Microeconomics Principles and Policy 13th Edition Baumol Test Bank Download

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True / False
1. The market demand curve shows how the quantity demanded of a product, during a specified time period, changes as
the price of that product changes.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: DISC: Elasticity
NATIONAL STANDARDS: United States - BPROG: Analytic
ACCREDITING STANDARDS: Elasticity
TOPICS: Elasticity: The Measure of Responsiveness
KEYWORDS: BLOOM’S: Comprehension
2. The law of demand states that a lower price increases the amount of a commodity that people are willing to buy.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: DISC: Supply and demand
ACCREDITING STANDARDS: Supply and demand
KEYWORDS: BLOOM’S: Knowledge
3. The demand curve depicts quantities demanded that have been gathered as prices have changed over time.
a. True
b. False
ANSWER: False
© 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed
with a certain product or service or otherwise on a password-protected website for classroom use.
POINTS: 1
DIFFICULTY: Difficult
4. The quantity demanded in a market depends on many things, but the concept of elasticity focuses on the effect of
changes in the price of the good.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Moderate
5. Elasticity is a measure of the responsiveness of change in quantity demanded to a change in price.

a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
6. Elasticity of demand equals the ratio of the percentage change in quantity demanded to the percentage change in the
price of the good.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
7. Elasticity of demand equals the ratio of the percentage change in the price of a good to the percentage change in the
quantity demanded.
a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Easy
8. Price elasticity of demand can be written as percentage change in Q divided by percentage change in P.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
9. Elasticity of demand is calculated using percentage changes in both price and quantity.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
10. Price elasticity of demand is a numerical measure of how much quantity demanded rises as price falls or quantity
demanded falls as price rises.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
11. Elasticity computations related to demand carry a minus sign to show that the demand curve is negatively sloped.
a. True
b. False
ANSWER: False
POINTS: 1
12. The elasticity formula solves the units problem because percentages are unaffected by the units of measure.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
13. The price elasticity of demand measure is generally stated as an absolute value.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
14. A line that is perfectly elastic has an elasticity of demand of zero.

a. True
b. False
ANSWER: False
POINTS: 1
15. Perfectly inelastic demand curves are vertical.

a. True
b. False
ANSWER: True
POINTS: 1
16. Perfectly elastic demand curves are vertical.

a. True
b. False
ANSWER: False
POINTS: 1
17. A vertical demand curve has an elasticity of demand equal to zero.

a. True
b. False
ANSWER: True
POINTS: 1
18. A horizontal demand curve is perfectly elastic because a change in price will not induce a change in quantity
demanded.
a. True
b. False
ANSWER: False
POINTS: 1
19. A horizontal demand curve is perfectly elastic because a change in price will induce an infinite change in quantity
demanded.
a. True
b. False
ANSWER: True
POINTS: 1
20. A straight-line demand curve has the same elasticity throughout its length.
a. True
b. False
ANSWER: False
POINTS: 1
21. A straight-line demand curve has an elasticity that becomes smaller as we move from left to right along the schedule.
a. True
b. False
ANSWER: True
POINTS: 1
22. A unit-elastic demand curve will be concave toward the origin.
a. True
b. False
ANSWER: False
POINTS: 1
23. The unit-elastic demand curve bends in the middle toward the origin of the graph and at either end moves closer to the
axes.
a. True
b. False
ANSWER: True
POINTS: 1
24. A demand curve with an elasticity of 1.0 is said to be an elastic demand curve.
a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Easy
25. A demand curve with an elasticity of 1.0 is a unit-elastic demand curve.

a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
26. When the goods of competing companies are identical, consumers have no reason to prefer one product over the other
so the demand curve for each manufacturer will be perfectly elastic.
a. True
b. False
ANSWER: True
POINTS: 1
27. Elasticity of demand is another way to measure slope.

a. True
b. False
ANSWER: False
POINTS: 1
28. The difference between slope and elasticity is that slope measures absolute change and elasticity measures percentage
change.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
29. The slope of the demand curve conveys all the useful information about elasticity.
a. True
b. False
ANSWER: False
POINTS: 1
30. The elasticity of a demand curve at any point can be ascertained by its steepness.
a. True
b. False
ANSWER: False
POINTS: 1
31. The elasticity of a straight-line demand curve is the same as its slope.
a. True
b. False
ANSWER: False
POINTS: 1
32. The elasticity of any demand curve is the same as its slope.
a. True
b. False
ANSWER: False
POINTS: 1
33. As one moves down a straight-line demand curve, the elasticity increases.
a. True
b. False
ANSWER: False
POINTS: 1
34. As one moves down a straight-line demand curve, the elasticity decreases.
a. True
b. False
ANSWER: True
POINTS: 1
35. As one moves down a straight-line demand curve away from the vertical axis, demand becomes less elastic and then
inelastic.
a. True
b. False
ANSWER: True
POINTS: 1
KEYWORDS: BLOOM’S: Analysis
36. Buyers' expenditures and sellers' revenues are always identical.

a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
TOPICS: Price Elasticity of Demand: Its Effect on Total Revenue and Total Expenditure
37. Total expenditure equals price times elasticity.
a. True
b. False
ANSWER: False
POINTS: 1
38. Total expenditure equals price times quantity.

a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
39. Demand elasticity equals quantity times price.

a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Easy
40. If demand is elastic, an increase in price will decrease total revenue.

a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
41. If demand is elastic, an increase in price will increase total revenue.

a. True
b. False
ANSWER: False
POINTS: 1
42. If demand is elastic, a rise in price will decrease total expenditure.

a. True
b. False
ANSWER: True
POINTS: 1
43. If demand is inelastic, a drop in price will raise total expenditure.

a. True
b. False
ANSWER: False
POINTS: 1
44. If price goes up 20 percent and quantity demanded declines by 10 percent, total revenue will rise.
a. True
b. False
ANSWER: True
POINTS: 1
45. If a demand curve is unit elastic, then P times Q will remain constant when P changes.
a. True
b. False
ANSWER: True
POINTS: 1
NATIONAL STANDARDS: United States - BPROG: Reflective Thinking - BPROG: Analysis
46. A demand curve with unit elasticity can never touch either the vertical or horizontal axes.
a. True
b. False
ANSWER: True
POINTS: 1
47. If demand is unit elastic, then a 10 percent increase in the price will lead to a 10 percent increase in quantity
demanded.
a. True
b. False
ANSWER: False
POINTS: 1
48. If demand is unit elastic, then a 10 percent increase in price will lead to a 10 percent drop in quantity demanded.
a. True
b. False
ANSWER: True
POINTS: 1
49. A rise in price will always result in an increase in the total amount consumers spend on a product.
a. True
b. False
ANSWER: False
POINTS: 1
50. A price increase will always increase a firm's revenue.

a. True
b. False
ANSWER: False
POINTS: 1
51. A price increase will always cause a firm's revenue to fall, because they will sell less of the good.
a. True
b. False
ANSWER: False
POINTS: 1
52. A tax on cigarettes can be expected to reduce teen smoking more than it reduces adult smoking.
a. True
b. False
ANSWER: True
POINTS: 1
53. The elasticity of demand is determined partly by whether the good is a necessity or a luxury.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
TOPICS: What Determines Demand Elasticity?
54. Necessities such as food and shelter have inelastic demand.

