Chapter 4  Elasticity 

1) The price elasticity of demand measures

A) how often the price of a good changes.

B) the slope of a budget curve.

C) how sensitive the quantity demanded is to changes in demand.

D) the responsiveness of the quantity demanded to changes in price.

2) Elasticity generally measures the

A) percentage change in a variable.

B) slope of a curve.

C) change in a variable.

D) responsiveness of a variable to a change in another variable.

3) The price elasticity of demand equals the magnitude of the

A) percentage change in the price of a good divided by the percentage change in the quantity demanded.

B) percentage change in the quantity demanded of a good divided by the percentage change in its price.

C) inverse of the slope of the demand curve.

D) slope of the demand curve.

4) An elasticity of demand is measured in

A) dollars.

B) units of output.

C) dollars per unit of output.

D) None of the above answers is correct because there are no units for an elasticity of demand.

5) When the quantity of coal is measured in kilograms instead of pounds, the demand for coal becomes

A) more elastic.

B) less elastic.

C) neither more nor less elastic.

D) undefined.

6) Suppose the quantity of gasoline is measured in gallons and the price of gasoline is measured in dollars. The price elasticity of demand is 0.67. If the price of gasoline was now measured in cents rather than dollars, the price elasticity of demand would now be

A) 0.0067.

B) 0.67.

C) 6.7.

D) 67.0.

7) If a 4 percent increase in the price of a newspaper will decrease the quantity of newspapers demanded by 8 percent. the demand for newspapers is ________.

A) inelastic

B) unit elastic

C) perfectly elastic

D) elastic

8) The price elasticity of demand for furniture is estimated at 1.3.  This value means a one percent increase in the

A) price of furniture will increase the quantity of furniture demanded by 1.3 percent.

B) price of furniture will decrease the quantity of furniture demanded by 1.3 percent.

C) quantity of furniture demanded will decrease the price of furniture by 1.3 percent.

D) quantity of furniture demanded will increase the price of furniture by 1.3 percent.

9) If the price of a soda increases by 2 percent and as a result the quantity of sodas demanded decreases by 5 percent, the price elasticity of demand equals

A) 0.40.

B) 1.50.

C) 2.50.

D) 1.00.

 10) The price elasticity of demand for DVDs is 2. If the price of a DVD increased by 2 percent, the quantity demanded will ________.

A) decrease by 2 percent

B) not change

C) decrease by 4 percent

D) decrease by 1 percent

.

11) The figure shows the demand curve for popsicles. The price elasticity of demand when the price of a popsicle increases from $0.30 to $0.50 is ________.

A) 0

B) 1

C) 1/2

D) 2

12) If demand is price elastic,

A) a 1 percent decrease in the price leads to an increase in the quantity demanded that exceeds 1 percent.

B) a 1 percent increase in the price leads to an increase in the quantity demanded that exceeds 1 percent.

C) a 1 percent decrease in the price leads to a decrease in the quantity demanded that is less than 1 percent.

D) the price is very sensitive to any shift of the supply curve.

13) If a consumer is relatively insensitive to changes in the price of a good, then the consumer's demand for the good is

A) elastic.

B) unit elastic.

C) inelastic.

D) perfectly elastic.

14) If the price of salt increases and the quantity demanded does not change, then

A) the price elasticity of demand is equal to zero.

B) demand is perfectly inelastic.

C) the demand curve for salt is horizontal.

D) Both answers A and B are correct.

15) If the price elasticity of demand is between 0 and 1, the good is said to have

A) perfectly elastic demand.

B) perfectly inelastic demand.

C) unit elastic demand.

D) inelastic demand.

16) A good with a vertical demand curve has a demand with

A) unit elasticity.

B) infinite elasticity.

C) zero elasticity.

D) varying elasticity.

17) If the demand for a good is perfectly elastic, the price elasticity of demand is ________ and the demand curve is ________.

A) infinite; vertical

B) zero; vertical

C) zero; horizontal

D) infinite; horizontal

18) In the above figure, which demand curve illustrates perfectly elastic demand?

A) G

B) H

C) I

D) J

19) According to the total revenue test, a price cut increases total revenue if demand is

A) inelastic.

B) perfectly inelastic.

C) elastic.

D) unit elastic.

20) To maximize its revenue,

A) a firm facing inelastic demand should always raise its price.

B) a firm facing elastic demand should always raise its price.

C) a firm should always charge the highest price possible regardless of the elasticity of demand.

D) None of the above answers is correct.

21)Total revenue for a good is at a maximum when the price elasticity of demand is

A) between 0 and 1.

B) 1.

C) greater than 1.

D) 0.

22) Demand is unit elastic when

A) the slope of the demand curve is -1.

B) a shift of the supply curve leads to no change in price.

C) a shift of the supply curve leads to an equal shift of the demand curve.

D) a change in the price of the product leads to no change in the total revenue.

23) Suppose Sandy's Candies wants to increase its total revenues. If Sandy increases the price of her candy, she must be assuming that the demand for candy is

A) unit elastic.

B) inelastic.

C) elastic.

D) income elastic.

24) Which goods have more elastic demands?

A) goods with many substitutes

B) goods which are necessities

C) goods with few substitutes

D) goods whose purchase represents a small percentage of income

25) The demand for a good is more price elastic

A) if closer substitutes are available.

B) if the good is a necessity rather than a luxury.

C) if the share of the good in the average consumer's budget is smaller.

D) in the short run than in the long run.

26) For many goods, the price elasticity of demand increases over time because

A) people's incomes tend to increase over time.

B) inflation increases all prices and incomes over time.

C) the ability to find substitutes for a good whose price has risen increases over time.

D) None of the above answers is correct.

27) Which of the following makes demand less elastic?

A) the existence of many close substitutes for the good

B) spending a large proportion of income on the good

C) a short time elapsing since the product's price changed

D) All of the above answers are correct.

28) The price elasticity of demand depends on the

A) proportion of consumers' budgets spent on the good.

B) number of available substitutes.

C) extent to which the commodity is a luxury.

D) all of the above  

Essay Questions: 

1) What is the price elasticity of demand? In terms of percentage changes, what is its formula?

Answer:  The price elasticity of demand is a measure of the responsiveness of quantity demanded to a change in price. The formula for the price elasticity of demand is the magnitude of the percentage change in quantity demanded divided by the percentage change in price.

2) What does a horizontal demand curve indicate about the price elasticity of demand?

Answer:  If the demand curve for a good is horizontal, the demand for the good is perfectly elastic so that the price elasticity of demand is infinite.

3) The price of chocolate chip cookies is $5.50 per pound. The manufacturer needs to decide whether to raise the price to $5.95 per pound or lower the price to $4.95 per pound. Recent test market results indicate that the demand for the cookie is elastic. If the manufacturer wants to increase the total revenue from sales of cookies, what price would you recommend for the cookie?

Answer:  You should recommend that the price be lowered to $4.95. Because the demand for the cookie is elastic, the lower price will generate a large enough increase in sales so that total revenue increases.

4) Water is considered a necessity. So, is the demand for water elastic or inelastic?

Answer:  The demand for necessities is inelastic, so the demand for water is inelastic.