TEST BANK chapter 5 elasticity and its application

32 ❖ Chapter /Elasticity and Its Application Chapter Elasticity and Its Application TRUE/FALSE Elasticity measures how responsive quantity is to changes in price ANS: T DIF: REF: 5-0 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Definitional Measures of elasticity enhance our ability to study the magnitudes of changes ANS: T DIF: REF: 5-0 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Definitional The demand for bread is likely to be more elastic than the demand for solid-gold bread plates ANS: F DIF: REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Interpretive In general, demand curves for necessities tend to be price elastic ANS: F DIF: REF: 5-1 LOC: Elasticity TOP: Price elasticity of demand NAT: Analytic MSC: Interpretive In general, demand curves for luxuries tend to be price elastic ANS: T DIF: REF: 5-1 LOC: Elasticity TOP: Price elasticity of demand NAT: Analytic MSC: Interpretive Necessities tend to have inelastic demands, whereas luxuries have elastic demands ANS: T DIF: REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Interpretive Goods with close substitutes tend to have more elastic demands than goods without close substitutes ANS: T DIF: REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Interpretive The demand for Rice Krispies is more elastic than the demand for cereal in general ANS: T DIF: REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Interpretive The demand for soap is more elastic than the demand for Dove soap ANS: F DIF: REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Interpretive 10 The demand for gasoline will respond more to a change in price over a period of five weeks than over a period of five years ANS: F DIF: REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Interpretive 11 Even the demand for a necessity such as gasoline will respond to a change in price, especially over a longer time horizon ANS: T DIF: REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Interpretive 12 The price elasticity of demand is defined as the percentage change in quantity demanded divided by the percentage change in price ANS: T DIF: REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Definitional 13 The price elasticity of demand is defined as the percentage change in price divided by the percentage change in quantity demanded ANS: F DIF: REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Definitional 33 ❖ Chapter /Elasticity and Its Application 14 Suppose that when the price rises by 20% for a particular good, the quantity demanded of that good falls by 10% The price elasticity of demand for this good is equal to 2.0 ANS: F DIF: REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Analytical 15 Suppose that when the price rises by 10% for a particular good, the quantity demanded of that good falls by 20% The price elasticity of demand for this good is equal to 2.0 ANS: T DIF: REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Analytical 16 If the price of calculators increases by 15 percent and the quantity demanded per week falls by 45 percent as a result, then the price elasticity of demand is ANS: T DIF: REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Applicative 17 Demand is inelastic if the price elasticity of demand is greater than ANS: F DIF: REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Inelastic demand MSC: Definitional 18 A linear, downward-sloping demand curve has a constant elasticity but a changing slope ANS: F DIF: REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Interpretive 19 Price elasticity of demand along a linear, downward-sloping demand curve increases as price falls ANS: F DIF: REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Interpretive 20 If the price elasticity of demand is equal to 0, then demand is unit elastic ANS: F DIF: REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Definitional 21 If the price elasticity of demand is equal to 1, then demand is unit elastic ANS: T DIF: REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Definitional 22 Demand for a good is said to be inelastic if the quantity demanded increases substantially when the price falls by a small amount ANS: F DIF: REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Inelastic demand MSC: Definitional 23 The midpoint method is used to calculate elasticity between two points because it gives the same answer regardless of the direction of the change ANS: T DIF: REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Midpoint method MSC: Interpretive 24 The flatter the demand curve that passes through a given point, the more inelastic the demand ANS: F DIF: REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Interpretive 25 The flatter the demand curve that passes through a given point, the more elastic the demand ANS: T DIF: REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Interpretive 26 If demand is perfectly inelastic, the demand curve is vertical, and the price elasticity of