ,a.ery woul) ,e willing to supply 101## ,agels. Dsing the mi)point metho)0 the price elasticity o( supply (or ,agels is a. #.2+. ,. #.33. c. 1.+/. ). 1.2-. DIF: + $%&: Elasticity EF: T%': !"+ *i)point metho) ; 'rice elasticity o( supply

ANS: D NAT: Analytic *S&: Analytical !2.

A ,a.ery woul) ,e willing to supply !## ,agels per )ay at a price o( A#.!# each. At a price o( A#.5#0 the ,a.ery woul) ,e willing to supply 101## ,agels. Dsing the mi)point metho)0 the price elasticity o( supply (or ,agels is a. #.2+0 an) supply is elastic. ,. #.2+0 an) supply is inelastic. c. 1.2-0 an) supply is elastic. ). 1.2-0 an) supply is inelastic. DIF: + $%&: Elasticity EF: T%': !"+ *i)point metho) ; 'rice elasticity o( supply

ANS: & NAT: Analytic *S&: Analytical !3.

In Lanuary the price o( wi)gets was A+.##0 an) <en)y?s <i)gets pro)uce) 5# wi)gets. In Fe,ruary the price o( wi)gets was A+.!#0 an) <en)y?s <i)gets pro)uce) 11# wi)gets. In *arch the price o( wi)gets was A-.##0 an) <en)y?s <i)gets pro)uce) 1/# wi)gets. The price elasticity o( supply o( <en)y?s <i)gets was a. #.3# when the price increase) (rom A+.## to A+.!# an) #.32 when the price increase) (rom A+.!# to A-.##. ,. #.55 when the price increase) (rom A+.## to A+.!# an) 1.#5 when the price increase) (rom A+.!# to A-.##. c. 1./+ when the price increase) (rom A+.## to A+.!# an) 1.-+ when the price increase) (rom A+.!# to A-.##. ). 1.!# when the price increase) (rom A+.## to A+.!# an) 1.15 when the price increase) (rom A+.!# to A-.##. DIF: $%&: Elasticity EF: T%': !"+ *i)point metho) ; 'rice elasticity o( supply

ANS: & NAT: Analytic *S&: Analytical !5.

In Lanuary the price o( wi)gets was A1.##0 an) <en)y?s <i)gets pro)uce) 5# wi)gets. In Fe,ruary the price o( wi)gets was A1.!#0 an) <en)y?s <i)gets pro)uce) 11# wi)gets. In *arch the price o( wi)gets was A+.##0 an) <en)y?s <i)gets pro)uce) 1/# wi)gets. The price elasticity o( supply o( <en)y?s <i)gets was a. #.37 when the price increase) (rom A1.## to A1.!# an) #.5/ when the price increase) (rom A1.!# to A+.##. ,. 1.+3 when the price increase) (rom A1.## to A1.!# an) 1.17 when the price increase) (rom A1.!# to A+.##. c. #.37 when the price increase) (rom A1.## to A1.!# an) 1.17 when the price increase) (rom A1.!# to A+.##. ). 1.+3 when the price increase) (rom A1.## to A1.!# an) #.5/ when the price increase) (rom A1.!# to A+.##. DIF: $%&: Elasticity EF: T%': !"+ *i)point metho) ; 'rice elasticity o( supply

ANS: A NAT: Analytic *S&: Analytical !7.

<hich o( the (ollowing statements is vali) when the mar.et supply curve is vertical@ a. *ar.et quantity supplie) )oes not change when the price changes. ,. Supply is per(ectly elastic. c. An increase in mar.et )eman) will increase the equili,rium quantity. ). An increase in mar.et )eman) will not increase the equili,rium price.

1#1

&hapter ! 9Elasticity an) Its Application

DIF: + $%&: Elasticity EF: T%': !"+ 'er(ectly inelastic supply

ANS: A NAT: Analytic *S&: Interpretive 2#.

