Multiple choice problems related to price elasticity of demand
1) Suppose a department store has a sale on its silverware. If the price of a place-setting is reduced from $30 to $20 and the quantity demanded increases from 3,000 place-settings to 5,000 place-settings, illustrate what is the price elasticity of demand for silverware?
c) 1.25 (Arc elasticity)
2) Why is the price elasticity of demand a relative measure? Which is, why is elasticity measured in percentage terms rather than in absolute terms?
a) So which the coefficient of elasticity will not be negative.
b) Because the absolute price or quantity demanded of a product is irrelevant to the elasticity measure.
c) Because absolute measures do not account for the direction of the change in quantity.
d) So the coefficient of elasticity will not be dependent on the physical units of the good.
3) An increase in price will result in an increase in total revenue if demand is:
a) unit elastic.
b) perfectly elastic.
c) relatively elastic.
4) Which of the subsequent is a plausible reason which restaurants offer "Senior Citizen Discounts"?
a) Senior citizens are not very sensitive to changes in price
b) Senior citizens tend to have elastic demands for restaurant meals.
c) Senior citizens are easily fooled by "come-ons" and are therefore frequently victims of price discrimination.
d) Senior citizens tend to have inelastic demands for restaurant meals.
5) Coffee and tea would be expected to have:
a) A negative cross-price elasticity of demand
b) Positive income elasticity of demand with respect to each other.
c) a positive cross-price elasticity of demand
d) Negative income elasticity of demand with respect to each other.
6) In the run up to the war in Iraq which began in 2003, one of the many concerns raised was which a war could result in a decrease in the supply of oil. At the same time, the U.S. economy was having a hard time recovering from the most recent recession and, as a result, incomes of many consumers had decreased (due to layoffs, wage cuts, and so forth). All else constant, it was reasonable to predict, with certainty, which the combination of these two factors would cause the equilibrium:
a) quantity of oil to increase.
b) quantity of oil to decrease
c) price of oil to increase.
d) price of oil to decrease
7) Understanding how individual sectors of the economy will respond to changes in key economic variables gives us a better understanding of how the macro economy behaves.
8) The market demand for a good is determined by vertically summing the demand curves of individual consumers. (Horizontal summation will be there)
9) Suppose a monopolistically competitive company comes up with a new innovation which allows it to earn above-normal economic profits. Given the nature of the market in which it operates, over time those profits will be competed away as new competitors enter the market.