Chapter 5 Elasticity

Chapter
5 Elasticity
5.1 Price Elasticity of Demand
1 Multiple Choice
Refer to the information provided in Figure 5.1 below to answer the questions that follow.
Figure 5.1
1) Refer to Figure 5.1. The demand for tickets is
A) perfectly price elastic. B) perfectly price inelastic.
C) unit price elastic. D) perfectly income inelastic.
Answer: B
Diff: 1
Topic: Price Elasticity of Demand
Skill: Fact
2) Demand determines price entirely when
A) demand is downward sloping. B) demand is perfectly inelastic.
C) supply is perfectly inelastic. D) supply is perfectly elastic.
Answer: C
Diff: 2
Skill: Definition
3) A perfectly price elastic demand curve will be a ________ line.
A) horizontal B) vertical
C) positively sloped D) negatively sloped
Answer: A
Diff: 1
Skill: Fact
116
4) A perfectly price elastic supply curve is a ________ line.
C) positively sloped D) negatively sloped
Answer: B
Diff: 1
Skill: Fact
5) When the price of radios decreases 5%, quantity demanded increases 5%. The price elasticity
of demand for radios is ________ and total revenue from radio sales will ________ .
A) elastic; decrease B) elastic; increase
C) inelastic; decrease D) unit elastic; not change
Answer: D
Diff: 2
Skill: Analytic
AACSB: Analytic Skills
6) When the price of fresh fish increases 10%, quantity demanded decreases 5%. The price
elasticity of demand for fresh fish is ________ and total revenue from fresh fish sales will
________ .
A) inelastic; increase B) inelastic; decrease
C) elastic; decrease D) elastic; increase
Answer: A
Diff: 2
Skill: Definition
7) When the price of fresh fish increases 10%, quantity demanded is unchanged. The price
elasticity of demand for fresh fish is
A) perfectly inelastic. B) elastic.
C) inelastic. D) unitary elastic.
Answer: A
Diff: 2
Skill: Definition
8) When the price of coffee increases 5%, quantity demanded decreases 10%. The price elasticity
of demand for coffee is ________ and total revenue from coffee sales will ________ .
A) inelastic; increase B) inelastic; decrease
C) elastic; increase D) elastic; decrease
Answer: D
Diff: 2
Skill: Definition
117
9) The ABC Computer Company wants to increase the quantity of computers it sells by 5%. If the
price elasticity of demand is ‐2.5, the company must
A) increase price by 2.0%. B) decrease price by 2.0%.
C) increase price by 0.5%. D) decrease price by 0.5%.
Answer: B
Diff: 2
Skill: Analytic
10) A government wants to reduce electricity consumption by 10%. The price elasticity of demand
for electricity is ‐5. The government must ________ the price of electricity by ________.
A) raise; 2.0% B) raise; 0.5% C) raise; 1.25% D) lower; 0.5%
Answer: A
Diff: 2
Skill: Analytic
11) A government wants to reduce electricity consumption by 5%. The price elasticity of demand
for electricity is ‐0.5. The government must ________ the price of electricity by ________.
A) raise; 10.0% B) raise; 1.0% C) raise; 0.1% D) lower; 0.5%
Answer: A
Diff: 2
Skill: Analytic
12) The price elasticity of demand for bottled water in Texas is ‐2, and the price elasticity of
demand for bottled water in California is ‐0.5. In other words, demand in Texas is ________
and demand in California is ________.
A) elastic; inelastic B) inelastic; elastic
C) elastic; unit elastic D) inelastic; unit inelastic
Answer: A
Diff: 2
Skill: Conceptual
13) The price elasticity of demand for heart transplants is perfectly inelastic. Thus, the price
elasticity demand for heart transplants is
A) 0.0. B) 1.0. C) ‐1.0. D) ‐100.0.
Answer: A
Diff: 2
Skill: Analytic
118
2 True/False
1) Price elasticity of demand is calculated using the change in quantity demanded and the
change in price.
Answer: FALSE
Diff: 2
Skill: Definition
2) The price elasticity of demand is generally negative to reflect the indirect relationship between
the quantity demanded of a good and its price.
Answer: TRUE
Diff: 2
Skill: Definition
3) Perfectly inelastic demand is represented as a vertical line.