<hich o( the (ollowing statements is not vali) when the mar.et supply curve is vertical@ a. *ar.et quantity supplie) )oes not change when the price changes. ,. Supply is per(ectly inelastic. c. An increase in mar.et )eman) will increase the equili,rium quantity. ). An increase in mar.et )eman) will increase the equili,rium price. DIF: + $%&: Elasticity EF: T%': !"+ 'er(ectly inelastic supply

ANS: & NAT: Analytic *S&: Interpretive 21.

<hich o( the (ollowing statements is vali) when supply is per(ectly elastic at a price o( A/@ a. The elasticity o( supply approaches in(inity. ,. The supply curve is vertical. c. At a price ,elow A/0 quantity supplie) is in(inite. ). At a price a,ove A/0 quantity supplie) is 8ero. DIF: $%&: Elasticity EF: T%': !"+ 'er(ectly elastic supply

ANS: A NAT: Analytic 6E>: Interpretive 2+.

<hich o( the (ollowing statements is not vali) when supply is per(ectly elastic@ a. The elasticity o( supply approaches in(inity. ,. The supply curve is hori8ontal. c. Qery small changes in price lea) to large changes in quantity supplie). ). The time perio) un)er consi)eration is more li.ely a short perio) rather than a long perio). DIF: $%&: Elasticity EF: T%': !"+ 'er(ectly elastic supply

ANS: D NAT: Analytic *S&: Interpretive 2-.

I( the quantity supplie) is the same regar)less o( price0 then supply is a. elastic. ,. per(ectly elastic. c. per(ectly inelastic. ). inelastic. DIF: + $%&: Elasticity EF: T%': !"+ 'er(ectly inelastic supply

ANS: & NAT: Analytic *S&: De(initional 2/.

<hen supply is per(ectly elastic0 the value o( the price elasticity o( supply is a. #. ,. 1. c. greater than # an) less than 1. ). in(inity. DIF: + $%&: Elasticity EF: T%': !"+ 'er(ectly elastic supply

ANS: D NAT: Analytic *S&: Interpretive 2!.

<hich o( the (ollowing woul) ,e true as the price elasticity o( supply approaches in(inity@ a. Qery small changes in price lea) to very large changes in quantity supplie). ,. Qery large changes in price lea) to very small changes in quantity supplie). c. Qery small changes in price lea) to no change in quantity supplie). ). Qery large changes in price lea) to no change in quantity supplie). DIF: + $%&: Elasticity EF: T%': !"+ 'er(ectly elastic supply

ANS: A NAT: Analytic *S&: Interpretive

&hapter ! 9Elasticity an) Its Application

Figure 5-16
Price

1#+

S1 S+

'1

S-

R1

Quantity

22.

Re%er to Fi()re 5!$8. <hich supply curve represents per(ectly inelastic supply@ a. S1 ,. S+ c. S). None o( the supply curves is per(ectly inelastic. DIF: 1 $%&: Elasticity EF: T%': !"+ 'er(ectly inelastic supply

ANS: A NAT: Analytic *S&: Interpretive 23.

Re%er to Fi()re 5!$8. <hich supply curve is most li.ely relevant over a very long perio) o( time@ a. S1 ,. S+ c. S). All o( the a,ove are equally li.ely to ,e relevant over a very long perio) o( time. DIF: + $%&: Elasticity EF: T%': !"+ 'er(ectly elastic supply

ANS: & NAT: Analytic *S&: Interpretive 25.

I( sellers )o not a)Hust their quantities supplie) at all in response to a change in price0 a. a)vances in technology must ,e prevalent. ,. the time perio) un)er consi)eration must ,e very long. c. supply is per(ectly elastic. ). supply is per(ectly inelastic. DIF: + $%&: Elasticity EF: T%': !"+ 'er(ectly inelastic supply

ANS: D NAT: Analytic *S&: Interpretive 27.

I( the price elasticity o( supply is 8ero0 then a. supply is more elastic than it is in any other case. ,. the supply curve is hori8ontal. c. the quantity supplie) is the same0 regar)less o( price. ). a change in )eman) will cause a relatively small change in the equili,rium price. DIF: + $%&: Elasticity EF: T%': !"+ 'er(ectly inelastic supply

ANS: & NAT: Analytic *S&: Interpretive 3#.

