Chapter 3

Chapter 3
As we move down along a linear demand curve, the price elasticity of demand becomes
more:
a) elastic.
b) inelastic.
c) log-linear.
d) variable.
The demand curve for a good is horizontal when it is:

a) a perfectly inelastic good.
b) a unitary elastic good.
c) a perfectly elastic good.
d) an inferior good.
If the cross-price elasticity between goods A and B is negative, we know the goods are:
a) inferior goods.
b) complements.
c) inelastic.
d) substitutes.
You are the manager of a popular shoe company. You know that the advertising elasticity of
demand for your product is 0.15. How much will you have to increase advertising in order to
increase demand by 10 percent?
a) 0.02 percent
b) 38.6 percent
c) 66.7 percent
d) 4.3 percent
Which of the following provides a measure of the overall fit of a regression?

a) t-statistic
b) F-statistic
c) R-square
d) The F-statistic and R-square
If the own price elasticity of demand is infinite in absolute value, then:

a) demand is perfectly inelastic.
b) the demand curve is horizontal.
c) consumers do not respond at all to changes in price.
d) demand is neither perfectly inelastic nor is the demand curve horizontal.
When a demand curve is linear,

a) the elasticity is the same as the slope of the demand curve.
b) demand is elastic at high prices.
c) demand is unitary elastic at low prices.
d) the elasticity is constant at all prices.
The demand for good X has been estimated to be ln Qxd = 100 − 2.5 ln PX + 4 ln PY + ln M.
The own price elasticity of good X is:
a) −2.5.
b) 4.0.
c) −2.5 percent.
d) 4.0 percent.
Which of the following statements is INCORRECT?

a) If a firm decreases the price of its product, its total revenue must decrease.
b) The own price elasticity of demand is constant at all points along a linear demand
curve.
c) As the price of X falls and we move down an individual's demand curve for X, the
money income of the individual also changes.
d) None of the statements is correct.
The cross-price elasticity of demand for books and magazines is −2.0. If the price of
magazines decreases by 10 percent, the quantity demanded of books will:
a) fall by 2.0 percent.
b) rise by 2.0 percent.
c) fall by 20 percent.
d) rise by 20 percent.
The demand for good X has been estimated by Qxd = 6 − 2Px + 5Py. Suppose that good X sells
at $3 per unit and good Y sells for $2 per unit. Calculate the own price elasticity.
a) −0.3
b) −0.4
c) −0.5
d) −0.6
When a demand curve is linear:

a) demand is elastic at low prices.
b) demand is inelastic at low prices.
c) demand is unitary elastic at low prices.
d) the elasticity is constant at all prices.
Suppose the equilibrium price in the market is $60 and the marginal revenue associated with
the linear (inverse) demand function is $20. Then we know that the own price elasticity of
demand is:
a) −2.
b) 2.
c) −1.5.
d) It cannot be determined from the information contained in the question.
When marginal revenue is positive for a linear (inverse) demand function, decreases in output
will cause total revenues to:
a) increase.
b) decrease.
c) remain unchanged.
d) There is not sufficient information to answer the question.
If the price of ground beef falls from $7 to $4, and this leads to an increase in demand for
beans from 80 to 120 cans, what is the (arc) cross price-elasticity of beans and ground beef?
a) −0.87.
b) 1.21.
c) 0.52.
d) −0.73.
The demand for good X has been estimated by Qxd = 12 − 3Px + 4Py. Suppose that good X
sells at $2 per unit and good Y sells for $1 per unit. Calculate the own price elasticity.
a) −0.2
b) −0.3
c) −0.5
d) −0.6
Suppose Qxd = 10,000 − 2 Px + 3 Py − 4.5M, where Px = $100, Py = $50, and M = $2,000.