Answer: TRUE
Diff: 1
Skill: Fact
4) Perfectly elastic demand is represented as a horizontal line.
Answer: TRUE
Diff: 1
Skill: Fact
119
5.2 Calculating Elasticities
1 Multiple Choice
Figure 5.2
1) Refer to Figure 5.2. If the price of a hamburger is increased from $8 to $10, the price elasticity
of demand equals ________. Use the midpoint formula.
A) ‐0.33 B) ‐3.0 C) ‐30. D) ‐300
Answer: B
Diff: 2
Topic: Calculating Elasticities
Skill: Analytic
2) Refer to Figure 5.2. If the price of a hamburger is increased from $6 to $8, the price elasticity of
demand equals ________. Use the midpoint formula.
A) ‐0.24 B) ‐1.0 C) ‐1.4 D) ‐2.0
Answer: C
Diff: 2
Skill: Analytic
3) Refer to Figure 5.2. If the price of a hamburger is increased from $2 to $4, the price elasticity of
demand equals ________. Use the midpoint formula.
A) ‐0.33 B) ‐2.0 C) ‐3.0 D) ‐5.0
Answer: A
Diff: 2
Skill: Analytic
120
4) Refer to Figure 5.2. At Point C the price elasticity of demand is ‐1. Along line segment EC of
the demand curve, the demand is
A) elastic.
B) unit elastic.
C) inelastic.
D) either elastic or inelastic, depending on whether price increases or decreases.
Answer: C
Diff: 2
Skill: Definition
5) Refer to Figure 5.2. At Point C the price elasticity of demand is ‐1. Along line segment AB of
the demand curve, the demand is
A) elastic.
B) unit elastic.
C) inelastic.
D) either elastic or inelastic, depending on whether price increases or decreases.
Answer: A
Diff: 2
Skill: Definition
Figure 5.3
6) Refer to Figure 5.3. Use the midpoint formula. If the price of a gardenburger is increased from
$8 to $10, the price elasticity of demand equals ________ and demand is ________ .
A) 4.5; elastic B) ‐0.5; inelastic C) ‐4.5; elastic D) ‐9.0; inelastic
Answer: C
Diff: 2
Skill: Analytic
121
7) Refer to Figure 5.3. Use the midpoint formula. If the price of a gardenburger is increased from
$6 to $8, the price elasticity of demand equals ________ and demand is ________ .
A) -0.57; inelastic B) ‐1.75; elastic C) ‐1.9; inelastic D) ‐2.0; elastic
Answer: B
Diff: 2
Skill: Analytic
8) Refer to Figure 5.3. Using the midpoint formula, if the price of a gardenburger is decreased
from $7 to $6, the price elasticity of demand equals ________ and the decrease results in a(n)
________ in total revenue.
A) ‐.13; decrease B) ‐.69; increase C) ‐1.44; increase D) ‐13; increase
Answer: C
Diff: 2
Skill: Analytic
9) The owner of a local hot dog stand has estimated that if he lowers the price of hot dogs from
$2.00 to $1.50, he will increase sales from 400 to 500 hot dogs per day. Using the midpoint
formula, the demand for hot dogs is
A) elastic. B) inelastic.
C) unit elastic. D) perfectly elastic.
Answer: B
Diff: 2
Skill: Definition
10) At a price of $11, quantity demanded is 90; and at a price of $9, quantity demanded is 110.
Since total revenue ________ by the price decrease, demand must be ________ .
A) is increased; elastic B) is decreased; inelastic
C) is unchanged; unit elastic D) is unchanged; elastic
Answer: C
Diff: 2
Skill: Analytic
11) At a price of $20, a store can sell 24 picture frames a day. At a price of $18 the store can sell 33
picture frames a day. Since total revenue ________ by the price decrease, demand must be
________ .
A) is increased; elastic B) is increased; inelastic
C) is increased; unit elastic D) is decreased; elastic
Answer: A
Diff: 2
Skill: Analytic
122
12) Price and total revenue move in inverse directions when demand is
A) price elastic. B) price inelastic.
C) unit price elastic. D) perfectly price inelastic.