I( the price elasticity o( supply (or a goo) is equal to in(inity0 then a. the supply curve is vertical. ,. the supply curve is hori8ontal. c. the supply curve also has a slope equal to in(inity. ). the quantity supplie) is constant regar)less o( the price.

1#-

&hapter ! 9Elasticity an) Its Application

DIF: + $%&: Elasticity EF: T%': !"+ 'er(ectly elastic supply

ANS: = NAT: Analytic *S&: Interpretive 31. a.

Price

<hich o( the (ollowing is an illustration o( the mar.et (or original paintings ,y )ecease) artist Qincent Qan 4ogh@
S

Quantity

,.
Price

Quantity

c.
Price

D
Quantity

).
Price

Quantity

a. ,. c. ).

A = & D DIF: + $%&: Elasticity EF: T%': !"+ 'er(ectly inelastic supply

ANS: & NAT: Analytic *S&: Applicative

&hapter ! 9Elasticity an) Its Application

1#/

Sec 5 ! Elasticity and Its Application ! Three Applications o% S)pply2 &e'and2 and Elasticity
"ULTI#LE CHOICE Scenario 5-2 The supply o( age) che))ar cheese is inelastic0 an) the supply o( ,rea) is elastic. =oth goo)s are consi)ere) to ,e normal goo)s ,y a maHority o( consumers. Suppose that a large income ta1 increase )ecreases the )eman) (or ,oth goo)s ,y 1#:. 1. Re%er to Scenario 5!+* The equili,rium price will a. increase in the age) che))ar cheese mar.et an) increase in the ,rea) mar.et. ,. increase in the age) che))ar cheese mar.et an) )ecrease in the ,rea) mar.et. c. )ecrease in the age) che))ar cheese mar.et an) increase in the ,rea) mar.et. ). )ecrease in the age) che))ar cheese mar.et an) )ecrease in the ,rea) mar.et.

ANS: D DIF: + EF: !"NAT: Analytic $%&: Elasticity T%': Equili,rium ; Normal goo)s ; 'rice elasticity o( supply +.

*S&: Applicative

Re%er to Scenario 5!+* The equili,rium quantity will a. increase in the age) che))ar cheese mar.et an) increase in the ,rea) mar.et. ,. increase in the age) che))ar cheese mar.et an) )ecrease in the ,rea) mar.et. c. )ecrease in the age) che))ar cheese mar.et an) increase in the ,rea) mar.et. ). )ecrease in the age) che))ar cheese mar.et an) )ecrease in the ,rea) mar.et.

ANS: D DIF: + EF: !"NAT: Analytic $%&: Elasticity T%': Equili,rium ; Normal goo)s ; 'rice elasticity o( supply -.

*S&: Applicative

Re%er to Scenario 5!+* The change in equili,rium price will ,e a. greater in the age) che))ar cheese mar.et than in the ,rea) mar.et. ,. greater in the ,rea) mar.et than in the age) che))ar cheese mar.et. c. the same in the age) che))ar cheese an) ,rea) mar.ets. ). may ,e greater in either the age) che))ar cheese mar.et or the ,rea) mar.et. DIF: $%&: Elasticity EF: T%': !"Equili,rium ; 'rice elasticity o( supply

ANS: A NAT: Analytic *S&: Analytical /.

Re%er to Scenario 5!+* The change in equili,rium quantity will ,e a. greater in the age) che))ar cheese mar.et than in the ,rea) mar.et. ,. greater in the ,rea) mar.et than in the age) che))ar cheese mar.et. c. the same in the age) che))ar cheese an) ,rea) mar.ets. ). may ,e greater in either the age) che))ar cheese mar.et or the ,rea) mar.et. DIF: $%&: Elasticity EF: T%': !"Equili,rium ; 'rice elasticity o( supply

ANS: = NAT: Analytic *S&: Analytical !.

