Economics 251

Review Questions Chapter 20 - Elasticity of Demand and Supply

(1) Suppose that as the price of Y falls from $2.00 to $1.90 the quantity of Y demanded increases from 110 to 118. Then the price elasticity of demand is:

(a) 4.00

(b) 2.09

(c) 1.37

(d) 3.94

(2) The price elasticity of demand for widgets is - 0.80. Assuming no change in the demand curve for widgets, a 16 percent increase in sales price implies a:

(a) 16 percent reduction in quantity demanded.

(b) 12.8 percent reduction in quantity demanded.

(c) 20 percent reduction in quantity demanded.

(d) 20 percent increase in quantity demanded.

(3) The price elasticity of demand of a straight-line demand curve is:

(a) elastic in high-price ranges and inelastic in low-price ranges.

(b) elastic, but does not change at various points on the curve.

(c) inelastic, but does not change at various points on the curve.

(d) 1 at all points on the curve.

(4) If the demand for bacon is relatively elastic, a 10 percent decline in the price of bacon will:

(a) decrease the quantity demanded by more than 10 percent.

(b) increase the quantity demanded by more than 10 percent.

(c) decrease the quantity demanded by less than 10 percent.

(d) increase the quantity demanded by less than 10 percent.

(5) The price elasticity of demand for restaurant meals is about –2.27. Other things equal, this means that a 20 percent decrease in the price of restaurant meals will cause the quantity of restaurant meals demanded to:

(a) increase by approximately 45 percent.

(b) decrease by approximately 2.27 percent.

(c) increase by approximately 8.8 percent.

(d) decrease by approximately 26 percent.

(6) Westville State University (WSU) raised tuition for the purpose of increasing its revenue so that more faculty can be hired. WSU is assuming that the demand for education at WSU is:

(a) decreasing.

(b) relatively elastic.

(c) perfectly elastic.

(d) relatively inelastic.

(7) The main determinant of the elasticity of supply is the:

(a) number of close substitutes for the product available to consumers.

(b) amount of time the producer has to adjust inputs in response to price change.

(c) urgency of consumer wants for the product.

(d) number of uses for the product.

Utilize the information in Table 1 to answer Questions (8) and (9).

Table 1

Price Quantity Demanded

$6 1

5 2

4 3

3 4

2 5

1 6

(8) In Table 1, the price elasticity of demand is relatively elastic:

(a) in the $6 to $4 price range.

(b) over the entire $6 to $1 price range.

(c) in the $3 to $1 price range.

(d) in the $6 to $5 price range only.

(9) In Table 1, the price elasticity of demand is relatively inelastic:

(a) in the $6 to $4 price range.

(b) over the entire $6 to $1 price range.

(c) in the $3 to $1 price range.

(d) in the $6 to $5 price range only.

Refer to Figure 1 to answer Question (10)

$/Q

Figure 1

10
2

(10) In Figure 1, assume that price increases from $2 to $10. The coefficient of the price elasticity of supply relating to this price change is about:

(a) 5 and supply is elastic.

(b) 1.11 and supply is elastic.

(c) 0.90 and supply is inelastic.

(d) 2.5 and supply is elastic.

(11) Suppose the income elasticity for toys is + 2.00. This means that:

(a) a 10 percent increase in income will increase the purchase of toys by 20 percent.

(b) a 10 percent increase in income will increase the purchase of toys by 2 percent.

(c) a 10 percent increase in income will decrease the purchase of toys by 2 percent.

(d) toys are an inferior good.

Utilize Figure 2 to answer Question (12).

S(1)

D(2)

Figure 2

$/Q
	P(1)
				Quantity (Q)
			Q(1)

(12) In Figure 2, supply adjustments, S(1), S(2) and S(3) are shown in response to an increase in demand from D(1) to D(2). In the long run, the increase in demand will:

(a) have no effect on either equilibrium price or quantity.

(b) increase equilibrium price, but not equilibrium quantity.

(c) increase equilibrium quantity, but not equilibrium price

(d) increase both equilibrium price and quantity.

(13) We would expect the cross elasticity of demand between Pepsi and Coke to be:

(a) positive, indicating normal goods.

(b) positive, indicating inferior goods.

(c) positive, indicating substitute goods.

(d) negative, indicating complementary goods.

(14) The price elasticity of which of the following goods and services is likely to be between 0 and 1?

(a) an addictive drug.

(b) jewelry.

(c) new cars.

(d) cruise ship vacations.

(15) The price elasticity of which of the following goods and services is likely to be between 1 and 3?

(a) toothpicks

(b) cigarettes.

(c) electricity for the home in the short run.

(d) new major appliances, such as refrigerators and stoves.