demand equals ANS: T DIF: REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Perfectly inelastic demand MSC: Interpretive 27 If demand is perfectly elastic, the demand curve is horizontal, and the price elasticity of demand equals ANS: F DIF: REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Perfectly elastic demand MSC: Interpretive Chapter /Elasticity and Its Application ❖ 34 28 Along the elastic portion of a linear demand curve, total revenue rises as price rises ANS: F DIF: REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand MSC: Interpretive 29 If a firm is facing elastic demand, then the firm should decrease price to increase revenue ANS: T DIF: REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand MSC: Applicative 30 If a firm is facing inelastic demand, then the firm should decrease price to increase revenue ANS: F DIF: REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand MSC: Applicative 31 When demand is inelastic, a decrease in price increases total revenue ANS: F DIF: REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Inelastic demand | Total revenue MSC: Interpretive 32 The income elasticity of demand is defined as the percentage change in quantity demanded divided by the percentage change in income ANS: T DIF: REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Income elasticity of demand MSC: Definitional 33 The income elasticity of demand is defined as the percentage change in quantity demanded divided by the percentage change in price ANS: F DIF: REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Income elasticity of demand MSC: Definitional 34 Normal goods have negative income elasticities of demand, while inferior goods have positive income elasticities of demand ANS: F DIF: REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Income elasticity of demand MSC: Interpretive 35 If the income elasticity of demand for a good is negative, then the good must be an inferior good ANS: T DIF: REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Income elasticity of demand MSC: Interpretive 36 If the cross-price elasticity of demand for two goods is negative, then the two goods are substitutes ANS: F DIF: REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Cross-price elasticity of demand MSC: Interpretive 37 If the cross-price elasticity of demand for two goods is negative, then the two goods are complements ANS: T DIF: REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Cross-price elasticity of demand MSC: Interpretive 38 Cross-price elasticity of demand measures how the quantity demanded of one good changes as the price of another good changes ANS: T DIF: REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Cross-price elasticity of demand MSC: Definitional 39 Cross-price elasticity is used to determine whether goods are inferior or normal goods ANS: F DIF: REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Cross-price elasticity of demand MSC: Interpretive 40 Cross-price elasticity is used to determine whether goods are substitutes or complements ANS: T DIF: REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Cross-price elasticity of demand MSC: Interpretive 35 ❖ Chapter /Elasticity and Its Application 41 The cross-price elasticity of garlic salt and onion salt is -2, which indicates that garlic salt and onion salt are substitutes ANS: F DIF: REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Cross-price elasticity of demand MSC: Interpretive 42 Price elasticity of supply measures how much the quantity supplied responds to changes in the price ANS: T DIF: REF: 5-2 NAT: Analytic LOC: Elasticity TOP: Price elasticity of supply MSC: Definitional 43 Supply and demand both tend to be more elastic in the long run and more inelastic in the short run ANS: T DIF: REF: 5-1 | 5-2 NAT: Analytic LOC: Elasticity TOP: Price elasticities of demand and supply MSC: Interpretive 44 If the price elasticity of supply is and the quantity supplied decreases by 6%, then the price must have decreased by 3% ANS: T DIF: REF: 5-2 NAT: Analytic LOC: Elasticity TOP: Price elasticity of supply MSC: Applicative 45 Supply is said to be inelastic if the quantity supplied responds substantially to changes in the price, and elastic if the quantity supplied responds only slightly to price ANS: F DIF: REF: 5-2 NAT: Analytic LOC: Elasticity TOP: Price elasticity of supply MSC: Definitional 46 Supply tends to be more elastic in the short run and more inelastic in the long run ANS: F DIF: REF: 5-2 NAT: Analytic TOP: Price elasticity of supply MSC: Interpretive 47 When the price of knee braces increased by 25 percent, the Brace Yourself Company increased its quantity supplied of knee braces per week by 75 percent BYC's price elasticity of supply of knee braces is 0.33 ANS: F DIF: REF: 5-2 NAT: Analytic LOC: Elasticity TOP: Price elasticity of supply MSC: Applicative 48 If a supply curve is horizontal, then supply is said to be perfectly elastic, and the price elasticity of supply approaches infinity ANS: T DIF: