Elasticity:
True/False
In general, demand curves for necessities tend to be price elastic.
ANS: F
Goods with close substitutes tend to have more elastic demands than do goods without close
substitutes.
ANS: T
Even the demand for a necessity such as gasoline will respond to a change in price, especially
over a longer time horizon.
ANS: T
If demand is perfectly elastic, the demand curve is horizontal, and the price elasticity of demand
equals 1.
ANS: F
If a supply curve is horizontal, then supply is said to be perfectly elastic, and the price elasticity
of supply approaches infinity.
ANS: T
Short Questions:
1. Consider the following pairs of goods. For which of the two goods would you expect the demand to
be more price elastic? Why?
a. water or diamonds
b. insulin or nasal decongestant spray
c. food in general or breakfast cereal
d. gasoline over the course of a week or gasoline over the course of a year
e. personal computers or IBM personal computers
ANS:
a. Diamonds are luxuries, and water is a necessity. Therefore, diamonds have the more elastic
demand.
b. Insulin has no close substitutes, but decongestant spray does. Therefore, nasal
decongestant spray has the more elastic demand.
c. Breakfast cereal has more substitutes than does food in general. Therefore, breakfast cereal
has the more elastic demand.
d. The longer the time period, the more elastic demand is. Therefore, gasoline over the course
of a year has the more elastic demand.
e. There are more substitutes for IBM personal computers than there are for personal
computers. Therefore, IBM personal computers have the more elastic demand.
2. Using the midpoint method, compute the elasticity of demand between points A and B. Is demand
along this portion of the curve elastic or inelastic? Interpret your answer with regard to price and
quantity demanded. Now compute the elasticity of demand between points B and C. Is demand
along this portion of the curve elastic or inelastic?
ANS:
In the section of the demand curve from A to B, the elasticity of demand would be 2.5. This would be an
elastic portion of the curve. This would mean that for every 1 percent change in price, quantity
demanded would change by 2.5 percent.
In the section of the demand curve from B to C, the elasticity of demand would be .75. This would be an
inelastic portion of the curve. This would mean that for every 1 percent change in price, quantity
demanded would change by 0.75 percent.
Multiple Choice
1. For a good that is a necessity,
a. quantity demanded tends to respond substantially to a change in price.
b. demand tends to be inelastic.
c. the law of demand does not apply.
d. All of the above are correct.
ANS: B
2. For a good that is a necessity, demand
a. tends to be inelastic.
b. tends to be elastic.
c. has unit elasticity.
d. cannot be represented by a demand curve in the usual way.
ANS: A
3. Which of the following statements is correct?
a. The demand for flat-screen computer monitors is more elastic than the demand for
monitors in general.
b. The demand for grandfather clocks is more elastic than the demand for clocks in
general.
c. The demand for cardboard is more elastic over a long period of time than over a short
period of time.
d. All of the above are correct.
ANS: D
4. The greater the price elasticity of demand, the
a. more likely the product is a necessity.
b. smaller the responsiveness of quantity demanded to a change in price.
c. greater the percentage change in price over the percentage change in quantity
demanded.
d. greater the responsiveness of quantity demanded to a change in price.
ANS: D
5. If the price elasticity of demand for a good is 4.0, then a 10 percent increase in price results in a
a. 0.4 percent decrease in the quantity demanded.
b. 2.5 percent decrease in the quantity demanded.
c. 4 percent decrease in the quantity demanded.
d. 40 percent decrease in the quantity demanded.
ANS: D
Figure 1
6. Refer to Figure 1. Using the midpoint method, the price elasticity of demand between point A and
point B is
a. 1.
b. 1.5.
c. 2.
d. 2.5.
ANS: D
7. Refer to Figure 1. Using the midpoint method, the price elasticity of demand between point B and
point C is
a. 0.5.
b. 0.75.
c. 1.0.
d. 1.3.
ANS: B
8. Refer to Figure 1. If the price decreased from $18 to $6,
a. total revenue would increase by $1,200, and demand is elastic between points A and C.
b. total revenue would increase by $800, and demand is elastic between points A and C.
c. total revenue would decrease by $1,200, and demand is inelastic between points A and
C.
d. total revenue would decrease by $800, and demand is inelastic between points A and C.
ANS: A
9. Refer to Figure 2. Sellers ’total revenue would increase if the price
a. increased from $4 to $6.
b. increased from $16 to $18.
c. decreased from $8 to $6.
d. All of the above are correct.
ANS: A
10. To determine whether a good is considered normal or inferior, one could examine the value of the
a. income elasticity of demand for that good.
b. price elasticity of demand for that good.
c. price elasticity of supply for that good.
d. cross-price elasticity of demand for that good.
ANS: A