a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
55. If a product constitutes a large portion of a consumer's income, demand will be more inelastic.
a. True
b. False
ANSWER: False
POINTS: 1
56. If there are many close substitutes available for a good, its elasticity of demand will be higher.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
57. Since an individual spends a small share of her income on salt, the elasticity of demand is likely to be low.
a. True
b. False
ANSWER: True
POINTS: 1
58. Elasticity of demand is likely to be higher for less-expensive goods, other things being equal.
a. True
b. False
ANSWER: False
POINTS: 1
59. As a price change persists over a long period of time, we should expect the demand elasticity to fall.
a. True
b. False
ANSWER: False
POINTS: 1
60. The ratio of the percentage change in quantity demanded to the percentage change in income is known as the cross
elasticity of demand.
a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Easy
TOPICS: Elasticity as a General Concept
61. Income elasticity of demand describes how change in income affects the quantity demanded of a good.
a. True
b. False
ANSWER: True
POINTS: 1
62. Cross-elasticity of demand measures the responsiveness of the quantity demanded of one good to a change in the price
of another good.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
63. If an increase in quantity demanded of a product reduces the quantity demanded of another, then the two goods are
said to be substitutes.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
64. Cross-elasticity of demand could be used to measure the responsiveness of the quantity demanded of swimming pools
to a change in the price of picnic tables.
a. True
b. False
ANSWER: True
POINTS: 1
65. A negative cross elasticity indicates that two goods are complements.
a. True
b. False
ANSWER: True
POINTS: 1
66. Two goods are substitutes if a decrease in the price of one raises the quantity demanded of the other.
a. True
b. False
ANSWER: False
POINTS: 1
67. Two goods with a low cross elasticity of demand are competing in the same market.
a. True
b. False
ANSWER: False
POINTS: 1
68. Demand curves often do not remain stationary; they shift because of changes in other variables.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
TOPICS: Appendix How Can We Find a Legitimate Demand Curve from Historical Statistics?
69. When price falls, demand rises.

a. True
b. False
ANSWER: False
POINTS: 1
70. A decrease in the price of a good will cause a movement along the demand schedule to a higher quantity demanded.
a. True
b. False
ANSWER: True
POINTS: 1
71. A buyer's response to a change in income is an example of a "change in demand."

a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
72. A fall in the price of a competing product will produce an outward shift in the demand curve for most products.
a. True
b. False
ANSWER: False
POINTS: 1
73. Historical demand curves are always suspect because their demand curves are likely to have shifted over time.
a. True
b. False
ANSWER: True
POINTS: 1
TOPICS: The Time Period of the Demand Curve and Economic Decision Making
74. An accurate demand curve can be derived by examining the quantities of a good that are sold over time as the price
varies.
a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Easy
TOPICS: Appendix: How Can We Find a Legitimate Demand Curve from Historical Statistics?
75. If demand for a seller's product is elastic, a price increase will decrease total revenue.
a. True
b. False
ANSWER: True
POINTS: 1
76. If demand for a seller's product is elastic, a price decrease will increase total revenue.
a. True
b. False
ANSWER: True
POINTS: 1
Multiple Choice
77. Elasticity
a. deals with percentage changes in price and quantity demanded.
b. employs percentage changes calculated in terms of average values of the prices and quantities at issue.
c. is generally stated in absolute value.
d. All of the above are correct.
ANSWER: d
POINTS: 1
DIFFICULTY: Easy
78. Price elasticity of demand is defined as

a. slope divided by price.
b. percentage change in price divided by percentage change in quantity demanded.
c. percentage change in quantity demanded divided by percentage change in price.
d. the inverse of the price elasticity of supply.
ANSWER: c
POINTS: 1
DIFFICULTY: Easy
79. The formula for price elasticity of demand that is used in practice
a. usually drops all minus signs.
b. usually takes on different values at different points on the demand curve.
c. may calculate the percentage change in price between P1 and P2 as "(P2 − P1) as a percentage of (P1 + P2)/2."
ANSWER: d
POINTS: 1
80. A correct formula (dropping all minus signs) for the calculation of the elasticity of demand between point Q1, P1 and
point Q2, P2 is
a. [(P2 − P1)/(P2 + P1)]/[(Q2 − Q1)/(Q2 + Q1)].
b. [(P2 − P1)/P1]/[(Q2 − Q1)/Q1].
c. [(Q2 − Q1)/(Q2 + Q1)]/[(P2 − P1)/(P2 + P1)].
d. [(Q2 − Q1)/Q2)]/[(P2 − P1)/P2].
ANSWER: c
POINTS: 1
81. At $6 per steak, consumers are willing to buy two steaks. At a price of $2, consumers are willing to buy six steaks.
The elasticity of the market demand curve between P = $6 and P = $2 (dropping all minus signs) is
a. 0.33.
b. 1.
c. 2.
d. 4.
ANSWER: b
POINTS: 1
82. If the price of gasoline rises by 20 percent and consumption of gasoline falls 5 percent,
a. demand is elastic.
b. demand is unit-elastic.
c. demand is inelastic.
d. elasticity of demand cannot be calculated.
ANSWER: c
POINTS: 1
DIFFICULTY: Easy
83. Demand is said to be price elastic at a point on a demand curve if a

a. 1 percent rise in price reduces the quantity demanded by more than 1 percent.
b. 1 percent rise in price reduces the quantity demanded by less than 1 percent.
c. 1 percent rise in price reduces the quantity demanded by more than 10 percent.
d. 10 percent rise in price reduces the quantity demanded by less than 10 percent.
ANSWER: a
POINTS: 1
DIFFICULTY: Easy
84. Demand is said to be elastic when percentage changes in quantity demanded are
a. less than the percentage changes in price.
b. higher than the percentage changes in price.
c. equal to the percentage changes in price.
d. zero when price changes.
ANSWER: b
POINTS: 1
DIFFICULTY: Easy
Figure 6-1
85. In Figure 6-1,

a. D1 is more elastic than D2 below P2 and less elastic above P2.
b. D1 is less elastic than D2 at all prices.
c. D2 is less elastic than D1 at all prices.
d. D2 is more elastic than D2 above P2 but less elastic below P2.
ANSWER: c
POINTS: 1
Figure 6-2
86. In Figure 6-2, the price elasticity of demand (dropping all minus signs) is ____ between P = 4 and P = 6 than between
P = 10 and P = 12 because between the lower set of prices the percentage change in price is ____.
a. smaller; smaller
b. smaller; greater
c. greater; smaller
d. greater; greater
ANSWER: b
POINTS: 1
87. From Figure 6-2, we can infer that demand is ____ between P = 12 and P = 10 and ____ between P = 6 and P = 4.
a. elastic; elastic
b. elastic; inelastic
c. inelastic; elastic
d. inelastic; inelastic
ANSWER: b
POINTS: 1
Figure 6-3
88. In Figure 6-3(a), at any price above $6, quantity demanded

a. falls to zero.
b. becomes infinitely large.
c. is equal to price.
d. is equal to the elasticity of demand.
ANSWER: a
POINTS: 1
DIFFICULTY: Easy
89. In Figure 6-3(a), demand is

a. perfectly elastic.
b. perfectly inelastic.
c. unit elastic.
d. fixed at one particular quantity.
ANSWER: a
POINTS: 1
DIFFICULTY: Easy
90. In Figure 6-3(b), as price falls from $15 to $6, total expenditure
a. falls.
b. increases.
c. remains constant.
d. first falls and then increases.
ANSWER: b
POINTS: 1
91. Along the inelastic portion of a demand curve, the