REF: 5-2 NAT: Analytic LOC: Elasticity TOP: Perfectly elastic supply MSC: Interpretive 49 A government program that reduces land under cultivation hurts farmers but helps consumers ANS: F DIF: REF: 5-3 NAT: Analytic LOC: Elasticity TOP: Total revenue MSC: Applicative 50 OPEC failed to maintain a high price of oil in the long run, partly because both the supply of oil and the demand for oil are more elastic in the long run than in the short run ANS: T DIF: REF: 5-3 NAT: Analytic LOC: Elasticity TOP: OPEC | Price elasticity of demand | Price elasticity of supply MSC: Applicative 51 Drug interdiction, which reduces the supply of drugs, may decrease drug-related crime because the demand for drugs is inelastic ANS: F DIF: REF: 5-3 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Applicative SHORT ANSWER Consider the following pairs of goods For which of the two goods would you expect the demand to be more price elastic? Why? a water or diamonds b insulin or nasal decongestant spray c food in general or breakfast cereal d gasoline over the course of a week or gasoline over the course of a year e personal computers or IBM personal computers Chapter /Elasticity and Its Application ❖ 36 ANS: a b Diamonds are luxuries, and water is a necessity Therefore, diamonds have the more elastic demand Insulin has no close substitutes, but decongestant spray does Therefore, nasal decongestant spray has the more elastic demand Breakfast cereal has more substitutes than does food in general Therefore, breakfast cereal has the more elastic demand The longer the time period, the more elastic demand is Therefore, gasoline over the course of a year has the more elastic demand There are more substitutes for IBM personal computers than there are for personal computers Therefore, IBM personal computers have the more elastic demand c d e DIF: TOP: 2 REF: 5-1 Price elasticity of demand NAT: Analytic MSC: Applicative LOC: Elasticity You own a small town movie theatre You currently charge $5 per ticket for everyone who comes to your movies Your friend who took an economics course in college tells you that there may be a way to increase your total revenue Given the demand curves shown, answer the following questions Price 10 Adult Demand 10 20 30 40 50 60 70 80 90 100 Quantity Price 10 Child Demand a b c d e f 10 15 20 25 30 35 40 45 50 55 60 65 70 Quantity What is your current total revenue for both groups? The elasticity of demand is more elastic in which market? Which market has the more inelastic demand? What is the elasticity of demand between the prices of $5 and $2 in the adult market? Is this elastic or inelastic? What is the elasticity of demand between $5 and $2 in the children's market? Is this elastic or inelastic? Given the graphs and what your friend knows about economics, he recommends you increase the price of adult tickets to $8 each and lower the price of a child's ticket to $3 How much could you increase total revenue if you take his advice? 37 ❖ Chapter /Elasticity and Its Application ANS: a b c d e f DIF: TOP: Total revenue from children's tickets is $100 and from adult tickets is $250 Total revenue from all sales would be $350 The demand for children's tickets is more elastic The adult ticket market has the more inelastic demand The elasticity of demand between $5 and $2 is 0.26, which is inelastic The elasticity of demand between $5 and $2 is 1.0, which is unit elastic Total revenue in the adult market would be $320 Total revenue in the children’s market would be $120, so total revenue for both groups would be $440 $440 - $350 is an increase in total revenue of $90 REF: 5-1 NAT: Price elasticity of demand | Total revenue Analytic LOC: Elasticity MSC: Applicative Use the graph shown to answer the following questions Put the correct letter(s) in the blank Price A B Demand C a b c d Quantity g h i j The elastic section of the graph is represented by section from _ The inelastic section of the graph is represented by section from _ The unit elastic section of the graph is represented by section _ The portion of the graph in which a decrease in price would cause total revenue to fall would be from _ The portion of the graph in which a decrease in price would cause total revenue to rise would be from _ The portion of the graph in which a decrease in price would not cause a change in total revenue would be _ The section of the graph in which total revenue would be at a maximum would be _ The section of the graph in which elasticity is greater than is _ The section of the graph in which elasticity is equal to is The section of the graph in which elasticity is less than is _ a b c d e f g h i j A to B B to C B B to C A to B B B A to B B B to C e f ANS: DIF: TOP: REF: 5-1 NAT: Price elasticity of demand | Total revenue Analytic LOC: Elasticity MSC: Applicative Chapter /Elasticity and Its Application ❖ 38 Using the midpoint method, compute the elasticity of demand between points A and B Is demand along this portion of the curve elastic or inelastic? Interpret your answer with regard to price and quantity demanded Now compute the elasticity of demand between points B and C Is demand along this portion of the curve elastic or inelastic? 