Answers to Multiple Choice Questions For Elasticity

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  1. Which of the following goods would you expect to have the largest income elasticity of demand?
    1. rice.
    2. toothpaste.
    3. beer.
    4. stereo equipment.
    5. newspapers.

  2. The cross price elasticity between two products is found to be -1/2. From this you know that the two products are:
    1. normal.
    2. inferior.
    3. necessities.
    4. complements.
    5. substitutes.

  3. If the cross price elasticity between goods B and A is -2 and the price of good B increases by 5%, the quantity demanded of good A will:
    1. increase by 5%
    2. increase by 10%
    3. decrease by 2%
    4. decrease by 5%
    5. decrease by 10%

  4. Karen's income elasticity of demand for bottles of her favorite wine is 1.5. Currently her income is equal to $50,000 and she normally buys 500 bottles per year (Unless Karen entertains a lot she has a problem). If her income increases to $55,000 how many bottles of her favorite wine will she buy per year?
    1. 425
    2. 550
    3. 575
    4. 515
    5. 675

  5. A firm learns that the own price elasticity of a product it manufactures is 3.5. What would be the correct action for this firm to take if it wishes to raise its total revenue?
    1. Raise the price because demand for the product is inelastic.
    2. Lower the price because demand for the good is elastic.
    3. We need information on the firm's cost structure in order to answer this question.
    4. Raise the price because demand is elastic.
    5. Lower the price because demand is inelastic.

  6. A monopolist learns that the own price elasticity of a product it manufactures is 0.5. What would be the correct action for this firm to take if it wishes to increase its profits?
    1. Raise the price because demand for the product is inelastic.
    2. Lower the price because demand for the good is elastic.
    3. We need information on the firm's cost structure in order to answer this question.
    4. Raise the price because demand is elastic.
    5. Lower the price because demand is inelastic.

  7. Cheryl's income elasticity for good A is -2.5. Her current income is $100,000 and she normally buys 100 units of good A per year. If her income increases to $110,000 how many units of good A will she buy?
    1. 250.
    2. 75.
    3. 125.
    4. 100.
    5. 82.5.

  8. After paying an economist to estimate the price elasticity of demand for socks, sock manufacturers, expecting to increase revenues, decide to reduce the price of socks. The estimate of demand elasticity could have been:
    1. .5
    2. .25
    3. .75
    4. -.75
    5. 1.75

  9. If the price elasticity of demand for some good is estimated to be 4. then a 1% increase in price will lead to a:
    1. 20% increase in quantity demanded.
    2. 0.25% decrease in quantity demanded.
    3. 0.5% increase in quantity demanded.
    4. 4% decrease in quantity demanded.
    5. 4% increase in quantity demanded.

  10. If coffee and tea are substitutes, what do we know for certain about the cross-price elasticity of demand for coffee with respect to the price of tea?
    1. It is greater than 1.
    2. It is negative.
    3. It is positive.
    4. they are both inferior goods.
    5. It is equal to one.

  11. Which of the following might cause the own price elasticity of demand for product Z to go from .75 to 1.25.
    1. A decrease in the manufacturing cost of Z.
    2. The introduction of a new product that is considered a close substitute for Z.
    3. An improvement in the manufacturing technology for Z.
    4. More firms begin producing product Z.
    5. A change in consumer tastes that causes consumers to feel that consuming Z is an important enhancement to their image.

  12. Candice currently spends $200 per month on long distance telephone calls. If the telephone company decides to reduce the rate from 10 cents a minute to 5 cents a minute then:
    1. whether she spends more or less than $200 per month depends on whether long distance telephone calls are a normal good or an inferior good.
    2. the fact that demand curves are downward-sloping implies she will spend more than $200 per month on long distance telephone calls.
    3. she will spend less than $200 per month on long distance telephone calls because the new price is an effective price floor.
    4. whether she spends more or less than $200 per month on long distance telephone calls depends on whether her demand is elastic or inelastic.
    5. she will spend more than $200 per month on long distance telephone calls because her demand shifted out.

  13. On the front page of the September 27, 1996 New York Times is an article with the headline ``U.S. Census Finds First Income Rise in Past Six Years.'' The text reports that ``much of the rise in household incomes was in the Midwest.'' Based on this information alone, what would you expect has been happening to equilibrium prices and quantities sold of new cars in the Midwest during this period of increasing incomes.
    1. Equilibrium prices have probably been rising and quantities falling since supply of new cars is probably inelastic.
    2. Equilibrium prices have probably been rising and quantities falling since demand for new cars is probably price and income inelastic.
    3. Equilibrium prices have probably been rising and quantities increasing since income elasticity of demand for new cars is probably positive and greater than one.
    4. Equilibrium prices have probably been falling and quantities increasing since income elasticity of demand for new cars is probably negative.
    5. Equilibrium prices have probably been falling and quantities falling since cross price elasticity of demand for new cars with respect to income is probably negative.

  14. Jane considers tofu a normal good and peanut butter an inferior good. We can predict that with an increase in her income she will consume:
    1. more of both goods.
    2. less of both goods.
    3. she will not change her consumption of peanut butter
    4. more peanut butter and less tofu.
    5. more tofu and less peanut butter.

  15. The government is considering an increase in the tax on gasoline. They know that the own-price elasticity of demand for gas is .25. The current price is $1.00 per gallon. They are willing to allow the quantity of gas sold to fall by 10%. What tax increase (in cents per gallon) would lead to a 10% reduction in quantity demanded? (we assume that the entire tax shows up in the price at the pump)
    1. .04
    2. .10
    3. .25
    4. .29
    5. .40

  16. The post office charges $1 to mail an iguana overseas. At this price 1,000 iguana are mailed each week. To increase revenue, the post office is considering an increase in the price of overseas iguana delivery to $2. Post office researchers have determined that the own price elasticity of demand for its iguana delivery service is 1/5. If the post office increases its price to $2:
    1. revenue will fall by $300.
    2. revenue will increase by $300.
    3. revenue won't change.
    4. revenue will fall by $600.
    5. revenue will increase by $600.

  17. If college enrollments drop by 10% when textbook prices double; textbooks and enrollments are __________ goods and their cross price elasticity is __________.
    1. complementary; -0.5
    2. substitute; 5
    3. complementary; -0.1
    4. substitute; 0.5
    5. complementary; -5

  18. Kevin's income elasticity for good A is equal to -1.5. His current income is $40,000 per year and he buys 200 units of good A annually. If his income falls to $36,000 how many units of good A will he purchase?
    1. 230.
    2. 170.
    3. 150.
    4. 125.
    5. 250.
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