a. change in price will always be less than the change in quantity demanded.
b. percentage change in price will be less than the percentage change in quantity demanded.
c. change in price will always be more than the change in quantity demanded.
d. percentage change in price will be more than the percentage change in quantity demanded.
ANSWER: d
POINTS: 1
Figure 6-4
92. In Figure 6-4, total expenditure ____ as price falls from P = 12 to P = 10.
a. falls
b. stays constant
c. rises
d. rises by more than $12
ANSWER: c
POINTS: 1
93. If the elasticity of demand for cigarettes is 0.4, then an increase in the price of a pack of cigarettes from $5.00 to $6.00
would reduce quantities demanded by about
a. 7 percent.
b. 40 percent.
c. 42 percent.
d. 220 percent.
ANSWER: a
POINTS: 1
94. If the price of apples decreases by 2 percent and causes apple consumption to increase by 4 percent, the price elasticity
of demand is ____, indicating the demand is ____.
a. 2, elastic
b. 2, inelastic
c. 0.5, elastic
d. 0.5, inelastic
ANSWER: a
POINTS: 1
95. If a 10 percent rise in price leads to a reduction in quantity demanded of more than 10 percent,
a. demand is elastic.
b. demand is inelastic.
c. elasticity of demand is unitary.
d. None of the above is correct.
ANSWER: a
POINTS: 1
DIFFICULTY: Easy
96. All of the following observations concerning the elasticity formula are true except
a. the changes with which it deals is measured as a percentage change.
b. each of the percentage changes is calculated in terms of the average values.
c. the calculation considers both positive and negative signs.
d. each percentage change is taken as an "absolute value."
ANSWER: c
POINTS: 1
DIFFICULTY: Easy
97. If the price elasticity of demand for radios is 2.5 (dropping the minus sign), then a 50 percent reduction in the price of
radios will lead to
a. the sale of 200 additional radios.
b. the sale of 125 percent more radios than before.
c. the sale of 150 percent more radios than before.
d. the sale of 25 percent more radios than before.
ANSWER: b
POINTS: 1
NATIONAL STANDARDS: United States - BPRPOG: Analysis
Figure 6-5
98. If the demand curve in Figure 6-5 is unit elastic, then total expenditure at A is ____ total expenditure at B.
a. greater than
b. less than
c. equal to
d. less elastic than
ANSWER: c
POINTS: 1
99. In Figure 6-5, if price falls from point A to point B along the unit-elastic demand curve,
a. total expenditure remains unchanged.
b. total expenditure increases.
c. total expenditure decreases.
d. total expenditure first increases and then declines.
ANSWER: a
POINTS: 1
100. A demand curve is described as perfectly inelastic if

a. the same quantity is purchased regardless of price.
b. the same price is charged regardless of quantity sold.
c. neither price nor quantity demanded ever change.
d. only quantity demanded can change.
ANSWER: a
POINTS: 1
DIFFICULTY: Easy
101. A demand curve is described as perfectly elastic if

a. any quantity can be sold at a given price.
b. the same quantity is sold regardless of price.
c. neither price nor quantity demanded ever change.
d. only price can change.
ANSWER: a
POINTS: 1
DIFFICULTY: Easy
102. A perfectly elastic demand curve for a firm

a. is represented by a vertical line.
b. means that with every unit price increase there will be a unit decrease in demand.
c. is formulated by P × Q = a constant, for all prices and quantities.
d. indicates that any increase in price will eliminate all purchases of its product.
ANSWER: d
POINTS: 1
DIFFICULTY: Easy
103. The price elasticity of a vertical demand curve is always

a. infinitely large.
b. zero.
c. one.
d. increasing as price increases.
ANSWER: b
POINTS: 1
DIFFICULTY: Easy
104. The price elasticity of a horizontal demand curve is always

a. infinitely large.
b. zero.
c. one.
d. increasing as price increases.
ANSWER: a
POINTS: 1
DIFFICULTY: Easy
105. Along a perfectly elastic demand curve,

a. the slope is always zero.
b. the price elasticity of demand is 1.
c. consumer purchases will not respond at all to a change in price.
d. All of the above are true.
ANSWER: a
POINTS: 1
DIFFICULTY: Easy
106. If the demand curve is vertical, the elasticity is

a. 1.0.
b. 0.0.
c. 0.5.
d. infinite.
ANSWER: b
POINTS: 1
DIFFICULTY: Easy
107. As we move down a straight-line demand curve, the price elasticity becomes
a. larger.
b. smaller.
c. larger, then smaller.
d. smaller, then larger.
ANSWER: b
POINTS: 1
108. Along a straight-line demand curve (dropping all minus signs), the price elasticity of demand
a. gets larger as quantity demanded gets larger.
b. gets smaller as quantity demanded gets larger.
c. always equals one.
d. is constant (though not necessarily equal to one).
ANSWER: b
POINTS: 1
109. Along a straight-line demand curve the
a. slope is constant.
b. ratio P/Q constantly changes.
c. elasticity grows much smaller toward the right-hand end.
ANSWER: d
POINTS: 1
Figure 6-6
110. The purchase of premium cable channels is an "all or nothing" choice. Which graph in Figure 6-6 best illustrates the
cable market demand curve?
a. 1
b. 2
c. 3
d. 4
ANSWER: a
POINTS: 1
KEYWORDS: BLOOMS: Application
111. An article in the Wall Street Journal reports that "most cable TV operators are aware that cable is price sensitive, and
there comes a point where people won't pay the price." Which demand curve in Figure 6-6 best illustrates this situation?
a. 1
b. 2
c. 3
d. 4
ANSWER: c
POINTS: 1
NATIONAL STANDARDS: United States - BPRPOG: Analysis
112. A craze for apples in Riverdale increases the quantity demanded at every price by five bushels. Between any two
prices, the new demand curve will be ____ the old demand curve.
a. more elastic than
b. less elastic than
c. equal in elasticity to
d. More information is needed to predict the relationship.
ANSWER: b
POINTS: 1
113. The emigration of some of Whoville's workers reduces the quantity of thingamabobs supplied at every price by 50.
The new supply curve will ____ the old supply curve.
a. be steeper and less elastic at every price than
b. have the same slope and the same elasticity at every price as
c. have the same slope and be more elastic at every price than
d. More information is needed to predict the relationship between the elasticities of the two supply curves.
ANSWER: c
POINTS: 1
114. Elasticity provides a guide to both

a. market stability and change in revenue as price changes.
b. responsiveness of quantity demanded to a change in price and market stability.
c. responsiveness of quantity demanded to a change in price and change in revenue as price changes.
d. technological change and change in revenue as price changes.
ANSWER: c
POINTS: 1
115. Total expenditure by a buyer is equal to the

a. slope at any point along the demand curve.
b. price times quantity demanded at any point along the demand curve.
c. elasticity times price at any point along the demand curve.
d. elasticity times quantity demanded at any point along the demand curve.
ANSWER: b
POINTS: 1
DIFFICULTY: Easy
116. A price cut will decrease the revenue a firm receives if the demand for its product is
a. elastic.
b. inelastic.
c. of unit elasticity.
d. straight elastic.
ANSWER: b
POINTS: 1
DIFFICULTY: Easy
117. A price cut will increase the revenue a firm receives if the demand for its product is
a. elastic.
b. inelastic.
c. of unit elasticity.
d. straight elastic.
ANSWER: a
POINTS: 1
DIFFICULTY: Easy
118. When Johanna cut prices in her jewelry store by 20 percent, the dollar value of her sales fell by 20 percent. This
indicates that
a. demand was elastic.
b. demand was inelastic.
c. demand was unit elastic.
d. the demand curve was vertical.
ANSWER: d
POINTS: 1
119. In an attempt to raise sales, Hannah cut prices in her bookstore by 20 percent. If the dollar value of her sales
remained constant, that indicates
a. old customers bought no more books.
b. no new customers bought books.
c. the quantity of books sold increased 20 percent.
d. the demand curve is vertical.
ANSWER: c
POINTS: 1
120. The term "unit elasticity" is used to describe a situation in which a rise in price is accompanied by
a. a fall in total expenditure.
b. a rise in total expenditure.
c. constant total expenditure.
d. a unit decrease in total expenditure.
ANSWER: c
POINTS: 1
NOTES: BLOOM’S: Knowledge
121. A demand curve to remain unit elastic along its entire length should
a. cross the X axis.
b. touch the X axis but not the Y axis.
c. never touch either the X or the Y axis.
d. touch the Y axis but not the X axis.
ANSWER: c
POINTS: 1
122. Regarding demand elasticity, which of the following statements is correct?

