TUTORIAL 4 - Demand Elasticities

1) For a particular product, a demand elasticity is a quantitative measure that shows: C

A) the percentage change in quantity demanded relative to the absolute change in any of the
other variables included in the demand function for that product.
B) the absolute change in quantity demanded relative to the percentage change in any of the
other variables included in the demand function for that product.
C) the percentage change in quantity demanded relative to the percentage change in any of the
other variables included in the demand function for that product.
D) the absolute change in quantity demanded relative to the absolute change in any of the other
variables included in the demand function for that product.

2) The price elasticity of demand is calculated as: D

A) the change in price divided by the change in quantity demanded.
B) the change in quantity demanded divided by the change in price.
C) the percentage change in price divided by the percentage change in quantity demanded.
D) the percentage change in quantity demanded divided by the percentage change in price.

3) Why is the price elasticity of demand a relative measure? That is, why is elasticity measured
in percentage terms rather than in absolute terms? A
A) So the coefficient of elasticity will not be dependent on the physical units of the good.
B) Because absolute measures do not account for the direction of the change in quantity.
C) So that the coefficient of elasticity will not be negative.
D) Because the absolute price or quantity demanded of a product is irrelevant to the elasticity
measure.

4) Assume the demand for a good is price inelastic, i.e., ed < 1 (in absolute value). This means
that if price decreases by 50 percent, quantity demanded will:C
A) increase by more than 50 percent.
B) decrease by more than 50 percent.
C) increase by less than 50 percent.
D) decrease by less than 50 percent.

5) Information on the price elasticity of demand is particularly important to managerial decision

making because:C
A) the higher the price elasticity of demand for a product is, the more profitable it will be to
produce more of it.
B) depending on the elasticity coefficient, decision makers will immediately know if a price
change will cause profits to increase or decrease.
C) it allows one to predict how total revenue will respond, i.e., increase or decrease, to a change
in price.
D) as the price elasticity coefficient approaches one, profits will increase.

6) Assuming we are considering a normal good, the calculated price elasticity of demand is:B
A) always positive.
B) always negative.
C) positive if demand is elastic and negative if demand is inelastic.
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D) positive if demand is inelastic and negative if demand is elastic.

7) If the percentage change in quantity demanded is less than the percentage change in price, we
would say that over this range, demand is: C
A) elastic.
B) unit elastic.
C) inelastic.
D) perfectly elastic.

8) If the percentage change in quantity demanded is greater than the percentage change in price,
we would say that over this range, demand is:A
A) elastic.
B) unit elastic.
C) inelastic.
D) perfectly inelastic.

9) If electricity demand is inelastic, and electric rates increase, which of the following is likely to
occur? B
A) Quantity demanded will fall by a relatively large amount.
B) Quantity demanded will fall by a relatively small amount.
C) Quantity demanded will rise in the short run, but fall in the long run.
D) Quantity demanded will fall in the short run, but rise in the long run.

10) Suppose the demand for meals at a medium-priced restaurant is elastic. If the management of
the restaurant is considering raising prices, it can expect a relatively: A
A) large decrease in quantity demanded.
B) large decrease in demand.
C) small decrease in quantity demanded.
D) small decrease in demand.

11) Suppose the demand for meals at a medium-priced restaurant is elastic. If the management of
the restaurant is considering raising prices, it can expect the total revenues the restaurant earns
to: C
A) increase.
B) stay the same.
C) decrease.
D) cannot be determined with the information given.

12) A decrease in price will result in an increase in total revenue if: B

A) the percentage change in quantity demanded is less than the percentage change in price.
B) the percentage change in quantity demanded is greater than the percentage change in price.
C) demand is inelastic.
D) the consumer is operating along a linear demand curve at a point at which the price is very
low and the quantity demanded is very high.

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13) An increase in price will result in an increase in total revenue if demand is: C
A) perfectly elastic.
B) relatively elastic.
C) inelastic.
D) unit elastic.