22 Price 20 18 A 16 14 12 B 10 C Demand 100 200 300 400 500 600 700 800 900 Quantity ANS: In the section of the demand curve from A to B, the elasticity of demand would be 2.5 This would be an elastic portion of the curve This would mean that for every percent change in price, quantity demanded would change by 2.5 percent In the section of the demand curve from B to C, the elasticity of demand would be 75 This would be an inelastic portion of the curve This would mean that for every percent change in price, quantity demanded would change by 0.75 percent DIF: TOP: REF: 5-1 Price elasticity of demand NAT: Analytic MSC: Applicative LOC: Elasticity When the Shaffers had a monthly income of $4,000, they usually ate out times a month Now that the couple makes $4,500 a month, they eat out 10 times a month Compute the couple's income elasticity of demand using the midpoint method Explain your answer (Is a restaurant meal a normal or inferior good to the couple?) ANS: The income elasticity of demand for the Shaffers is 1.89 Since the income elasticity of demand is positive, eating out would be interpreted as a normal good DIF: TOP: REF: 5-1 Income elasticity of demand NAT: Analytic MSC: Applicative LOC: Elasticity Recently, in Smalltown, the price of Twinkies fell from $0.80 to $0.70 As a result, the quantity demanded of Ho-Ho's decreased from 120 to 100 What would be the appropriate elasticity to compute? Using the midpoint method, compute this elasticity What does your answer tell you? ANS: The appropriate elasticity to compute would be cross-price elasticity The cross-price elasticity for this example would be 1.36 The two goods are substitutes because the cross-price elasticity is positive DIF: TOP: REF: 5-1 Cross-price elasticity of demand NAT: Analytic MSC: Applicative LOC: Elasticity 39 ❖ Chapter /Elasticity and Its Application Sec00 - Elasticity and Its Application MULTIPLE CHOICE In general, elasticity is a measure of a the extent to which advances in technology are adopted by producers b the extent to which a market is competitive c how firms’ profits respond to changes in market prices d how much buyers and sellers respond to changes in market conditions ANS: D NAT: Analytic DIF: LOC: Elasticity REF: TOP: 5-0 Elasticity MSC: Definitional DIF: LOC: Elasticity REF: TOP: 5-0 Elasticity MSC: Interpretive DIF: LOC: Elasticity REF: TOP: 5-0 Elasticity MSC: Interpretive When consumers face rising gasoline prices, they typically a reduce their quantity demanded more in the long run than in the short run b reduce their quantity demanded more in the short run than in the long run c not reduce their quantity demanded in the short run or the long run d increase their quantity demanded in the short run but reduce their quantity demanded in the long run ANS: A NAT: Analytic MSC: Definitional How does the concept of elasticity allow us to improve upon our understanding of supply and demand? a Elasticity allows us to analyze supply and demand with greater precision than would be the case in the absence of the elasticity concept b Elasticity provides us with a better rationale for statements such as “an increase in x will lead to a decrease in y” than we would have in the absence of the elasticity concept c Without elasticity, we would not be able to address the direction in which price is likely to move in response to a surplus or a shortage d Without elasticity, it is very difficult to assess the degree of competition within a market ANS: A NAT: Analytic 5-0 Elasticity When studying how some event or policy affects a market, elasticity provides information on the a equity effects on the market by identifying the winners and losers b magnitude of the effect on the market c speed of adjustment of the market in response to the event or policy d number of market participants who are directly affected by the event or policy ANS: B NAT: Analytic REF: TOP: Elasticity is a a measure of how much buyers and sellers respond to changes in market conditions b the study of how the allocation of resources affects economic well-being c the maximum amount that a buyer will pay for a good d the value of everything a seller must give up to produce a good ANS: A NAT: Analytic DIF: LOC: Elasticity DIF: LOC: Elasticity REF: TOP: 5-0 Elasticity MSC: Applicative A 10 percent increase in gasoline prices reduces gasoline consumption by about a percent after one year and 2.5 percent after five years b 2.5 percent after one year and percent after five years c 10 percent after one year and 20 percent after five years d percent after one year and percent after five years ANS: B NAT: Analytic DIF: LOC: Elasticity REF: TOP: 5-0 Elasticity MSC: Applicative Chapter /Elasticity and Its Application ❖ 40 Which of the following statements about the consumers’ responses to rising gasoline prices is correct? a About 