Answer: A
Diff: 1
Skill: Fact
13) Price and total revenue are directly related when demand is
A) price elastic. B) price inelastic.
C) unit price elastic. D) perfectly price elastic.
Answer: B
Diff: 1
Skill: Fact
14) Total revenue decreases if price ________ and demand is ________.
A) falls; elastic B) falls; inelastic
C) rises; inelastic D) rises; unit elastic
Answer: B
Diff: 1
Skill: Fact
15) Total revenue increases if price ________ and demand is ________.
A) falls; inelastic B) falls; elastic
C) rises; elastic D) rises; unit elastic
Answer: B
Diff: 1
Skill: Fact
123
Figure 5.4
16) Refer to Figure 5.4. The demand for milkshakes is unit elastic at Point C. If a store reduces the
price of a milkshake from P3 to P4, its total revenue will
A) increase. B) decrease.
C) remain constant. D) either increase or decrease.
Answer: B
Diff: 1
Skill: Fact
17) Refer to Figure 5.4. The demand for milkshakes is unit elastic at Point C. If the milkshake price
falls from P1 to P2, total revenue will
A) increase. B) decrease.
C) remain constant. D) either increase or decrease.
Answer: A
Diff: 1
Skill: Fact
18) Refer to Figure 5.4. Along the given demand curve, which of the following is true?
A) Demand is less elastic along the segment AB than the segment EF.
B) Demand is less elastic along the segment EF than the segment AB.
C) Since the demand curve is linear, the price elasticity of demand between each of the
points (e.g. segment AB, segment BC, etc.) is the same.
D) It is impossible to tell with the given diagram.
Answer: B
Diff: 2
Skill: Fact
124
19) A firm is currently producing in the inelastic portion of its demand curve. What course of
action do you recommend for it assuming it wants to raise revenue?
A) Continue producing at the current output level, because it maximizes its total revenue by
producing in the inelastic portion of its demand curve.
B) Reduce price, because if it reduces price and demand is inelastic, total revenue will
increase.
C) Increase price, because if it increases price and demand is inelastic, total revenue will
increase.
D) Continue selling at the same price, but increase the amount it produces.
Answer: C
Diff: 2
Skill: Conceptual
20) A firm is currently producing in the elastic portion of its demand curve. What course of action
do you recommend for it assuming it wants to raise revenue?
A) Continue producing at the current output level, because it maximizes its total revenue by
producing in the elastic portion of its demand curve.
B) Reduce price, because if it reduces price and demand is elastic, total revenue will
increase.
C) Increase price, because if it increases price and demand is elastic, total revenue will
increase.
D) Continue selling at the same price, but increase the amount it produces.
Answer: B
Diff: 2
Skill: Conceptual
2 True/False
1) When the slope of a demand curve is constant, price elasticity of demand is constant as well.
Answer: FALSE
Diff: 1
Skill: Fact
2) A demand curve with continuously changing slope over all quantity values can have a
constant price elasticity of demand.
Answer: TRUE
Diff: 2
Skill: Fact
3) A demand curve with constant slope over all quantity values can have a continuously
changing price elasticity of demand.
Answer: TRUE
Diff: 2
Skill: Fact
125
4) A tax on a good whose demand is price elastic will be effective in discouraging consumption
of that good.
Answer: TRUE
Diff: 1
Skill: Fact
5) If government officials are mainly interested in generating tax revenue, then they should tax
goods for which demand is price elastic.
Answer: FALSE
Diff: 1
Skill: Fact
6) How total revenue changes when a price changes can be predicted using price elasticity of
demand.
Answer: TRUE
Diff: 2
Skill: Definition
7) When demand is elastic, an increase in price will result in an increase in total revenue.
Answer: FALSE
Diff: 1
Skill: Fact
8) When demand is elastic, a decrease in price will result in an increase in total revenue.
Answer: TRUE
Diff: 1
Skill: Fact
9) When demand is inelastic, an increase in price will result in an increase in total revenue.
Answer: TRUE
Diff: 1
Skill: Fact
10) When demand is inelastic, a decrease in price will result in an increase in total revenue.
Answer: FALSE
Diff: 1
Skill: Fact
11) When demand is unit elastic, an increase in price will result in an increase in total revenue.