Re%er to Scenario 5!+* Total consumer spen)ing on age) che))ar cheese will a. increase0 an) total consumer spen)ing on ,rea) will increase. ,. increase0 an) total consumer spen)ing on ,rea) will )ecrease. c. )ecrease0 an) total consumer spen)ing on ,rea) will increase. ). )ecrease0 an) total consumer spen)ing on ,rea) will )ecrease. DIF: $%&: Elasticity EF: T%': !"Equili,rium ; Total consumer spen)ing

ANS: D NAT: Analytic *S&: Analytical

1#!

&hapter ! 9Elasticity an) Its Application

Scenario 5-3 *il. has an inelastic )eman) an) ,ee( has an elastic )eman). Suppose that a mysterious increase in ,ovine in(ertility )ecreases ,oth the population o( )airy cows an) the population o( ,ee( cattle ,y !# percent. 2. Re%er to Scenario 5!5* The equili,rium price will a. increase in the mil. mar.et an) increase in the ,ee( mar.et. ,. increase in the mil. mar.et an) )ecrease in the ,ee( mar.et. c. )ecrease in the mil. mar.et an) increase in the ,ee( mar.et. ). )ecrease in the mil. mar.et an) )ecrease in the ,ee( mar.et.

ANS: A DIF: + EF: !"NAT: Analytic $%&: Elasticity T%': Equili,rium ; 'ro)uctivity ; 'rice elasticity o( )eman) 3. Re%er to Scenario 5!5* The equili,rium quantity will a. increase in the mil. mar.et an) increase in the ,ee( mar.et. ,. increase in the mil. mar.et an) )ecrease in the ,ee( mar.et. c. )ecrease in the mil. mar.et an) increase in the ,ee( mar.et. ). )ecrease in the mil. mar.et an) )ecrease in the ,ee( mar.et.

*S&: Applicative

ANS: D DIF: + EF: !"NAT: Analytic $%&: Elasticity T%': Equili,rium ; 'ro)uctivity ; 'rice elasticity o( )eman) 5. Re%er to Scenario 5!5* The change in equili,rium price will ,e a. greater in the mil. mar.et than in the ,ee( mar.et. ,. greater in the ,ee( mar.et than in the mil. mar.et. c. the same in the mil. an) ,ee( mar.ets. ). may ,e greater in either the mil. mar.et or the ,ee( mar.et. DIF: $%&: Elasticity EF: T%':

*S&: Applicative

ANS: A NAT: Analytic *S&: Analytical 7.

!"Equili,rium ; 'rice elasticity o( )eman)

Re%er to Scenario 5!5* The change in equili,rium quantity will ,e a. greater in the mil. mar.et than in the ,ee( mar.et. ,. greater in the ,ee( mar.et than in the mil. mar.et. c. the same in the mil. an) ,ee( mar.ets. ). may ,e greater in either the mil. mar.et or the ,ee( mar.et. DIF: $%&: Elasticity EF: T%': !"Equili,rium ; 'rice elasticity o( )eman)

ANS: = NAT: Analytic *S&: Analytical 1#.

Re%er to Scenario 5!5* Total consumer spen)ing on mil. will a. increase0 an) total consumer spen)ing on ,ee( will increase. ,. increase0 an) total consumer spen)ing on ,ee( will )ecrease. c. )ecrease0 an) total consumer spen)ing on ,ee( will increase. ). )ecrease0 an) total consumer spen)ing on ,ee( will )ecrease. = DIF: EF: !"Analytic $%&: Elasticity Equili,rium ; 'rice elasticity o( )eman) ; Total consumer spen)ing Analytical

ANS: NAT: T%': *S&: 11.

The )iscovery o( a new hy,ri) wheat woul) increase the supply o( wheat. As a result0 wheat (armers woul) reali8e an increase in total revenue i( a. the supply o( wheat is elastic. ,. the supply o( wheat is inelastic. c. the )eman) (or wheat is inelastic. ). the )eman) (or wheat is elastic. DIF: + $%&: Elasticity EF: T%': !"Supply ; 'rice elasticity o( )eman) ; Total revenue

ANS: D NAT: Analytic *S&: Applicative

&hapter ! 9Elasticity an) Its Application

1+.

