ECON 301-Chapter 6—Elasticities. Questions and Answers

ECON 301-Chapter 6—Elasticities. Questions and Answers TRUE/FALSE 1. Price elasticity is a measure of the relative responsiveness of the change in quantity demanded to a change in price. ANS: T PTS: 1 2. Price elasticity is a measure of the relative responsiveness of the change in price to a change in quantity demanded. ANS: F PTS: 1 3. Moving along an inelastic portion of a demand curve, the change in quantity demanded will always be proportionally less than the change in price. ANS: T PTS: 1 4. If Pizza Hut decreases its price for a large pizza by 25% and this leads to a 75% increase in sales, we can conclude that demand is relatively elastic with regard to price. ANS: T PTS: 1 5. As we move down along a straight-line demand curve, demand becomes increasingly price elastic. ANS: F PTS: 1 6. The widespread availability of e-mail has likely increased the price elasticity of demand for the services of the U.S. Postal Service. ANS: T PTS: 1 7. Moving along an elastic portion of a demand curve, the change in price will always be proportionately less than the change in the quantity demanded. ANS: T PTS: 1 8. A perfectly elastic demand curve is vertical. ANS: F PTS: 1 9. Demand is relatively elastic when the price elasticity coefficient exceeds 1.0. ANS: T PTS: 1 10. If the price elasticity coefficient equals 4.2, then demand is relatively inelastic with regard to price. ANS: F PTS: 1 11. A decrease in price will cause a firm's total revenue to decrease if demand is price inelastic. ANS: T PTS: 1 12. An increase in price will cause a firm's total revenue to increase if demand is price elastic. ANS: F PTS: 1 13. If a consumer's total expenditure on a good does not vary with price, then that consumer's demand curve is unit elastic over that range of prices. ANS: T PTS: 1 14. A perfectly inelastic supply curve is vertical. ANS: T PTS: 1 15. When a 5% increase in price leads to an 8% increase in quantity supplied, supply is relatively inelastic. ANS: F PTS: 1 16. When a 9% increase in price leads to a 6% increase in quantity supplied, supply is relatively inelastic. ANS: T PTS: 1 17. Given an upward sloping supply curve, the more inelastic is demand, the greater the fraction of the burden of taxation that is borne by the consumer. ANS: T PTS: 1 18. When demand is relatively more elastic than supply, the largest portion of a tax is paid by the consumer. ANS: F PTS: 1 19. To determine whether or not a pair of goods are complements, economists are interested in the cross price elasticity of demand between the two goods. ANS: T PTS: 1 20. To assess whether or not a good is inferior, economists are interested in the cross price elasticity of demand. ANS: F PTS: 1 MULTIPLE CHOICE 1. Price elasticity of demand is defined as: a. the slope of the demand curve. b. the slope of the demand curve divided by the price. c. the percentage change in price divided by the percentage change in quantity demanded. d. the percentage change in quantity demanded divided by the percentage change in price. e. the inverse of the price elasticity of supply. ANS: D PTS: 1 2. Total revenue represents the amount that: a. sellers receive for a good or service which is computed as P÷Q. b. sellers receive for a good or service which is computed as PxQ. c. one buyer spends on a good or service which is computed as PxQ. d. one buyer spends on a good or service which is computed as P÷Q. e. one buyer spends on a good or service which is computed as Q÷P. ANS: B PTS: 1 3. Demand is said to be ____ when the quantity demanded is very responsive to changes in price. a. independent b. inelastic c. unit elastic d. elastic e. flexible ANS: D PTS: 1 4. Demand is said to be ____ when the quantity demanded changes the same proportion as the price. a. independent b. inelastic c. unit elastic d. elastic e. flexible ANS: C PTS: 1 5. When demand is elastic: a. price elasticity of demand is greater than one. b. consumers are relatively responsive to changes in price. c. the percentage change in quantity demanded resulting from a price change is greater than the percentage change in price. d. all of the above are correct. ANS: D PTS: 1 6. If the demand curve is perfectly elastic, the elasticity coefficient is ____ and the curve is ____. a. zero, vertical b. infinity, horizontal c. horizontal d. infinity, vertical e. less than 1, vertical ANS: B PTS: 1 7. Shanequa and Mya have a business that provides personal fitness training services. They know that after raising their prices from $50 to $75 per hour, the quantity of hours they spent delivering training services only fell from 45 to 40 hours per week. The demand for their services is: a. elastic, with a price elasticity coefficient greater than one. b. elastic, with a price elasticity coefficient less than one. c. inelastic, with a price elasticity coefficient greater than one. d. inelastic, with a price elasticity coefficient less than one. e. unit elastic, with a price elasticity coefficient equal to one. ANS: D PTS: 1 8. A steel mill raises the price of steel by 7%, which results in a 20% reduction in the quantity of steel demanded. The demand curve facing this firm is: a. elastic. b. inelastic. c. unit elastic. d. unit inelastic. ANS: A PTS: 1 9. A steel mill raises the price of steel by 20%, which results in a 7% reduction in the quantity of steel demanded. The demand curve facing this firm is: a. elastic. b. inelastic. c. unit elastic. d. unit inelastic. ANS: B PTS: 1 10. If the demand is perfectly elastic, what would happen to the quantity demanded if there is a tiny increase in price? a. quantity demanded will increase proportionately b. quantity demanded will fall to zero c. quantity demanded will register a disproportionately high increase d. quantity demanded will decrease proportionately e. quantity demanded will remain the same ANS: B PTS: 1 11. Bailey's Barber Shop knows that a 5% increase in the price of their haircuts results in a 15% decrease in the number of haircuts purchased. What is the elasticity of demand facing Bailey's Barber Shop? a. 0.05 b. 0.10 c. 0.15 d. 0.33 e. 3.0 ANS: E PTS: 1 12. Fantastic Cuts Hair Salon knows that a 15% in