10 percent of the long-run reduction in quantity demanded arises because people drive less and about 90 percent arises because they switch to more fuel-efficient cars b About 90 percent of the long-run reduction in quantity demanded arises because people drive less and about 10 percent arises because they switch to more fuel-efficient cars c About half of the long-run reduction in quantity demanded arises because people drive less and about half arises because they switch to more fuel-efficient cars d Because gasoline is a necessity, consumers not decrease their quantity demanded in either the short run or the long run ANS: C NAT: Analytic DIF: LOC: Elasticity REF: TOP: 5-0 Elasticity MSC: Applicative Sec01 - Elasticity and Its Application - The Elasticity of Demand MULTIPLE CHOICE The price elasticity of demand measures how much a quantity demanded responds to a change in price b quantity demanded responds to a change in income c price responds to a change in demand d demand responds to a change in supply ANS: A NAT: Analytic MSC: Definitional 5-1 Price elasticity of demand DIF: LOC: Elasticity REF: TOP: 5-1 Price elasticity of demand The price elasticity of demand for a good measures the willingness of a consumers to buy less of the good as price rises b consumers to avoid monopolistic markets in favor of competitive markets c firms to produce more of a good as price rises d firms to cater to the tastes of consumers ANS: A NAT: Analytic MSC: Interpretive REF: TOP: The price elasticity of demand measures a buyers’ responsiveness to a change in the price of a good b the extent to which demand increases as additional buyers enter the market c how much more of a good consumers will demand when incomes rise d the movement along a supply curve when there is a change in demand ANS: A NAT: Analytic MSC: Definitional DIF: LOC: Elasticity DIF: LOC: Elasticity REF: TOP: 5-1 Price elasticity of demand Which of the following statements about the price elasticity of demand is correct? a The price elasticity of demand for a good measures the willingness of buyers of the good to buy less of the good as its price increases b Price elasticity of demand reflects the many economic, psychological, and social forces that shape consumer tastes c Other things equal, if good x has close substitutes and good y does not have close substitutes, then the demand for good x will be more elastic than the demand for good y d All of the above are correct ANS: D NAT: Analytic MSC: Interpretive DIF: LOC: Elasticity REF: TOP: 5-1 Price elasticity of demand 41 ❖ Chapter /Elasticity and Its Application For a good that is a necessity, a quantity demanded tends to respond substantially to a change in price b demand tends to be inelastic c the law of demand does not apply d All of the above are correct ANS: B NAT: Analytic MSC: Interpretive 5-1 Price elasticity of demand DIF: LOC: Elasticity REF: TOP: 5-1 Price elasticity of demand DIF: LOC: Elasticity REF: TOP: 5-1 Price elasticity of demand DIF: LOC: Elasticity REF: TOP: 5-1 Price elasticity of demand If the price of milk rises, when is the price elasticity of demand likely to be the lowest? a immediately after the price increase b one month after the price increase c three months after the price increase d one year after the price increase ANS: A NAT: Analytic MSC: Applicative 11 REF: TOP: If the price of natural gas rises, when is the price elasticity of demand likely to be the highest? a immediately after the price increase b one month after the price increase c three months after the price increase d one year after the price increase ANS: D NAT: Analytic MSC: Applicative 10 DIF: LOC: Elasticity Which of the following is likely to have the most price inelastic demand? a white chocolate chip with macadamia nut cookies b Mrs Field’s chocolate chip cookies c milk chocolate chip cookies d cookies ANS: D NAT: Analytic MSC: Applicative 5-1 Price elasticity of demand Which of the following is likely to have the most price inelastic demand? a mint-flavored toothpaste b toothpaste c Colgate mint-flavored toothpaste d a generic mint-flavored toothpaste ANS: B NAT: Analytic MSC: Applicative REF: TOP: Goods with many close substitutes tend to have a more elastic demands b less elastic demands c price elasticities of demand that are unit elastic d income elasticities of demand that are negative ANS: A NAT: Analytic MSC: Interpretive DIF: LOC: Elasticity DIF: LOC: Elasticity REF: TOP: 5-1 Price elasticity of demand For a good that is a luxury, demand a tends to be inelastic b tends to be elastic c has unit elasticity d cannot be represented by a demand curve in the usual way 95 ❖ Chapter /Elasticity and Its Application ANS: A NAT: Analytic MSC: Analytical DIF: LOC: Elasticity REF: TOP: 5-2 Midpoint method | Price elasticity of supply Figure 5-13 Price 15 Supply 14 H 13 12 11 G 10 D C B A 25 34 50 75 100 125 150 175 200 225 250 275 300 325 350 375 400 425 450 475 500 525 550 575 Refer to Figure 5-13 Along which of these segments of the supply