1#2

=ecause the )eman) (or wheat ten)s to ,e inelastic0 the )evelopment o( a new0 more pro)uctive hy,ri) wheat woul) ten) to a. increase the total revenue o( wheat (armers. ,. )ecrease the total revenue o( wheat (armers. c. )ecrease the )eman) (or wheat. ). )ecrease the supply o( wheat. DIF: + $%&: Elasticity EF: T%': !"Supply ; 'rice elasticity o( )eman) ; Total revenue

ANS: = NAT: Analytic *S&: Applicative 1-.

6nowing that the )eman) (or wheat is inelastic0 i( all (armers voluntarily )i) not plant wheat on 1# percent o( their lan)0 then a. consumers o( wheat woul) ,uy more wheat. ,. wheat (armers woul) su((er a re)uction in their total revenue. c. wheat (armers woul) e1perience an increase in their total revenue. ). the )eman) (or wheat woul) )ecrease. DIF: + $%&: Elasticity EF: T%': !"Supply ; 'rice elasticity o( )eman) ; Total revenue

ANS: & NAT: Analytic *S&: Applicative 1/.

I( corn (armers .now that the )eman) (or corn is inelastic0 an) they want to increase their total revenue0 they shoul) all a. plant more corn so that they woul) ,e a,le to sell more each year. ,. increase spen)ing on (ertili8er in an attempt to pro)uce more corn on the acres they (arm. c. re)uce the num,er o( acres they plant in corn. ). contri,ute to a (un) that promotes technological a)vances in corn pro)uction. DIF: + $%&: Elasticity EF: T%': !"'rice elasticity o( )eman) ; Total revenue

ANS: & NAT: Analytic *S&: Applicative 1!.

There are (ewer (armers in the Dnite) States to)ay than +## years ago ,ecause o( a. increases in (arm technology. ,. increase) government regulations in (arming. c. an elastic )eman) (or (oo). ). environmental programs )esigne) to re)uce soil erosion. DIF: + $%&: Elasticity EF: T%': !"Technology ; Inelastic )eman)

ANS: A NAT: Analytic *S&: Applicative 12.

Bow )i) the (arm population in the Dnite) States change ,etween 17!# an) +##5@ a. It )roppe) (rom 1# million to (ewer than - million people. ,. It )roppe) (rom +# million to (ewer than ! million people. c. It )roppe) (rom -# million to Hust over 2 million people. ). It increase) (rom 1# million to almost 1- million people. DIF: 1 $%&: Elasticity EF: T%': !"'opulation *S&: De(initional

ANS: A NAT: Analytic 13.

=etween 17!# an) +##5 there was a a. +# percent )rop in the num,er o( (armers0 ,ut (arm output more than triple). ,. -# percent )rop in the num,er o( (armers0 ,ut (arm output more than triple). c. !# percent )rop in the num,er o( (armers0 ,ut (arm output more than )ou,le). ). 3# percent )rop in the num,er o( (armers0 ,ut (arm output more than )ou,le). DIF: + $%&: Elasticity EF: T%': !"'opulation ; %utput

ANS: D NAT: Analytic *S&: De(initional

1#3
15.

&hapter ! 9Elasticity an) Its Application

An a)vance in (arm technology that results in an increase) mar.et supply is a. goo) (or (armers ,ecause it raises prices (or their pro)ucts ,ut ,a) (or consumers ,ecause it raises prices consumers pay (or (oo). ,. ,a) (or (armers ,ecause total revenue will (all ,ut goo) (or consumers ,ecause prices (or (oo) will (all. c. goo) (or (armers ,ecause it raises prices (or their pro)ucts an) also goo) (or consumers ,ecause more output is availa,le (or consumption. ). ,a) (or (armers ,ecause total revenue will (all an) ,a) (or consumers ,ecause (armers will raise the price o( (oo) to increase their total revenue. DIF: + $%&: Elasticity EF: T%': !"Technology ; Supply

ANS: = NAT: Analytic *S&: Applicative 17.