14) An increase in price will result in no change in total revenue if: C

A) the percentage change in price is large enough to cause quantity demanded to fall to zero.
B) the coefficient of elasticity is equal to zero.
C) the percentage change in quantity demanded is equal to the percentage change in price (in
absolute values).
D) the demand function is perfectly elastic.

15) When demand is inelastic and price decreases: A

A) the effect of the decrease in price on total revenue dominates the effect of the increase in
quantity demanded on total revenue; overall total revenue declines.
B) the effect of the increase in quantity demanded on total revenue dominates the effect of the
decrease in price on total revenue; overall total revenue increases.
C) the effects of the decrease in price on total revenue and the corresponding increase in quantity
demanded on total revenue perfectly offset one another; overall total revenue remains
unchanged.
D) quantity demanded and total revenue fall to zero.

16) Which of the following is not considered to be a determinant of the price elasticity of
demand for a particular good? C
A) The number of available substitutes.
B) The cost of the good relative to total income.
C) The quantity of the good that is supplied to the market.
D) The time period under consideration.

17) In which of the following cases would the price elasticity of demand be expected to increase?
A
A) The number of close substitutes for the good increases.
B) The time period under consideration decreases.
C) The cost of the good relative to total income decreases.
D) The supply of the good increases.

18) Assume an analyst has been hired to estimate the price elasticity of demand for Levi's brand
blue jeans and for blue jeans in general. Ceteris paribus, we would expect the price elasticity of
demand in absolute value to be:A
A) larger for Levi's brand blue jeans than for blue jeans in general.
B) larger for blue jeans in general than for Levi's brand blue jeans.
C) approximately the same for both Levi's brand blue jeans and blue jeans in general.
D) none of the above because the market for blue jeans cannot be analyzed using the model of
supply and demand.

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19) Which of the following is a plausible reason that restaurants offer "Senior Citizen
Discounts"? A
A) Senior citizens tend to have relatively more elastic demands for restaurant meals than other
consumer groups.
B) Senior citizens tend to have relatively more inelastic demands for restaurant meals. than other
consumer groups.
C) Senior citizens are not very sensitive to changes in prices.
D) Senior citizens are easily fooled by "come-ons" and are therefore frequently victims of price
discrimination.

20) According to one study, the price elasticity of demand for restaurant meals is -2.27. This
implies that if restaurants want to increase their total revenues they should: B
A) increase prices.
B) decrease prices.
C) leave prices unchanged.
D) cannot be determined with the information given.

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21) Demand for a good will tend to be more price elastic if it exhibits which of the following
characteristics? B
A) It accounts for a small part of the consumer's total income.
B) The good has many available substitutes.
C) It is a non-durable (as opposed to a durable good).
D) There is little time for the consumer to adjust to the price change.
Topic: Determinants of price elasticity of demand

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22) As the percentage of the consumer's income accounted for by a particular good decreases,
demand for the good will:B
A) tend to become more price elastic.
B) tend to become more price inelastic.
C) tend to become closer to unit elastic.
D) tend toward being perfectly elastic.
Topic: Determinants of price elasticity of demand

23) If the consumer has a great deal of time to adjust to an increase in the price of gasoline,
which of the following is correct? A
A) Quantity demanded will be relatively sensitive to the change in price.
B) The percentage change in quantity demanded will be quite small relative to the percentage
change in price.
C) The percentage change in price will be quite large relative to the percentage change in
quantity demanded.
D) Demand will tend to be unitary elastic as it is for most goods in the long run.
Topic: Determinants of price elasticity of demand

24) Many unions attempt to raise the hourly wages received by their members by restricting the
supply of workers firms can hire from. Assuming the demand for workers who belong to these
unions is inelastic, this would cause: D
A) wages of individual union members to decrease and the total (combined) income of union
members to increase.
B) wages of individual union members and the total (combined) income of union members to
decrease.
C) wages of individual union members to increase and the total (combined) income of union
members to decrease.
D) wages of individual union members and the total (combined) income of union members to
increase.
Topic: Elasticity and total revenue