a. If demand for seller's product is elastic, a price increase will decrease total revenue.
b. If demand for seller's product is elastic, a price increase will increase total revenue.
c. If demand is exactly unit-elastic, an increase in price will raise total revenue.
d. If demand is exactly unit-elastic, an increase in price will raise total revenue.
ANSWER: a
POINTS: 1
123. When Scuba, Inc., lowered the price of a tank of compressed air by 20 percent, it sold 10 percent more tankfuls. The
price elasticity for compressed air is
a. 2.
b. 1/2.
c. 1.
d. 20.
ANSWER: b
POINTS: 1
124. Big Alice Ice Cream Parlor reduced its price of an ice cream cone from $1 to 90 cents. Sales consequently increased
from 1,000 cones per week to 1,050. The approximate price elasticity is
a. 0.20.
b. 0.46.
c. 2.16.
d. 5.00.
ANSWER: b
POINTS: 1
Figure 6-7
125. In Figure 6-7, which total expenditure curve belongs to a demand curve that is unit elastic throughout?
a. 1
b. 2
c. 3
d. 4
ANSWER: c
POINTS: 1
126. Julia knows the price elasticity of movie rentals is 3. She knows, therefore, that if she raises her price from $2 to
$2.50, her rentals will drop by approximately
a. 150 percent.
b. 100 percent.
c. 75 percent.
d. 33 percent.
ANSWER: c
POINTS: 1
127. Tele-Com, Inc., the nation's largest cable TV company, tested the effect of a price reduction for the Disney Channel.
It lowered prices from $10.75 to $7.95 and found that the number of customers more than doubled. This means the
a. demand curve for the Disney Channel shifted to the right.
b. supply curve of the Disney Channel shifted to the left.
c. demand for the Disney Channel is elastic in this price range.
d. demand for the Disney Channel is inelastic in this price range.
ANSWER: c
POINTS: 1
Figure 6-8
128. Libya sold more crude oil in 1985 than it sold five years earlier, but revenues were 17 percent less. Which graph in
Figure 6-8 is consistent with this set of facts?
a. 1
b. 2
c. 3
d. 4
ANSWER: c
POINTS: 1
129. To avoid an increase in the local property tax, Sullivan County, New York, proposed a 2 percent hotel tax, which
presumably would be passed on to tourists. The hotel industry argued that the tax would hurt hotel business. They are
really arguing that
a. tourist and convention demand is inelastic, so hotel bookings will decline.
b. tourist and convention demand is very elastic, so hotel bookings will decline.
c. they would prefer a property tax increase instead.
d. it is unfair to tax people who do not live in the area.
ANSWER: b
POINTS: 1
130. Suppose that the supply of insulin is perfectly elastic and the demand for insulin perfectly inelastic. Then the result of
an excise tax would be
a. a significant increase in government revenue and a significant decrease in the quantity consumed.
b. a significant decrease in the quantity consumed with no change in government revenue.
c. a significant increase in government revenue and no change in the quantity consumed.
d. no increase in government revenue and no change in the quantity consumed.
ANSWER: c
POINTS: 1
DIFFICULTY: Easy
131. If the marginal cost of producing vanity license plates is virtually zero (by prison inmates with little else to do), then
states would maximize their profits on plate sales at the point on a linear demand curve where
a. demand is inelastic.
b. demand is elastic.
c. demand is unit elastic.
d. the demand curve crosses the horizontal axis.
ANSWER: c
POINTS: 1
132. Would a profit-maximizing firm sell where demand is inelastic?

a. No, this would not follow the rule of MC = MR.
b. No, the firm could not profitably raise price.
c. Yes, the firm could profitably lower price to attract sales.
d. Yes, in this case there are few substitutes for the good.
ANSWER: a
POINTS: 1
133. A recent study on enrollment at a liberal arts college concluded that demand elasticity is 0.91. The administration is
considering a tuition increase to help balance the budget. The revenue-maximizing decision is to
a. decrease tuition, which should boost enrollment enough to balance the budget.
b. decrease tuition, which would bring in more revenue.
c. leave tuition as is-an increase would not help balance the budget.
d. increase tuition, which would bring in more revenue.
ANSWER: d
POINTS: 1
134. The local symphony recently raised its price for tickets to their summer concerts in the park. At the end of the
summer season, the symphony was surprised to see that total revenue had actually decreased. The reason was that the
elasticity of demand for tickets was
a. unit elastic.
b. inelastic.
c. elastic.
d. Not enough information is given.
ANSWER: c
POINTS: 1
135. John's Bait Shop was surprised to learn that when it raised prices by 10 percent, total revenue was unaffected. This is
because the elasticity for bait is
a. unit elastic.
b. inelastic.
c. elastic.
d. Not enough information is given.
ANSWER: a
POINTS: 1
136. If demand is unit elastic, revenue

a. and price rise and fall together.
b. rises as price falls.
c. falls as price rises.
d. remains constant as price rises or falls.
ANSWER: d
POINTS: 1
DIFFICULTY: Easy
137. If, as price increases by 10 percent, total revenue decreases by 10 percent demand is
a. elastic.
b. unit elastic.
c. inelastic.
d. perfectly inelastic.
ANSWER: a
POINTS: 1
138. When the price of penicillin tablets increases by $5 per dozen, the drug company's revenue increases by $6 million.
Its elasticity of demand (in absolute terms) must be
a. zero.
b. greater than one.
c. less than one.
d. infinitely large.
ANSWER: c
POINTS: 1
139. The demand for Exxon gasoline is ____ the demand for all gasoline.
a. exactly as elastic as, and of a different slope from
b. more elastic than
c. less elastic than
d. exactly as elastic and of a different slope from
ANSWER: b
POINTS: 1
DIFFICULTY: Easy
140. The demand for French Roast coffee is likely to be

a. elastic.
b. inelastic.
c. unit elastic.
ANSWER: a
POINTS: 1
DIFFICULTY: Easy
141. The price elasticity of demand for widgets at any particular price is determined by
a. whether widgets are luxuries or necessities.
b. how much of their budgets consumers spend on widgets.
c. whether there are any good substitutes for widgets.
ANSWER: d
POINTS: 1
DIFFICULTY: Easy
142. The demand for potatoes at current prices is likely to be
a. elastic.
b. inelastic.
c. unit elastic.
d. perfectly elastic.
ANSWER: b
POINTS: 1
DIFFICULTY: Easy
143. A 10 percent increase in the cost of restaurant meals, which are a luxury, will most likely
a. increase the purchase of meals by 10 percent.
b. increase the purchase of meals by less than 10 percent.
c. decrease the purchase of meals by more than 10 percent.
d. decrease the purchase of meals by less than 10 percent.
ANSWER: c
POINTS: 1
144. If both matches and automobile prices increase by 10 percent, consumers will likely buy
a. fewer matches and approximately the same quantity of automobiles.
b. approximately the same quantity of matches and fewer automobiles.
c. fewer matches and fewer automobiles.
d. approximately the same quantity of both matches and automobiles.
ANSWER: b
POINTS: 1
145. A relatively large increase in the cost of electricity would likely