Farm programs that pay (armers not to plant crops on all their lan) a. hurt (armers ,y lowering their total revenue an) hurt consumers ,y causing shortages o( some (oo) items. ,. help (armers ,y cutting costs0 which helps consumers ,y lowering (oo) prices. c. help (armers ,y increasing total revenue in the mar.et ,ut hurt consumers ,y raising prices. ). help (armers )irectly since they receive government payments ,ut have no real e((ects on consumers. DIF: + $%&: Elasticity EF: T%': !"Total revenue

ANS: & NAT: Analytic *S&: Applicative +#.

<hich o( the (ollowing was not a reason %'E& (aile) to .eep the price o( oil high@ a. %ver the long run0 pro)ucers o( oil outsi)e o( %'E& respon)e) to higher prices ,y increasing oil e1ploration an) ,y ,uil)ing new e1traction capacity. ,. &onsumers respon)e) to higher prices with greater conservation. c. &onsumers replace) ol) ine((icient cars with newer e((icient ones. ). The agreement %'E& mem,ers signe) allowe) each country to pro)uce as much oil as each wante). DIF: + $%&: Elasticity EF: T%': !"%'E& *S&: Applicative

ANS: D NAT: Analytic +1.

%'E& success(ully raise) the worl) price o( oil in the 173#s an) early 175#s0 primarily )ue to a. an inelastic )eman) (or oil an) a re)uction in the amount o( oil supplie). ,. a re)uction in the amount o( oil supplie) an) a worl)"wi)e oil em,argo. c. a worl)"wi)e oil em,argo an) an elastic )eman) (or oil. ). a re)uction in the amount o( oil supplie) an) an elastic )eman) (or oil. DIF: + $%&: Elasticity EF: T%': !"%'E& *S&: Applicative

ANS: A NAT: Analytic ++.

In the mar.et (or oil in the short run0 )eman) a. an) supply are ,oth elastic. ,. an) supply are ,oth inelastic. c. is elastic an) supply is inelastic. ). is inelastic an) supply is elastic.

ANS: = DIF: + EF: !"NAT: Analytic $%&: Elasticity T%': 'rice elasticity o( )eman) ; 'rice elasticity o( supply +-. A )ecrease in supply will cause the largest increase in price when a. ,oth supply an) )eman) are inelastic. ,. ,oth supply an) )eman) are elastic. c. )eman) is elastic an) supply is inelastic. ). )eman) is inelastic an) supply is elastic.

*S&: Interpretive

ANS: A DIF: EF: !"NAT: Analytic $%&: Elasticity T%': 'rice elasticity o( )eman) ; 'rice elasticity o( supply

*S&: Analytical

&hapter ! 9Elasticity an) Its Application

+/. A )ecrease in supply will cause the smallest increase in price when a. ,oth supply an) )eman) are inelastic. ,. )eman) is elastic an) supply is inelastic. c. ,oth supply an) )eman) are elastic. ). )eman) is inelastic an) supply is elastic.

1#5

ANS: & DIF: EF: !"NAT: Analytic $%&: Elasticity T%': 'rice elasticity o( )eman) ; 'rice elasticity o( supply +!.

*S&: Analytical

<hich o( the (ollowing statements )oes not help to e1plain why government )rug inter)iction increases )rug" relate) crime@ a. The )eman) (or illegal )rugs is inelastic. ,. Inter)iction results in )rug a))icts having a greater nee) (or quic. cash. c. Inter)iction results in an increase in the amount o( money nee)e) to ,uy the same amount o( )rugs. ). 4overnment )rug programs are more lenient now with )rug o((en)ers than they were in the 175#s. DIF: + $%&: Elasticity EF: T%': !"4overnment ; 'rice elasticity o( )eman)

ANS: D NAT: Analytic *S&: Applicative +2.