curve is supply least elastic? a between G and H b between C and D c between A and C d between A and B ANS: A NAT: Analytic MSC: Applicative 35 DIF: LOC: Elasticity REF: TOP: 5-2 Price elasticity of supply Refer to Figure 5-13 Along which of these segments of the supply curve is supply most elastic? a between A and B b between C and D c between D and H d between G and H ANS: A NAT: Analytic MSC: Applicative 36 Quantity DIF: LOC: Elasticity REF: TOP: 5-2 Price elasticity of supply Refer to Figure 5-13 Using the midpoint method, what is the price elasticity of supply between points A and B? a 2.33 b 1.0 c 0.43 d 0.1 ANS: A NAT: Analytic MSC: Analytical DIF: LOC: Elasticity REF: TOP: 5-2 Midpoint method | Price elasticity of supply Chapter /Elasticity and Its Application ❖ 96 37 Refer to Figure 5-13 Using the midpoint method, what is the price elasticity of supply between points B and C? a 1.67 b 1.19 c 0.84 d 0.61 ANS: B NAT: Analytic MSC: Analytical 38 DIF: LOC: Elasticity REF: TOP: 5-2 Midpoint method | Price elasticity of supply Refer to Figure 5-13 Using the midpoint method, what is the price elasticity of supply between points D and G? a 1.89 b 1.26 c 0.53 d 0.34 ANS: C NAT: Analytic MSC: Analytical DIF: LOC: Elasticity REF: TOP: 5-2 Midpoint method | Price elasticity of supply Figure 5-14 10 Price Supply 5 39 10 15 25 30 35 40 Quantity Refer to Figure 5-14 Using the midpoint method, what is the price elasticity of supply between $4 and $6? a 0.75 b 1.00 c 1.20 d 1.25 ANS: D NAT: Analytic MSC: Analytical 40 20 DIF: LOC: Elasticity REF: TOP: 5-2 Midpoint method | Price elasticity of supply Refer to Figure 5-14 Using the midpoint method, what is the price elasticity of supply between $6 and $8? a 0.86 b 1.00 c 1.17 d 1.25 ANS: C NAT: Analytic MSC: Analytical DIF: LOC: Elasticity REF: TOP: 5-2 Midpoint method | Price elasticity of supply 97 ❖ Chapter /Elasticity and Its Application Figure 5-15 Price Supply C B A 25 41 50 75 200 225 250 275 300 Quantity DIF: LOC: Elasticity REF: TOP: 5-2 Midpoint method | Price elasticity of supply Refer to Figure 5-15 Using the midpoint method, what is the price elasticity of supply between point B and point C? a 1.44 b 1.29 c 0.96 d 0.78 ANS: D NAT: Analytic MSC: Analytical 43 150 175 Refer to Figure 5-15 Using the midpoint method, what is the price elasticity of supply between point A and point B? a 0.58 b 0.71 c 1.06 d 1.4 ANS: B NAT: Analytic MSC: Analytical 42 100 125 DIF: LOC: Elasticity REF: TOP: 5-2 Midpoint method | Price elasticity of supply Refer to Figure 5-15 If, holding the supply curve fixed, there were an increase in demand that caused the equilibrium price to increase from $6 to $8, then sellers’ total revenue would a increase b decrease c remain unchanged d The effect on total revenue cannot be determined from the given information ANS: A NAT: Analytic MSC: Applicative DIF: LOC: Elasticity REF: TOP: 5-2 Total revenue | Price elasticity of supply Table 5-6 Price Quantity Supplied Supply Curve A $1.00 $2.00 500 600 Supply Curve B $1.00 $3.00 600 900 Supply Curve C $2.00 $5.00 400 700 Chapter /Elasticity and Its Application ❖ 98 44 Refer to Table 5-6 Which of the three supply curves represents the least elastic supply? a supply curve A b supply curve B c supply curve C d There is no difference in the elasticity of the three supply curves ANS: A NAT: Analytic MSC: Applicative 45 REF: TOP: 5-2 Midpoint method | Price elasticity of supply DIF: LOC: Elasticity REF: TOP: 5-2 Midpoint method | Price elasticity of supply DIF: LOC: Elasticity REF: TOP: 5-2 Midpoint method | Price elasticity of supply At a price of $1.20, a local coffee shop is willing to supply 100 cinnamon rolls per day At a price of $1.40, the coffee shop would be willing to supply 150 cinnamon rolls per day Using the midpoint method, the price elasticity of supply is a 0.15 b 0.375 c 2.5 d 2.60 ANS: D NAT: Analytic MSC: Analytical 49 DIF: LOC: Elasticity At a price of $1.00, a local coffee shop is willing to supply 100 cinnamon rolls per day At a price of $1.20, the coffee shop would be willing to supply 150 cinnamon rolls per day Using the midpoint method, the price elasticity of supply is a 0.45 b 0.90 c 1.11 d 2.20 ANS: D NAT: Analytic MSC: Analytical 48 5-2 Midpoint method | Price elasticity of supply Refer to Table 5-6 Along which of the supply curves does quantity supplied move proportionately more than the price? a along supply curve B only b along supply curves B and C c along all three supply curves d Quantity supplied moves proportionately more than the price along none of the three supply curves ANS: D NAT: Analytic MSC: Applicative 47 REF: TOP: Refer to Table 5-6 Which of the three supply curves represents the most elastic supply? a supply curve A b supply curve B c supply curve C d There is no difference in the elasticity of the three supply curves ANS: C NAT: Analytic MSC: Applicative 46 DIF: LOC: Elasticity DIF: LOC: Elasticity REF: TOP: 5-2 Midpoint method | Price elasticity of supply On a certain supply curve, one