a. result in a large increase in the use of gas for home use immediately.
b. cause an immediate large decline in the use of electricity.
c. increase the use of gas and decrease the use of electricity after a time lapse.
d. cause an equal reduction in the use of electricity immediately.
ANSWER: c
POINTS: 1
146. The demand for a new effective drug for the cure of AIDS would most likely be
a. elastic.
b. unit elastic.
c. perfectly elastic.
d. highly inelastic.
ANSWER: d
POINTS: 1
147. Which of the following is more likely be the price elasticity of demand for anti-venom?
a. highly inelastic
b. unit elastic
c. elastic
d. perfectly elastic
ANSWER: a
POINTS: 1
148. When OPEC raises the price of petroleum, American expenditures on oil imports increase, suggesting that
a. the United States' elasticity of demand for imported oil is greater than one.
b. the United States' elasticity of demand for imported oil is less than one.
c. imported oil and domestically produced oil are complementary goods.
d. the short-run elasticity of demand for oil is greater than the long-run elasticity.
ANSWER: b
POINTS: 1
DIFFICULTY: Easy
149. A decrease in the price of rice from 50 cents to 40 cents a pound increases consumption from 16 to 20 tons a week in
Gainesville and from 160 to 200 tons in the larger city of Miami. The elasticity of demand for rice is
a. greater in Miami than in Gainesville, even taking into account the population difference.
b. greater in Gainesville than in Miami in spite of the population difference.
c. equal in Gainesville and Miami regardless of the population difference.
d. impossible to compare because of the population difference.
ANSWER: c
POINTS: 1
150. Which of the following goods will have the most inelastic demand at any time?
a. jewelry
b. Big Macs
c. electricity
d. pork chops
ANSWER: c
POINTS: 1
151. Which of the following goods will have the most elastic demand at any time?
a. coffee
b. gasoline
c. restaurant meals
d. insulin
ANSWER: c
POINTS: 1
152. The price elasticity of new automobile purchases is about 1.2. This implies that an increase of $1,000 on a $10,000
automobile will
a. reduce the number of autos sold by approximately 1.2 percent.
b. increase the consumer expenditures on autos by approximately 1.2 percent.
c. reduce the number of autos sold by approximately 12 percent.
d. increase consumer expenditures on autos by approximately 12 percent.
ANSWER: c
POINTS: 1
DIFFICULTY: Easy
153. A good will tend to be more price elastic if it

a. is a luxury good.
b. has no close substitutes.
c. is a small part of the household budget.
d. is a necessity.
ANSWER: a
POINTS: 1
DIFFICULTY: Easy
154. A study of New York City (NYC) tax rates concluded that taxes on the nonmanufacturing sector should be higher
since that sector has fewer alternatives. Manufacturers are more mobile and may move to avoid higher taxes. This means
that
a. nonmanufacturing firms have a more elastic demand for NYC locations.
b. manufacturing firms have an inelastic demand for the NYC locations.
c. nonmanufacturing firms have relatively inelastic demand for the NYC locations.
d. nonmanufacturing demand for NYC locations is perfectly elastic.
ANSWER: c
POINTS: 1
155. The price of an airline ticket rises as the amount of time between purchase and flight departure gets smaller. The
airlines base the policy on the assumption that
a. consumers are not aware of airline prices.
b. consumer demand is unrelated to prices.
c. consumer demand becomes more elastic as departure time approaches.
d. consumer demand becomes less elastic as departure time approaches.
ANSWER: d
POINTS: 1
156. In 1975, New York City increased regulated taxi fares by 17.5 percent and expected taxi revenue to increase a like
amount. The taxi commission believed taxi demand was
a. unit elastic.
b. inelastic.
c. elastic.
ANSWER: d
POINTS: 1
157. The relationship between a change in consumer income and a resulting change in demand for a good is
a. demand elasticity.
b. income elasticity of demand.
c. cross elasticity of income demand.
d. supply elasticity.
ANSWER: b
POINTS: 1
158. The elasticity of supply is calculated by
a. determining the slope of the supply curve.
b. dividing the absolute change in quantity supplied by the absolute change in price.
c. dividing the percentage change in quantity supplied by the percentage change in price.
d. dividing the percentage change in price by the percentage change in quantity demanded.
ANSWER: c
POINTS: 1
Figure 6-9
159. In 1983, government price supports raised the price of sugar above its equilibrium value. Which graph in Figure 6-9
illustrates the impact of sugar price supports on the sugar substitute fructose?
a. 1
b. 2
c. 3
d. 4
ANSWER: c
POINTS: 1
160. Certain goods are related such that an increase in the price of one good decreases the quantity demanded of the other.
These goods are
a. complements.
b. substitutes.
c. luxury goods.
d. competing goods.
ANSWER: a
POINTS: 1
DIFFICULTY: Easy
161. The measure used to determine whether two products are substitutes or complements is called
a. price elasticity of demand.
c. cross elasticity of demand.
d. inverse elasticity of demand.
ANSWER: c
POINTS: 1
DIFFICULTY: Easy
162. If two goods are complements, their cross elasticity of demand will normally be
a. zero.
b. a negative number.
c. a positive number.
d. infinity.
ANSWER: b
POINTS: 1
163. The price of coffee rose 50 percent and coffee sales fell 25 percent. Doughnut sales also fell 25 percent. From this
information we can conclude that
a. demand for coffee is inelastic.
b. coffee and doughnuts are complements.
c. the cross elasticity of demand is minus 0.5 percent.
ANSWER: d
POINTS: 1
164. Two economists from Ohio University estimated that the demand curve for kerosene in Indonesia was such that a 10
percent increase in the price reduced the quantity demanded by 2.2 percent and that a 10 percent increase in the price of
electricity increased the demand for kerosene by 1.6 percent. This indicates that (i) the demand for kerosene is price
inelastic and (ii) kerosene and electricity are substitutes. Which of these two statements is correct?
a. i and ii
b. i not ii
c. ii not i
d. neither i nor ii
ANSWER: a
POINTS: 1
165. The elasticity measure which has been employed by the courts to assess the degree of market competition is
a. price elasticity of demand.
c. cross elasticity of demand.
d. inverse elasticity of demand.
ANSWER: c
POINTS: 1
DIFFICULTY: Easy
166. If goods X and Y are complements, the

a. quantities demanded of X and Y tend to move in opposite directions.
b. quantities demanded of X and Y tend to move in the same direction.
c. prices of X and Y tend to move in the same direction.
d. supply curves for X and Y tend to move in the same direction.
ANSWER: b
POINTS: 1
DIFFICULTY: Easy
167. The definition of cross elasticity of demand for two products X and Y is
a. percentage change in quantity of X demanded/percentage change in quantity of Y demanded.
b. percentage change in price of Y/percentage change in quantity of X demanded.
c. percentage change in price of Y/percentage change in price of X.
d. percentage change in quantity of X demanded/percentage change in price of Y.
ANSWER: d
POINTS: 1
DIFFICULTY: Easy
168. Cross elasticity of demand for