25) Which of the following statements is correct? C

A) Arc elasticity of demand is the same as the slope of the demand curve.
B) Arc elasticity of demand only applies to a nonlinear demand curve.
C) Point elasticity of demand is measured at each point along a demand curve.
D) Point elasticity of demand is measured between two adjacent points on a demand curve.
Topic: Point versus arc elasticity of demand

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26) Assume the marginal revenue from each additional unit of a good sold is 0. In this case, we
can conclude that demand for the good is: B
A) unit elastic
B) perfectly elastic.
C) perfectly inelastic.
D) relatively inelastic.
Topic: Perfectly elastic demand

27) If the cross-price elasticity of demand between two goods is positive, we can assume that the
two goods in question are: B
A) complements.
B) substitutes.
C) inferior goods.
D) totally unrelated to one another.
Topic: Cross price elasticity of demand

28) Which of the following pairs of goods would be expected to have a positive cross-price
elasticity of demand? A
A) coffee and tea.
B) gasoline and large SUVs.
C) tennis racquets and tennis balls.
D) hot dogs and hot dog buns.
Topic: Cross price elasticity of demand

29) Hot dogs and hot dog buns would be expected to have: D
A) positive income elasticities of demand with respect to each other.
B) negative income elasticities of demand with respect to each other.
C) a positive cross-price elasticity of demand.
D) a negative cross-price elasticity of demand.
Topic: Cross price elasticity of demand

30) Which of the following is not a basic assumption underlying the theory of consumer
behavior? B
A) Consumers prefer more to less.
B) Consumer preferences depend on the amounts of goods they consume as well as the amounts
being consumed by other consumers.
C) Goods are continuously divisible, that is, consumers can always purchase one more or one
less unit of a good.
D) Consumers have well-behaved preferences, that is, preference orderings are complete.
Topic: Utility maximization

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31) An indifference curve is negatively-sloped because: C
A) utility is a subjective concept.
B) as the consumer obtains additional units of one good, the consumer is willing to sacrifice
increasing amounts of the other good.
C) in order to remain at the same level of utility, if an individual gets more of one good, he must
sacrifice some of the other good.
D) marginal utility is constant along an indifference curve, and increases in the consumption of
one good cause the price of that good to fall.
Topic: Indifference curves

32) Consider an indifference curve drawn for movies and pizzas. Which of the following
statements about this indifference curve is false? A
A) As an individual consumes more pizzas, the amount of movies the consumer is willing to give
up for an additional pizza increases.
B) If the individual consumes more pizzas, the amount of movies consumed must fall if the
consumer is to stay on the same indifference curve.
C) The indifference curve will be convex to the origin, that is, bowed in toward the origin.
D) If the consumer purchases more of movies and pizzas, total utility will increase, but the
consumer will be on a new indifference curve that is farther from the origin than the original
indifference curve.
Topic: Indifference curves

33) The slope of the budget constraint: B

A) changes as the marginal rate of substitution changes.
B) is the ratio of the prices of the two goods.
C) is the ratio of the budget to total utility.
D) equals one, since the consumer can purchase any combination along the budget constraint.
Topic: Budget constraint

34) Consider two goods, X and Y, where X is measured on the horizontal axis and Y is measured
on the vertical axis. All else constant, a decrease in the price of X will cause the consumer's
budget constraint to:B
A) rotate in along the X axis
B) rotate out along the X axis.
C) shift out parallel to the original budget constraint.
D) shift in parallel to the original budget constraint.
Topic: Budget constraint

35) Which of the following statements is true when the consumer is in utility-maximizing
equilibrium? D
A) The number of units of each good purchased is equal.
B) The prices of the goods in question must be equal.
C) The total benefits the consumer receives from every good consumed must be the same for all
goods.
D) The rate at which the consumer is willing to trade one good for another is equal to the ratio of
their market prices.
Topic: Utility maximization

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