<hich o( the (ollowing statements helps to e1plain why government )rug inter)iction increases )rug"relate) crime@ a. The )irect impact is on ,uyers0 not sellers. ,. Success(ul )rug inter)iction policies re)uce the )eman) (or illegal )rugs. c. Drug a))icts will have an even greater nee) (or quic. cash to support their ha,its. ). In the short run0 ,oth equili,rium quantities an) prices will (all in the mar.ets (or illegal )rugs. DIF: + $%&: Elasticity EF: T%': !"4overnment ; 'rice elasticity o( )eman)

ANS: & NAT: Analytic *S&: Applicative +3.

<hich o( the (ollowing statements is not correct concerning government attempts to re)uce the (low o( illegal )rugs into the country@ a. Drug inter)iction raises prices an) total revenue in the )rug mar.et. ,. Drug inter)iction can increase )rug"relate) crime. c. Drug inter)iction shi(ts the )eman) curve (or )rugs to the le(t. ). Drug inter)iction shi(ts the supply curve o( )rugs to the le(t. DIF: + $%&: Elasticity EF: T%': !"4overnment ; Deman) ; Supply

ANS: & NAT: Analytic *S&: Applicative +5.

4iven the mar.et (or illegal )rugs0 when the government is success(ul in re)ucing the (low o( )rugs into the Dnite) States0 a. supply )ecreases0 )eman) is una((ecte)0 an) price increases. ,. )eman) )ecreases0 supply is una((ecte)0 an) price )ecreases. c. )eman) an) supply ,oth )ecrease0 leaving price essentially unchange). ). supply )ecreases0 )eman) increases0 an) price increases su,stantially as a result. DIF: + $%&: Elasticity EF: T%': !"4overnment ; Deman) ; Supply

ANS: A NAT: Analytic *S&: Applicative +7.

I( mariHuana were legali8e)0 it is li.ely that there woul) ,e an increase in the supply o( mariHuana. A)vocates o( mariHuana legali8ation argue that this woul) signi(icantly re)uce the amount o( revenue going to the criminal organi8ations that currently supply mariHuana. These a)vocates ,elieve that the a. supply (or mariHuana is elastic. ,. )eman) (or mariHuana is elastic. c. supply (or mariHuana is inelastic. ). )eman) (or mariHuana is inelastic. DIF: + $%&: Elasticity EF: T%': !"'rice elasticity o( )eman) ; Total revenue

ANS: D NAT: Analytic *S&: Applicative

1#7
-#.

&hapter ! 9Elasticity an) Its Application

Dn)er which o( the (ollowing con)itions woul) the inter)iction o( illegal )rugs result in a )ecrease in the quantity o( )rugs sol) and in a )ecrease in total spen)ing on illegal )rugs ,y )rug users@ a. The inter)iction has the e((ect o( shi(ting the )eman) curve (or illegal )rugs to the right. ,. The price elasticity o( )eman) (or illegal )rugs is 1.-. c. The price elasticity o( supply (or illegal )rugs is #.5. ). As a result o( the inter)iction0 the price o( illegal )rugs increases ,y +# percent an) the quantity o( illegal )rugs sol) )ecreases ,y 12 percent. DIF: + $%&: Elasticity EF: T%': !"'rice elasticity o( )eman) ; Total revenue

ANS: = NAT: Analytic *S&: Applicative

Scenario 5-4 Suppose the government is concerne) a,out (irms in the Dnite) States importing illegal caviar. As a result0 the government increases ,or)er patrols to catch illegal shipments. D.S. &ustoms agents per(orm DNA testing on the caviar to )etermine i( it comes (rom en)angere) species o( (ish. I( so0 the government )estroys the caviar. -1. Re%er to Scenario 5!7* <hat woul) we e1pect to o,serve in the caviar mar.et@ a. Equili,rium prices an) quantities will increase. ,. Equili,rium prices will increase ,y more i( the )eman) (or caviar is elastic than i( )eman) is inelastic. c. Total revenues to caviar (irms will increase i( the )eman) (or caviar is inelastic. ). All o( the a,ove are correct. DIF: + $%&: Elasticity EF: T%': !"'rice elasticity o( )eman) ; Total revenue

ANS: & NAT: Analytic *S&: Applicative