a. substitutes will normally be positive.
b. complements will normally be positive.
c. substitutes will normally be negative.
d. complements will normally be infinite.
ANSWER: a
POINTS: 1
DIFFICULTY: Easy
169. Chicken and fish are substitutes. Therefore, the cross elasticity of demand between chicken and fish is
a. negative.
b. positive.
c. zero.
d. Any of the above is possible.
ANSWER: b
POINTS: 1
DIFFICULTY: Easy
170. If the cross elasticity of demand for potato chips and pretzels equals 1.5,
a. potato chips and pretzels must both be luxury goods.
b. either potato chips or pretzels must be a luxury good, and both may be luxury goods.
c. potato chips and pretzels must be substitutes.
d. potato chips and pretzels must be complements.
ANSWER: c
POINTS: 1
DIFFICULTY: Easy
171. If the price elasticity of supply of doodads equals 0.50 and the price rises by 3 percent, then the quantity supplied of
doodads will rise by ____.
a. 0.50 percent.
b. 1.50 percent.
c. 6.00 percent.
d. 15 percent.
ANSWER: b
POINTS: 1
172. Hot dogs and hot dog buns are found to be related by the cross elasticity of demand. If they are complementary
goods, the cross elasticity will be
a. positive.
b. equal to zero.
c. negative.
d. unknown.
ANSWER: c
POINTS: 1
173. After a $5 million ad campaign, Coca-Cola measured its effectiveness by calculating the cross elasticity of demand
between Coke and Pepsi. A successful campaign would be indicated if the cross elasticity went from
a. 0.9 to 0.5.
b. 0.9 to 1.5.
c. −0.5 to −0.2.
d. −0.9 to −1.5.
ANSWER: a
POINTS: 1
174. After a number of acquisitions, Air American controls 75 percent of the U.S. market. It has been charged with
"monopolizing" the U.S. air markets by the Justice Department. In its defense, the airline would want to introduce
evidence that
a. cross elasticities for air and rail travel were very high.
b. income elasticities for air and rail travel were very high.
c. price elasticity for air, rail, and auto travel were negative.
d. management always considered the public interest when setting prices.
ANSWER: a
POINTS: 1
175. A rightward shift in the demand curve for a product will ordinarily result from
a. a decrease in the advertising budget.
b. a decrease in the price of a competing product.
c. an increase in consumer income.
d. an increase in the price of a complementary good.
ANSWER: c
POINTS: 1
DIFFICULTY: Easy
176. Scientific evidence suggests that consumption of foods rich in fiber lowers cholesterol. As a result, the demand for
bran increases at every price by 5,000 bushels and the supply curve for bran is perfectly price elastic. The quantity of bran
consumed will
a. not change.
b. change unless the demand curve is perfectly inelastic.
c. rise by exactly 5,000 bushels.
d. not rise by exactly 5,000 bushels unless the demand curve is perfectly inelastic.
ANSWER: c
POINTS: 1
177. If the demand for gasoline becomes more elastic over time,
a. the demand curve will shift out.
b. the demand curve will become flatter.
c. other things being equal, the equilibrium price of gasoline must fall.
d. other things being equal, the equilibrium quantity of gasoline must fall.
ANSWER: b
POINTS: 1
DIFFICULTY: Easy
TOPICS: Price Elasticity of Demand: Its Effect on Total Revenue and Total Expenditure vs. Shifts
in the Demand Curve
178. Which of the following will lead to a movement along the same demand curve?
a. Changes in income.
b. Changes in the price of substitute goods.
c. Changes in the price of the product.
d. Changes in the preference of the consumer.
ANSWER: c
POINTS: 1
DIFFICULTY: Easy
179. As a result of a decline in interest rates and a rise in household income, the demand curve for housing has shifted to
the right, but has retained the same slope. Consequently, the elasticity of demand for housing
a. has declined.
b. has increased.
c. has remained unchanged.
d. cannot be compared.
ANSWER: a
POINTS: 1
180. Historical data on prices and quantities sold do not provide the basis for drawing an accurate demand curve because
a. reporters who gather these data are often wrong.
b. factors other than price may change over time.
c. they do not include measures of price close to the quantity axis.
d. they sometimes tend to be clustered around one point.
ANSWER: b
POINTS: 1
TOPICS: Appendix: How Can We Find a Legitimate Demand Curve from Historical Statistics?
181. Regarding the price elasticities of demand, which of the following statements is true?
a. Price elasticities vary considerably from product to product
b. Luxurious goods are generally less price elastic.
c. Necessities are generally more price elastic.
d. All of these statements are true.
ANSWER: a
POINTS: 1
182. The relationships between elasticity and total revenue hold because:
a. total revenue equals price divided by quantity demanded
b. total revenue equals price times quantity demanded
c. a drop in price has two opposing effects on the two components of the formula
d. both b and c
ANSWER: d
POINTS: 1
183. If the price of potatoes is reduced, consumers likely:

a. significantly more potatoes
b. significantly fewer potatoes
c. roughly the same quantity of potatoes
d. an unknown quantity of potatoes; in this situation, consumers' actions cannot be predicted
ANSWER: c
POINTS: 1
Essay
184. Define the following terms and explain their importance to the study of economics.
a. price elasticity
b. complements
c. substitutes
d. cross elasticity
e. supply elasticity
ANSWER: Price elasticity is the ratio of the percentage change in quantity demanded to the
a. percentage change in price that brings about the change in quantity demanded. The
term is used extensively in economic predictions.
Two goods are called complements if an increase in the quantity consumed of one
b.
increases the quantity demanded of the other, all other factors remaining constant.
Two goods are called substitutes if an increase in the quantity consumed of one cuts
c.
the quantity demanded of the other, all other factors remaining constant.
Cross-elasticity of demand for some good X to a change in the price of another good
Y is the ratio of the percentage change in quantity demanded of X to the percentage
d.
change in the price of Y that brings about the change in quantity demanded. This is
used in antitrust analysis in determining the boundary of a market.
Supply elasticity is the ratio of the percentage change in quantity supplied to the
e. percentage change in price that brings about the change in quantity supplied. The
term is used extensively in economic predictions.
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: DISC: The study of economics, an - DISC: The study of economics, and definitions in
economics
ACCREDITING STANDARDS: The study of economics, and defi - The study of economics, and definitions of economics
185. Explain what happens to the magnitude of price elasticity of demand as price increases along a straight-line demand
curve.
ANSWER: Price elasticity is the ratio of percentage change in quantity to the percentage change in
price. One form of the formula is [(change in Q)/(change in P)] [P/Q]. Since slope of a
straight line is constant, only P/Q changes. As P increases, Q decreases, so P/Q increases.
Thus, elasticity increases (in absolute value).
POINTS: 1
186. The Sandy Deli operates near a college campus. It has been selling 325 sandwiches a day at $1.75 each and is
considering a price cut. It estimates 450 sandwiches would sell per day at $1.50 each. Calculate the marginal revenue of
such a price cut and the elasticity between the two points.
ANSWER: Revenue is currently 325 × $1.75 = $568.75. Revenue at the new price is 450 × $1.50 =
$675. The marginal revenue is $675 − $568.75 = $106.25. Elasticity is (% DQ)/(% DP) =
[125/387.5]/[.25/1.625] = 2.097.
POINTS: 1
187. The current price of concert t-shirts is $20 each, and the company has been selling 400 per week. If price elasticity is
2.5 and the price changes to $21, how many t-shirts will be sold per week?
ANSWER: The percentage change in price is 1/20.5 = .0488. The percentage change in quantity is
.0488 × 2.5 = .1220. The new quantity is such that 0.1220 = (400 − Q2)/[(400 + Q2)/2].
Solving for Q2 we see 0.061(400 + Q2) = 400 − Q2 which then yields 1.061 Q2 = 375.6
s0 that Q2 = 354.0.
POINTS: 1
188. Suppose that elasticity has been reliably measured as 1.55 and the unit price decreases from $20 to $17.50. How
much will quantity demanded increase?
ANSWER: The percentage change in price is 2.5/18.75 = .1333. The percentage change in quantity is
.1333 × 1.55 = .2067. In percentages, the change is 20.67 percent.
POINTS: 1
189. The following table contains information regarding price and output for a firm. For each point except the first,
calculate the elasticity between it and the point above.
Price Quantity Elasticity
$7 10 _____
6 20 _____
5 30 _____
4 40 _____
3 50 _____
2 60 _____
1 70 _____
ANSWER:
Price Quantity Elasticity
$7 10 (None)
6 20 4.33
5 30 2.2
4 40 1.286
3 50 .7778
2 60 .4545
1 70 .231
POINTS: 1
190. In a past fare war, U.S. Air reduced the price of its Charlotte, North Carolina, to New York City round-trip fare from
$198 to $138 to match American Airlines. U.S. Air did so reluctantly, saying it would cost the company millions of
dollars in revenue. American, on the other hand, believed the fare cut would increase its revenue. What different
assumptions about the underlying price elasticity of demand did each airline believe true?
ANSWER: U.S. Air must have believed demand in this price range to be inelastic, so that a fare cut
would lead to a relatively small increase in quantity demanded. American must have
believed the opposite, that the fare cut would stimulate a more than proportional, or
elastic, consumer response.
POINTS: 1
191. What is an optimal decision?