Answer: FALSE
Diff: 1
Skill: Fact
126
12) When demand is unit elastic, a decrease in price will result in no change in total revenue.
Answer: TRUE
Diff: 1
Skill: Fact
5.3 The Determinants of Demand Elasticity
1 Multiple Choice
1) When there are more substitutes for a product, the ________ for the product is ________.
A) demand; less price elastic B) demand; more price elastic
C) income elasticity; greater D) income elasticity; smaller
Answer: B
Diff: 1
Topic: Determinants of Demand Elasticity
Skill: Fact
2) The more time that elapses, the
A) less price elastic is the demand for the product.
B) more price elastic is the demand for the product.
C) greater the income elasticity of demand for a product.
D) smaller the income elasticity of demand for the product.
Answer: B
Diff: 1
Skill: Fact
3) The determinants of elasticity include
A) availability of substitutes. B) price relative to income.
C) time. D) all of the above
Answer: D
Diff: 2
Skill: Definition
4) Related to the Economics in Practice on page 95: Which of the following, if true, would most
effectively undermine the argument that raising cigarette taxes reduce the number of people
who smoke cigarettes?
A) The demand for cigarettes is relatively inelastic.
B) The demand for cigarettes is relatively elastic.
C) The supply for cigarettes is relatively inelastic.
D) The supply for cigarettes is relatively elastic.
Answer: A
Diff: 3
Topic: Determinants of Demand Elasticity: Economics in Practice
Skill: Conceptual
AACSB: Reflective Thinking
127
5) Related to the Economics in Practice on page 95: Which of the following, if true, would support
the argument for raising cigarette taxes even if the price of cigarettes has relatively little impact
on adults’ cigarette consumption?
A) The health risks of cigarette smoking are affected by the amount of nicotine in cigarettes
as well as the number of cigarettes smoked.
B) When cigarette taxes vary between neighboring states, people have an incentive to buy
cigarettes in the state with lower taxes.
C) Illness due to smoking is a significant cause of lost economic productivity.
D) The demand for cigarettes is more elastic for underage smokers as compared to that of
adult smokers.
Answer: D
Diff: 3
Skill: Conceptual
6) Related to the Economics in Practice on page 97: Which of the following best explains why
demand is often more elastic in the long run than it is in the short run?
A) When demand is elastic, price increases reduce revenue because a small price increase
will lead to a large decrease in quantity demanded.
B) In the long run, consumers have greater access to substitutes.
C) Consumers tend to postpone making purchasing decisions as long as possible.
D) In the short run, prices can change rapidly, but in the long run they are more stable.
Answer: B
Diff: 3
Skill: Analytic
7) Related to the Economics in Practice on page 97: Frank runs a corner delicatessen and one day
decides to raise his prices by 10 percent. Total revenue is likely to ________ at the end of the
first month of the higher prices since demand is relatively elastic in the ________ term.
A) rise; short B) fall; short C) rise; long D) fall; long
Answer: D
Diff: 2
Skill: Conceptual
5.4 Other Important Elasticities
1 Multiple Choice
1) For perfectly price inelastic supply
A) supply determines price solely.
B) demand determines price solely.
C) only a government can set the price.
D) either supply or demand may set the price.
Answer: B
Diff: 2
Topic: Other Important Elasticities
Skill: Definition
128
2) A perfectly price elastic supply curve will be a ________ line.
C) upward sloping D) downward sloping
Answer: A
Diff: 2
Skill: Definition
3) An increase in demand caused no change in the equilibrium price. Thus, supply must be
A) perfectly inelastic. B) inelastic.
C) elastic. D) perfectly elastic.
Answer: D
Diff: 2
Skill: Definition
4) If the supply of oranges is unit elastic, the price elasticity of supply of oranges is
A) 0.0. B) 1.0. C) ‐1.0. D) ‐100.0.
Answer: B
Diff: 2
Skill: Analytic
5) The income elasticity of demand
A) measures the change in income necessary for a given change in quantity demanded.
B) measures the responsiveness of income to changes in quantity demanded.
C) measures the responsiveness of quantity demanded to changes in income.
D) is the ratio of the percentage change in income to the percentage change in quantity
demanded.