Then good X has a demand which is:
a) elastic.
b) inelastic.
c) unitary.
d) neither elastic, inelastic, nor unitary elastic.
If the price of pork chops falls from $8 to $6, and this leads to an increase in demand for
apple sauce from 100 to 140 jars, what is the (arc) cross price-elasticity of apple sauce and
pork chops?
a) −0.95.
b) 2.71.
c) 0.42.
d) −1.17.
Suppose the demand for good x is ln Qxd = 21 − 0.8 ln Px − 1.6 ln Py + 6.2 ln M + 0.4 ln Ax.
Then we know good x is:
a) an inferior good.
b) an elastic good.
c) a normal good.
d) a Giffen good.
Which of the following measures of fit penalizes a researcher for estimating many
coefficients with relatively little data?
a) t-statistic
b) R-square
c) Adjusted R-square
d) Neither the t-statistic, the R-square, nor the adjusted R-square
The demand for good X is estimated to be Qxd = 10,000 − 4PX + 5PY + 2M + AX where PX is
the price of X, PY is the price of good Y, M is income, and AX is the amount of advertising on
X. Suppose the present price of good X is $50, PY = $100, M = $25,000, and AX = 1,000
units. What is the demand curve for good X?
a) 61,500
b) 61,300
c) 61,300 − 4PX
d) 61,500 − 4PX
If there are few close substitutes for a good, demand tends to be relatively:
a) elastic.
b) inelastic.
c) unitary elastic.
d) neither elastic, inelastic, nor unitary elastic.
The demand for good X has been estimated to be ln Qxd = 100 − 2.5 ln PX + 4 ln PY + ln M.
The income elasticity of good X is:
a) 4.0.
b) 1.0.
c) 2.0.
d) −2.5.
Each week Bill buys exactly 7 bottles of cola regardless of its price. Bill's own price elasticity
of demand for cola IN ABSOLUTE VALUE is:
a) greater than 1.
b) less than 1.
c) 1.
d) zero.
The demand for video recorders has been estimated to be linear and given by the demand
relation Qv = 145 − 3.2Pv + 7M − 0.95Pf − 39Pm, where Qv is the quantity of video recorders,
Pf denotes the price of video recorder film, Pm is the price of attending a movie, Pv is the price
of video recorders, and M is income. Based on the estimated demand equation we can
conclude:
a) video recorders are normal goods.
b) the demand for video recorders is inelastic.
c) video recorders are normal goods and the demand for video recorders is inelastic.
d) video recorders are normal goods and video recorder film is a complement for video
recorders.
If quantity demanded for sneakers falls by 6 percent when price increases 20 percent, we
know that the absolute value of the own price elasticity of sneakers is:
a) 0.3.
b) 0.7.
c) 2.3.
d) 3.3.
Which of the following is a correct statement about the own price elasticity of demand?
a) Demand tends to be more inelastic in the short term than in the long term.
b) Demand tends to be more elastic as more substitutes are available.
c) Demand tends to be more inelastic for goods that comprise a smaller share of a
consumer's budget.
d) All of the statements are correct.
A firm derives revenue from two sources: goods X and Y. Annual revenues from good X and
Y are $10,000 and $20,000, respectively. If the price elasticity of demand for good X is −2.0
and the cross-price elasticity of demand between Y and X is 1.5, then a 4 percent increase in
the price of X will:
a) increase total revenues from X and Y by $800.
b) increase total revenues from X and Y by $8,000.
c) decrease total revenues from X and Y by $400.
d) increase total revenues from X and Y by $400.
Suppose a regression with 51 observations returns a regression sum of squares of 56,000 and
a total sum of squares of 250,000. The corresponding R2 is:
a) 0.776.
b) 0.224.
c) 0.345.
d) 0.671.
If the demand function for a particular good is Q = 50 − 4P, then demand at a price of $10 is:
a) elastic.
b) unit elastic.
c) inelastic.
d) Elasticity cannot be determined.

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Chapter 3

The demand curve for a good is horizontal when it is:

Which of the following provides a measure of the overall fit of a regression?

If the own price elasticity of demand is infinite in absolute value, then:

When a demand curve is linear,

Which of the following statements is INCORRECT?

When a demand curve is linear:

Suppose Qxd = 10,000 − 2 Px + 3 Py − 4.5M, where Px = $100, Py = $50, and M = $2,000.

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