ANSWER: An optimal decision is one that best serves the objectives of the decision maker, whatever
those objectives may be. It is selected by explicit or implicit comparison with the possible
alternative choices. The term optimal connotes neither approval nor disapproval of the
objective itself.
POINTS: 1
DIFFICULTY: Easy
192. For each pair of goods, explain which is more elastic: toothpicks vs. cars; electricity vs. yachts; IBM computers vs.
Apple computers.
ANSWER: The more elastic are cars, yachts, and IBM computers. Cars take a larger fraction of
income than do toothpicks, electricity is a necessity vs. luxury yachts, and there are many
IBM clones (while the substitutes for Apples are not as close).
POINTS: 1
193. Arrange the following goods from least to most elastic, explaining your ordering: gasoline, Exxon gas, Exxon gas at
a particular gas station.
ANSWER: Gasoline is least elastic, since there are few substitutes for the entire category of this good
in the operation of cars. Exxon gas at a particular station is most elastic, since one can
substitute other Exxon stations or other brands of gas.
POINTS: 1
DIFFICULTY: Easy
194. A unit-elastic demand curve never touches or crosses either of the axes. Why?
ANSWER: When demand is unit-elastic, total expenditure must be the same at every point on the
curve. Suppose that at any point the curve, the demand curve were to touch the horizontal
axis, meaning that the price would equal zero. Then total expenditure would be zero.
Therefore, if the demand curve remains unit-elastic along its entire length, it can never
cross the horizontal axis. By the same reasoning, it cannot cross the vertical axis. Because
the slope of the demand curve is negative, any unit-elastic curve simply must get closer
and closer to the axes as it moves away from its middle points. But it will never touch
either axis.
POINTS: 1
195. Along a straight-line demand curve, why does the price elasticity of demand grow steadily smaller as we move from
left to right?
ANSWER: As we move from left to right, the quantity keeps getting larger, so that a given numerical
change in quantity becomes an ever-smaller percentage change. But, simultaneously, the
price keeps going lower, so that a given numerical change in price becomes an ever-
larger percentage change. So, as one moves from left to right along the demand curve, the
numerator of the elasticity fraction keeps falling and the denominator keeps growing
larger; thus the fraction that is the elasticity formula keeps declining.
POINTS: 1
196. What is the shape of a perfectly elastic demand curve? Explain its significance for a seller.
ANSWER: The perfectly elastic demand curve is horizontal and parallel to the X axis. A slight
increase in the price will drop the quantity demanded to zero. It means that the seller will
lose all of her customers if she raises her price even slightly.
POINTS: 1
DIFFICULTY: Easy
TOPICS: Price Elasticity of Demand and the Shapes of Demand Curves
197. Why is it customary to report price elasticity of demand in absolute value terms, while cross elasticities and income
elasticities are reported with their sign attached?
ANSWER: Price elasticity of demand is always negative, since the law of demand says that an
increase in price will reduce quantity demanded. It is simpler to use the absolute value,
recognizing that the true sign is always negative. Cross elasticities and income elasticities
can be positive or negative, with the signs giving information. A positive cross elasticity
indicates that as the price of product Y increases, purchases of X increase, so the two
goods are substitutes. Income elasticities are typically positive, as increased income leads
to a greater quantity purchased, but the opposite does occasionally happen for inferior
goods such as Spam.
POINTS: 1
198. Using the general concept of elasticity, would you expect the elasticity of demand for advertising to be positive or
negative? Explain.
ANSWER: Firms would advertise only if they believe it would increase sales. However, with regard
to the cost or price of advertising, a firm would purchase a greater amount of advertising
at a lower price per advertisement, As such, we would expect the elasticity of demand for
advertising to be negative with regard to price.
POINTS: 1
199. Sun City's public bus line has been operating at a deficit. The city decides to raise the fare from 50 cents to 75 cents,
anticipating enough additional revenue to cover the deficit. What assumption is the city making about price elasticity?
ANSWER: Sun City is assuming demand is price inelastic. This means an increase in revenue would
accompany an increase in price.
POINTS: 1
DIFFICULTY: Easy
200. What are the main determinants of demand elasticity? Explain their importance.
ANSWER: First is the nature of the good. Necessities have less-elastic demand than do luxury goods.
Second, there's availability of close substitutes. The more substitutes exist and the closer
they are to the original good, the more elastic demand will be. Third is the fraction of
income absorbed; the smaller the fraction of income spent on an item, the more elastic
demand will be. Fourth is the passage of time; the more time that passes after a price
change, the greater the demand elasticity.
POINTS: 1
201. How might a court use cross elasticity in an antitrust case?
ANSWER: One major issue a court must settle is the boundary of a market. Legal language is
addressed to particular lines of commerce in parts of the country. This requires the
definition of the relevant market in product and geographical terms. The opening
quotation from the DuPont Cellophane case shows the importance of the computation.
POINTS: 1
202. How might a market research analyst use measures of elasticity-price, cross, and income-in her work? Explain.
ANSWER: A market researcher is interested in determining the effects of changes on demand for a
product or industry. Each measure of elasticity can be critical here. Price elasticity helps
predict changes in unit output for a price change. Income elasticity helps predict changes
in demand as buyer income changes, perhaps over a business cycle. Cross elasticity helps
predict the impact of a change in prices of competitors in the industry, competing
products, and other products that affect demand for a particular product. Market
researchers rely upon all of these in defining markets, defining boundaries of markets,
and analyzing effects from competitors.
POINTS: 1
203. How can one tell from cross elasticity what kind of relationship exists between any two goods?
ANSWER: If the price of X increases and the quantity demanded of Y decreases, resulting in a
negative cross elasticity, the two goods are complements. If the price of X increases and
the quantity demanded of Y increases, resulting in a positive cross elasticity, the two
goods are substitutes.
POINTS: 1
204. The cross elasticity between two goods has been measured at −1.2. How are the goods related? Explain. Give an
example of goods for which this might be a reasonable measure of cross elasticity.
ANSWER: The goods are complements. An increase in the use of one decreases the use of both. A
decrease in the price of one increases the quantity demanded of one and the demand for
the other. Examples include hamburgers and buns, cameras and film, cars and gasoline,
etc.
POINTS: 1
205. What does cross elasticity of demand between goods reveal about the nature of relationship between them?
ANSWER: Its sign reveals whether the goods are substitutes or complements. If the two goods are
substitutes their cross elasticities of demand will normally be positive. The cross
elasticities of demand for complement goods will normally be negative.
POINTS: 1
DIFFICULTY: Easy
206. If the income of buyers increases and a company maintains the same price, what is the most likely impact on quantity
sold? Explain. Draw a graphical display of the result.
ANSWER: The most likely result will be an increase in demand, so that quantity will increase at all
prices. The graph should look like Figure 6-5 in the text.
POINTS: 1
207. Specifically, what might cause the quantity demanded of a particular good to double at a particular price?
ANSWER: This results from a rightward shift in the demand curve, which could be caused by an
increase in consumer income, an increase in advertising expenditure, reduction in the
price of a complementary good, or an increase in the price of a substitute good.
POINTS: 1
DIFFICULTY: Easy
208. In the DuPont cellophane case, rivals accused DuPont of monopolizing cellophane. DuPont claimed that the relevant
market was flexible wrapping material, such as wax paper and aluminum foil, rather than just cellophane. DuPont won the
case. What type of evidence constituted DuPont's defense?
ANSWER: DuPont needed to show that other flexible wrapping materials are substitutes for
cellophane, which requires a large, positive cross elasticity. DuPont showed that as the
price of other flexible wrapping materials increased, sales of cellophane declined
substantially, showing a large, positive cross elasticity.
POINTS: 1
209. If Polaroid wanted damages against Kodak for infringing on its instant development film process, and the courts
found a high positive cross elasticity between purchases of Polaroid instant film and 35mm regular film, would that have
strengthened or weakened Polaroid's claim against Kodak?
ANSWER: A large positive cross elasticity showed a strong substitute relationship, so that Polaroid
was losing sales not only to Kodak instant film but also to 35mm film in general. Hence,
it could not claim all lost sales were due to Kodak's infringement, which reduced the
damages it could claim.
POINTS: 1
210. Why are time series data unlikely to give an accurate estimate of demand?
ANSWER: Demand may have shifted over time, so that instead of obtaining points on a single
demand curve, one is connecting points from several demand curves. One needs to obtain
several price, quantity points at a single point in time to be assured of an accurate
estimate of a single demand curve.
POINTS: 1
211. The sales manager of a retail outlet suggests that the best way to increase customers is to have a sale. If a 10 percent
price cut doesn't bring in enough customers, then he'll cut prices 20 percent. Increased cash flow should take care of
profits. Do you agree? Explain.
ANSWER: A price cut will (usually) lead to increased unit sales. However, if demand is inelastic,
then the price cut will reduce total revenue. The pricing plan makes more sense if demand
is elastic.
POINTS: 1
212. Would a profit-maximizing firm sell at a price where demand is inelastic? Explain.
ANSWER: No. If demand is inelastic, then marginal revenue is negative. The firm could not possibly
follow the profit-maximizing rule of MR = MC.
POINTS: 1
213. How would an increase in cigarette taxes succeed according to the following criteria: collecting a large amount of tax
revenue; distorting demand as little as possible; discouraging consumption of harmful commodities?
ANSWER: Assuming demand for cigarettes is fairly inelastic among adults, the tax is a good
candidate for collecting a lot of revenue. As price increases as a consequence of the
additional tax, quantity demanded will not decrease much. So the government will get
additional tax revenue on a large quantity. The cigarette tax also does well by not
distorting demand very much, since higher price causes only a small change in
consumption for the inelastic case. The tax also discourages consumption of a harmful
commodity, although by a small amount if demand is inelastic.
Since the demand for cigarettes is more elastic among younger smokers, the effects
would be different. The tax causes the price of cigarettes to rise, causing a greater
reduction in smoking among teens, and thus the government will be not increase its
revenues very much-in fact, revenues may actually decrease. In this case the tax does
distort demand considerably.
POINTS: 1
214. Why do economists measure responsiveness of demand to price in percentage changes rather than in absolute
changes?
ANSWER: Different units of measurement will give different values and it could be misleading.
Elasticity measures responsiveness on the basis of percentage changes in price and
quantity rather than on absolute changes. The elasticity formula solves the units problem
because percentages are unaffected by units of measurement. For example, if the
government expenditure doubles, it goes up by hundred percent, whether measured in
millions or billions of dollars.
POINTS: 1
DIFFICULTY: Easy
ACCREDITING STANDARDS: The study of economics, and defi - The study of economics, and definitions of economics

