### Chapter 7. Elasticities and Their Applications

1. If, when the price of a product rises from \$1.50 to \$2, the quantity demanded of the product decreases from 1,000 to 900, the price elasticity of demand coefficient is
 A. 3
 B. 2.71
 C. 0.37
 D. 0.33

2. If a 1% fall in the price of a product causes the quantity demanded of the product to increase 2%, demand is
 A. inelastic
 B. elastic
 C. unit elastic
 D. perfectly elastic

3.
 R-1 20a

In the following diagram, D1 is a

 A. perfectly elastic demand curve
 B. perfectly inelastic demand curve
 C. unit elastic demand curve
 D. a long-run demand curve

4. Compared to the lower-right portion, the upper-left portion of most demand curves tends to be
 A. more inelastic
 B. more elastic
 C. unit elastic
 D. perfectly inelastic

5.
 R-2 20b

In which range of the demand schedule is demand price inelastic?

 A. \$11 ­ \$9
 B. \$9 ­ \$7
 C. \$7 ­ \$5
 D. \$5 ­ \$3

6. If a business increased the price of its product from \$7 to \$8 when the price elasticity of demand was inelastic, then
 A. total revenues decreased
 B. total revenues increased
 C. total revenues remain unchanged
 D. total revenues were perfectly inelastic

7. You are the sales manager for a pizza company and have been informed that the price elasticity demand for your most popular pizza is greater than 1. To increase total revenues, you should
 A. increase the price of the pizza
 B. decrease the price of the pizza
 C. hold pizza prices constant
 D. decrease demand for your pizza

8. Assume Amanda Herman finds that her total spending on compact discs remains the same after the price of compact discs falls, other things equal. Which of the following is true about Amanda's demand for compact discs with this price change?
 A. It is unit price elastic.
 B. It is perfectly price elastic.
 C. It is perfectly price inelastic.
 D. It increased in response to the price change.

9.
 R-3 20c

If price is P3, then total revenue is measured by the area

 A. 0P3 CQ3
 B. 0P3 BQ2
 C. 0P3 BQ3
 D. 0P3 CQ2

10.
 R-3 20c

If price falls from P2 to P1, then in this price range demand is

 A. relatively inelastic because the loss in total revenue (areas 3 + 6 + 8) is greater than the gain in total revenue (area 10)
 B. relatively elastic because the loss in total revenue (areas 3 + 6 + 8) is greater than the gain in total revenue (area 10)
 C. relatively inelastic because the loss in total revenue (area 10) is less than the gain in total revenue (areas 3 + 6 + 8)
 D. relatively inelastic because the loss in total revenue (areas 4 + 7 + 9 + 10) is greater than the gain in total revenue (areas 3 + 6 + 8)

11.
 R-3 20c

As price falls from P4 to P3, you know that demand is

 A. elastic because total revenue decreased from 0P4 AQ1 to 0P3 BQ2
 B. inelastic because total revenue decreased from 0P3 BQ2 to 0P4 AQ1
 C. elastic because total revenue increased from 0P4 AQ1 to 0P3 BQ2
 D. inelastic because total revenue decreased from 0P4 AQ1 to 0P3 BQ2

12. Which product is most likely to be the most price elastic?
 B. clothing
 C. restaurant meals
 D. local telephone service

13. Which of the following is characteristic of a product whose demand is elastic?
 A. The price elasticity coefficient is less than 1.
 B. Total revenue decreases if price decreases.
 C. Buyers are relatively insensitive to price changes.
 D. The percentage change in quantity is greater than the percentage change in price.

14. The demand for Nike basketball shoes is more price elastic than the demand for basketball shoes as a whole. This is best explained by the fact that
 A. Nike basketball shoes are a luxury good, not a necessity
 C. there are more complements for Nike basketball shoes than for basketball shoes as a whole
 D. there are more substitutes for Nike basketball shoes than for basketball shoes as a whole

15. Which of the following is characteristic of a good whose demand is inelastic?
 A. There are a large number of good substitutes for the good for consumers.
 B. The buyer spends a small percentage of total income on the good.
 C. The good is regarded by consumers as a luxury.
 D. The period of time for which demand is given is relatively long.

16. From a time perspective, the demand for most products is
 A. less elastic in the short run and unit elastic in the long run
 B. less elastic in the long run and unit elastic in the short run
 C. more elastic in the short run than in the long run
 D. more elastic in the long run than in the short run

17. If a 5% fall in the price of a commodity causes quantity supplied to decrease by 8%, supply is
 A. inelastic
 B. unit elastic
 C. elastic
 D. perfectly inelastic

18.
 R-4 20d

In the following diagram, what is the price elasticity of supply between points A and C?

 A. 1.33
 B. 1.67
 C. 1.85
 D. 2.46

19. If supply is inelastic and demand decreases, the total revenue of sellers will
 A. increase
 B. decrease
 C. decrease only if demand is elastic
 D. increase only if demand is inelastic

20. The chief determinant of the price elasticity of supply of a product is
 A. the number of good substitutes the product has
 B. the length of time sellers have to adjust to a change in price
 C. whether the product is a luxury or a necessity
 D. whether the product is a durable or a nondurable good

21. A study shows that the coefficient of the cross price elasticity of Coke and Sprite is negative. This information indicates that Coke and Sprite are
 A. normal goods
 B. complementary goods
 C. substitute goods
 D. independent goods

22. If a 5% increase in the price of one good results in a decrease of 2% in the quantity demanded of another good, then it can be concluded that the two goods are
 A. complements
 B. substitutes
 C. independent
 D. normal

23. Most goods can be classified as normal goods rather than inferior goods. The definition of a normal good means that
 A. the percentage change in consumer income is greater than the percentage change in price of the normal good
 B. the percentage change in quantity demanded of the normal good is greater than the percentage change in consumer income
 C. as consumer income increases, consumer purchases of a normal good increase
 D. the income elasticity of demand is negative

24.
 R-5 20e

Based on the information in the table, which product would be an inferior good?

 A. Product A
 B. Product B
 C. Product C
 D. Product D

25. For which product is the income elasticity of demand most likely to be negative?
 A. automobiles
 B. bus tickets
 C. computers
 D. tennis rackets

26.
 R-6 20f

In the following diagram, a legal price floor of \$9.00 will result in

 A. a surplus of 20 units
 B. a surplus of 10 units
 C. a shortage of 20 units
 D. no shortage or surplus

27.
 R-7 20g

The equilibrium price and quantity is

 A. \$4.00 and 600 pounds
 B. \$3.80 and 350 pounds
 C. \$3.60 and 400 pounds
 D. \$3.40 and 300 pounds

28.
 R-7 20g

If a legal price floor is established at \$4.20, there will be a

 A. shortage of 450 pounds
 B. surplus of 450 pounds
 C. shortage of 300 pounds
 D. surplus of 300 pounds

29.
 R-2 20b

A shortage of 150 pounds of the product will occur if a legal price is established at

 A. \$3.20
 B. \$3.40
 C. \$3.80
 D. \$4.00

30. Which of the following would be an example of a price floor?
 A. controls on apartment rent in major cities
 B. limiting interest charged by credit card companies
 C. price controls during World War II
 D. price supports for agricultural products

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