Answer: C
Diff: 1
Skill: Definition
6) If income increases by 10% and, in response, the quantity of housing demanded increases by
7%, then the income elasticity of demand for housing is
A) -0.7 B) -1 C) 0.7 D) 1.43
Answer: C
Diff: 2
Skill: Analytic
129
7) The income elasticity of demand for education is 3.5. Thus, a 4% increase in income will
A) decrease the quantity of education demanded by 3.5%.
B) decrease the quantity of education demanded by 14%.
C) increase the quantity of education demanded by 4%.
D) increase the quantity of education demanded by 14%.
Answer: D
Diff: 2
Skill: Analytic
8) The income elasticity of demand for low-quality beef is -2. Thus, an 8% decrease in the
quantity of low-quality beef demanded
A) is the result of a decrease in income of 4%.
B) is the result of an increase in income of 0.25%.
C) is the result of an increase in income of 4%.
D) is unrelated to any change in income.
Answer: C
Diff: 2
Skill: Analytic
9) The ABC Computer Company spends a lot of money for advertising designed to convince you
that their personal computers are superior to all other personal computers. If the ABC
Company is successful, the demand for ABC personal computers
A) and the demand for other firmsʹ personal computers will become less price elastic.
B) and the demand for other firmsʹ personal computers will become more price elastic.
C) will become more price elastic but the demand for other firmsʹ personal computers will
become less price elastic.
D) will become less price elastic but the demand for other firmsʹ personal computers will
become more price elastic.
Answer: D
Diff: 3
Skill: Conceptual
130
10) A government is considering levying an alcohol tax to raise revenue to finance health care
benefits. People for the tax argue that alcohol demand is price inelastic. Which of the following
statements is TRUE?
A) The alcohol tax may not raise as much revenue as anticipated in the years to come
because alcohol demand is more elastic the longer the period of time consumers have to
adjust.
B) This is a very good way to raise revenue both in the short term and in the long term
because there are no close substitutes for alcohol.
C) This tax will not raise much revenue either in the short term or the long term because
demand is price inelastic.
D) No tax revenue can be raised in this way because alcohol sellers will just lower their price
by the amount of the tax and therefore the consumer price of alcohol will not change.
Answer: A
Diff: 3
Skill: Conceptual
11) In order to discourage consumers from eating unhealthy fast food, the government is
considering placing a tax on all fast food sales. Which of the following statements is TRUE?
A) Given the numerous alternatives, consumersʹ demand for fast food is relatively elastic
and the tax will likely work to discourage fast food consumption.
B) The tax on fast food will likely raise considerable revenue, but will be unlikely to reduce
the consumption of fast food by consumers.
C) The tax on fast food will likely increase the demand for homecooked meals.
D) Both (A) and (C) are true.
Answer: D
Diff: 3
Skill: Conceptual
12) Suppose an increase of 10% in the price of steak reduces the consumption of steak by 30%.
Such a price rise will induce households to spend
A) less of their income on steak.
B) more of their income on steak.
C) the same amount on steak as before.
D) more on products that are complementary with steak.
Answer: A
Diff: 2
Skill: Definition
13) Cross‐price elasticity of demand measures the response in the
A) price of a good to a change in the quantity of another good demanded.
B) income of consumers to the change in the price of goods.
C) quantity of one good demanded when the quantity demanded of another good changes.
D) quantity of one good demanded to a change in the price of another good.
Answer: D
Diff: 2
Skill: Definition
131
14) If the quantity demanded of tea increases by 2% when the price of coffee increases by 6%, the
cross‐price elasticity of demand between tea and coffee is
A) -3. B) 0.33. C) 3. D) 12.
Answer: B
Diff: 2
Skill: Analytic
15) If the quantity demanded of bagels decreases by 8% when the price of croissants decreases by
16%, the cross‐price elasticity of demand between bagels and croissants is
A) 0.5. B) ‐5. C) ‐2. D) 2.
Answer: A
Diff: 2
Skill: Analytic
16) If the quantity demanded of peanut butter increases by 4% when the price of jelly decreases by
2%, the cross‐price elasticity of demand between peanut butter and jelly is
A) -4. B) ‐2. C) -0.5. D) 2.