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Test Bank for Microeconomics Principles and Policy 13th

Edition Baumol Blinder 130528061X 9781305280618

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5. Elasticity is a measure of the responsiveness of change in quantity demanded to a change in price.

14. A line that is perfectly elastic has an elasticity of demand of zero.

15. Perfectly inelastic demand curves are vertical.

16. Perfectly elastic demand curves are vertical.

17. A vertical demand curve has an elasticity of demand equal to zero.

25. A demand curve with an elasticity of 1.0 is a unit-elastic demand curve.

27. Elasticity of demand is another way to measure slope.

36. Buyers' expenditures and sellers' revenues are always identical.

38. Total expenditure equals price times quantity.

39. Demand elasticity equals quantity times price.

40. If demand is elastic, an increase in price will decrease total revenue.

41. If demand is elastic, an increase in price will increase total revenue.

42. If demand is elastic, a rise in price will decrease total expenditure.

43. If demand is inelastic, a drop in price will raise total expenditure.

50. A price increase will always increase a firm's revenue.

54. Necessities such as food and shelter have inelastic demand.

69. When price falls, demand rises.

71. A buyer's response to a change in income is an example of a "change in demand."

78. Price elasticity of demand is defined as

83. Demand is said to be price elastic at a point on a demand curve if a

85. In Figure 6-1,

88. In Figure 6-3(a), at any price above $6, quantity demanded

89. In Figure 6-3(a), demand is

91. Along the inelastic portion of a demand curve, the

100. A demand curve is described as perfectly inelastic if

101. A demand curve is described as perfectly elastic if

102. A perfectly elastic demand curve for a firm

103. The price elasticity of a vertical demand curve is always

104. The price elasticity of a horizontal demand curve is always

105. Along a perfectly elastic demand curve,

106. If the demand curve is vertical, the elasticity is

114. Elasticity provides a guide to both

115. Total expenditure by a buyer is equal to the

122. Regarding demand elasticity, which of the following statements is correct?

132. Would a profit-maximizing firm sell where demand is inelastic?

136. If demand is unit elastic, revenue

140. The demand for French Roast coffee is likely to be

145. A relatively large increase in the cost of electricity would likely

153. A good will tend to be more price elastic if it

166. If goods X and Y are complements, the

168. Cross elasticity of demand for

183. If the price of potatoes is reduced, consumers likely:

191. What is an optimal decision?

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