Answer: B
Diff: 2
Skill: Analytic
17) If the cross‐price elasticity of demand between fish and chicken is 2, then a 2% increase in the
price of fish will result in a ________ in the quantity of chicken demanded.
A) 1% increase B) 4% increase C) 10% increase D) 20% decrease
Answer: B
Diff: 2
Skill: Analytic
18) The cross-price elasticity of demand between good X and good Y is -3. Given this

information, which of the following statements is TRUE?
A) The demand for goods X and Y is elastic.
B) Goods X and Y are substitutes.
C) Goods X and Y are complements.
D) The demand for goods X and Y is income elastic.
Answer: C
Diff: 2
Skill: Conceptual
132
19) The cross-price elasticity of demand between good X and good Y is 0.5. Given this
information, which of the following statements is TRUE?
A) The demand for goods X and Y is inelastic.
B) Goods X and Y are substitutes.
C) Goods X and Y are complements.
D) The demand for goods X and Y is income inelastic.
Answer: B
Diff: 2
Skill: Conceptual
Refer to the information provided in Figure 5.5 below to answer the question that follows.
Figure 5.5
20) Refer to Figure 5.5. As the price of W increased, the demand for Y shifted from D1 to D2. The

cross‐price elasticity of demand between W and Y is
A) positive. B) negative.
C) zero. D) indeterminate from this information.
Answer: A
Diff: 2
Skill: Definition
21) In output markets, the elasticity of supply tends to be
A) negative. B) zero.
C) positive. D) decreasing at an increasing rate.
Answer: C
Diff: 1
Skill: Conceptual
133
22) If the elasticity of labor supply is positive, the labor‐supply curve would be
A) horizontal. B) vertical.
C) downward sloping. D) upward sloping.
Answer: D
Diff: 1
Skill: Fact
Refer to the information provided in Figure 5.6 below to answer the question that follows.
Figure 5.6
23) Refer to Figure 5.6. The market is initially in equilibrium at Point A (where price = $7 and

quantity = 12 thousand pizzas) and supply shifts from S1 to S2. Which of the following
statements is TRUE?
A) Price will still serve as a rationing device causing quantity supplied to exceed 12
thousand pizzas.
B) There is no need for price to serve as a rationing device in this case because the new
equilibrium quantity exceeds the original equilibrium quantity.
C) Price will still serve as a rationing device causing quantity demanded to fall from 12 to 10
thousand pizzas.
D) The market cannot move to a new equilibrium until there is also a change in demand.
Answer: C
Diff: 1
Skill: Analytic
24) At a price of $4, quantity supplied is 100; and at a price of $6, quantity supplied is 120. Using
the midpoint formula, the price elasticity of supply is ________ and supply is ________.
A) 0.1; inelastic B) 0.45; inelastic C) 2.2; elastic D) 10; elastic
Answer: B
Diff: 2
Skill: Analytic
134
25) A mass transit authority charges bus fares of $1.25 during morning rush hours but only $1.00
during late morning non‐rush hours. Economists explain the fare difference by the fact that the
demand for bus rides during the morning rush hours is ________ but during the late morning
it is ________.
A) more elastic; more inelastic B) perfectly elastic; perfectly inelastic
C) more inelastic; more elastic D) unit elastic; relatively inelastic
Answer: C
Diff: 2
Skill: Conceptual
2 True/False
1) A positive cross‐price elasticity between two goods implies that the two goods are substitutes.
Answer: TRUE
Diff: 2
Skill: Definition
2) A positive cross‐price elasticity between two goods implies that the two goods are
compliments.
Answer: FALSE
Diff: 2
Skill: Definition
3) Inferior goods will experience increasing demand when incomes increase.
Answer: FALSE
Diff: 2
Skill: Analytic
4) If a group has a negative elasticity of labor supply (above some income level), then continued
increases in wages will result in decreases in the quantity of labor supplied.
Answer: TRUE
Diff: 2
Skill: Definition
135

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Chapter 5 Elasticity

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Chapter

18) The cross-price elasticity of demand between good X and good Y is -3. Given this

20) Refer to Figure 5.5. As the price of W increased, the demand for Y shifted from D1 to D2. The

23) Refer to Figure 5.6. The market is initially in equilibrium at Point A (where price = $7 and

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