point is (quantity supplied = 200, price = $4.00) and another point is (quantity supplied = 250, price = $4.50) Using the midpoint method, the price elasticity of supply is about a 0.22 b 0.53 c 1.00 d 1.89 99 ❖ Chapter /Elasticity and Its Application ANS: D NAT: Analytic MSC: Analytical 50 REF: TOP: 5-2 Midpoint method | Price elasticity of supply DIF: LOC: Elasticity REF: TOP: 5-2 Midpoint method | Price elasticity of supply DIF: LOC: Elasticity REF: TOP: 5-2 Midpoint method | Price elasticity of supply Suppose that an increase in the price of carrots from $1.30 to $1.80 per pound increases the quantity of carrots that carrot farmers produce from 1.2 million pounds to 1.6 million pounds Using the midpoint method, what is the approximate value of the price elasticity of supply? a 0.67 b 0.89 c 1.00 d 1.13 ANS: B NAT: Analytic MSC: Analytical 54 DIF: LOC: Elasticity Holding all other factors constant and using the midpoint method, if a pencil manufacturer increases production from 40 to 50 boxes when price increases by 20 percent, then supply is a inelastic, since the price elasticity of supply is equal to 91 b inelastic, since the price elasticity of supply is equal to 1.1 c elastic, since the price elasticity of supply is equal to 0.91 d elastic, since the price elasticity of supply is equal to 1.1 ANS: D NAT: Analytic MSC: Analytical 53 5-2 Midpoint method | Price elasticity of supply Holding all other factors constant and using the midpoint method, if a pencil manufacturer increases production by 20 percent when the market price of pencils increases from $0.50 to $0.60, then supply is a inelastic, since the price elasticity of supply is equal to 91 b inelastic, since the price elasticity of supply is equal to 1.1 c elastic, since the price elasticity of supply is equal to 0.91 d elastic, since the price elasticity of supply is equal to 1.1 ANS: D NAT: Analytic MSC: Analytical 52 REF: TOP: On a certain supply curve, one point is (quantity supplied = 200, price = $2.00) and another point is (quantity supplied = 250, price = $2.50) Using the midpoint method, the price elasticity of supply is about a 0.2 b 0.5 c 1.0 d 2.5 ANS: C NAT: Analytic MSC: Analytical 51 DIF: LOC: Elasticity DIF: LOC: Elasticity REF: TOP: 5-2 Midpoint method | Price elasticity of supply An increase in the price of pure chocolate morsels from $2.25 to $2.45 causes suppliers of chocolate morsels to increase their quantity supplied from 125 bags per minute to 145 bags per minute Supply is a elastic, and the price elasticity of supply is 1.74 b elastic, and the price elasticity of supply is 0.57 c inelastic, and the price elasticity of supply is 1.74 d inelastic, and the price elasticity of supply is 0.57 ANS: A NAT: Analytic MSC: Analytical DIF: LOC: Elasticity REF: TOP: 5-2 Midpoint method | Price elasticity of supply Chapter /Elasticity and Its Application ❖ 100 55 A bakery would be willing to supply 500 bagels per day at a price of $0.50 each At a price of $0.80, the bakery would be willing to supply 1,100 bagels Using the midpoint method, the price elasticity of supply for bagels is a 0.62 b 0.77 c 1.24 d 1.63 ANS: D NAT: Analytic MSC: Analytical 56 DIF: LOC: Elasticity REF: TOP: 5-2 Midpoint method | Price elasticity of supply DIF: LOC: Elasticity REF: TOP: 5-2 Midpoint method | Price elasticity of supply In January the price of widgets was $1.00, and Wendy's Widgets produced 80 widgets In February the price of widgets was $1.50, and Wendy's Widgets produced 110 widgets In March the price of widgets was $2.00, and Wendy's Widgets produced 140 widgets The price elasticity of supply of Wendy's Widgets was a 0.79 when the price increased from $1.00 to $1.50 and 0.84 when the price increased from $1.50 to $2.00 b 1.27 when the price increased from $1.00 to $1.50 and 1.19 when the price increased from $1.50 to $2.00 c 0.79 when the price increased from $1.00 to $1.50 and 1.19 when the price increased from $1.50 to $2.00 d 1.27 when the price increased from $1.00 to $1.50 and 0.84 when the price increased from $1.50 to $2.00 ANS: A NAT: Analytic MSC: Analytical 59 5-2 Midpoint method | Price elasticity of supply In January the price of widgets was $2.00, and Wendy's Widgets produced 80 widgets In February the price of widgets was $2.50, and Wendy's Widgets produced 110 widgets In March the price of widgets was $3.00, and Wendy's Widgets produced 140 widgets The price elasticity of supply of Wendy's Widgets was a 0.70 when the price increased from $2.00 to $2.50 and 0.76 when the price increased from $2.50 to $3.00 b 0.88 when the price increased from $2.00 to $2.50 and 1.08 when the price increased from $2.50 to $3.00 c 1.42 when the price increased from $2.00 to $2.50 and 1.32 when the price increased from $2.50 to $3.00 d 1.50 when the price increased from $2.00 to $2.50 and 1.18 when the price increased from $2.50 to $3.00 ANS: C NAT: Analytic MSC: Analytical 58 REF: TOP: A bakery would be willing to supply 500 bagels per day at a price of $0.50 each At a price of $0.80, the bakery would be willing to supply 1,100 bagels Using the midpoint method, the price elasticity of supply for bagels is a 0.62, and supply is elastic b 0.62, and supply is inelastic c 1.63, and supply is elastic d 1.63, and supply is inelastic ANS: C NAT: Analytic MSC: Analytical 57 DIF: LOC: Elasticity DIF: LOC: Elasticity REF: TOP: 5-2 Midpoint method | Price elasticity of supply Which of the following statements is valid when the market supply curve is vertical? a Market quantity supplied does not change when the price changes b Supply is perfectly elastic c An increase in market demand will increase the equilibrium quantity d An increase in market demand will not increase the equilibrium price 101 ❖ Chapter /Elasticity and Its Application ANS: A NAT: Analytic MSC: Interpretive 60 5-2 Perfectly inelastic supply DIF: LOC: Elasticity REF: TOP: 5-2 Perfectly elastic supply DIF: LOC: Elasticity REF: TOP: 5-2 Perfectly elastic supply DIF: LOC: Elasticity REF: TOP: 5-2 Perfectly inelastic supply When supply is perfectly elastic, the value of the price elasticity of supply is a b c greater than and less than d infinity ANS: D NAT: Analytic MSC: Interpretive 65 REF: TOP: If the quantity supplied is the same regardless of price, then supply is a elastic b perfectly elastic c perfectly inelastic d inelastic ANS: C NAT: Analytic MSC: Definitional 64 DIF: LOC: Elasticity Which of the following statements is not valid when supply is perfectly elastic? a The elasticity of supply approaches infinity b The supply curve is horizontal c Very small changes in price lead to large changes in quantity supplied d The time period under consideration is more likely a short period rather than a long period ANS: D NAT: Analytic MSC: Interpretive 63 5-2 Perfectly inelastic supply Which of the following statements is valid when supply is perfectly elastic at a price of $4? a The elasticity of supply approaches infinity b The supply curve is vertical c At a price below $4, quantity supplied is infinite d At a price above $4, quantity supplied is zero ANS: A NAT: Analytic KEY: Interpretive 62 REF: TOP: Which of the following statements is not valid when the market supply curve is vertical? a Market quantity supplied does not change when the price changes b Supply is perfectly inelastic c An increase in market demand will increase the equilibrium quantity d An increase in market demand will increase the equilibrium price ANS: C NAT: Analytic MSC: Interpretive 61 DIF: LOC: Elasticity DIF: LOC: Elasticity REF: TOP: 5-2 Perfectly elastic supply Which of the following would be true as the price elasticity of supply approaches infinity? a Very small changes in price lead to very large changes in quantity supplied b Very large changes in price lead to very small changes in quantity supplied c Very small changes in price lead to no change in quantity supplied d Very large changes in price lead to no change in quantity supplied ANS: A NAT: Analytic MSC: Interpretive DIF: LOC: Elasticity REF: TOP: 5-2 Perfectly elastic supply Chapter /Elasticity and Its Application ❖ 102 Figure 5-16 Price S1 S2 S3 P1 Q1 66 Refer to Figure 5-16 Which supply curve represents perfectly inelastic supply? a S1 b S2 c S3 d None of the supply curves is perfectly inelastic ANS: A NAT: Analytic MSC: Interpretive 67 5-2 Perfectly inelastic supply DIF: LOC: Elasticity REF: TOP: 5-2 Perfectly elastic supply DIF: LOC: Elasticity REF: TOP: 5-2 Perfectly inelastic supply If the price elasticity of supply is zero, then a supply is more elastic than it is in any other case b the supply curve is horizontal c the quantity supplied is the same, regardless of price d a change in demand will cause a relatively small change in the equilibrium price ANS: C NAT: Analytic MSC: Interpretive 70 REF: TOP: If sellers not adjust their quantities supplied at all in response to a change in price, a advances in technology must be prevalent b the time period under consideration must be very long c supply is perfectly elastic d supply is perfectly inelastic ANS: D NAT: Analytic MSC: Interpretive 69 DIF: LOC: Elasticity Refer to Figure 5-16 Which supply curve is most likely relevant over a very long period of time? a S1 b S2 c S3 d All of the above are equally likely to be relevant over a very long period of time ANS: C NAT: Analytic MSC: Interpretive 68 Quantity DIF: LOC: Elasticity REF: TOP: 5-2 Perfectly inelastic supply If the price elasticity of supply for a good is equal to infinity, then a the supply curve is vertical b the supply curve is horizontal c the supply curve also has a slope equal to infinity d the quantity supplied is constant regardless of the price 103 ❖ Chapter /Elasticity and Its Application ANS: B NAT: Analytic MSC: Interpretive 71 DIF: LOC: Elasticity REF: TOP: 5-2 Perfectly elastic supply Which of the following is an illustration of the market for original paintings by deceased artist Vincent Van Gogh? a Price S D Quantity b Price D S Quantity c Price S D Quantity d Price D S Quantity a b c d A B C D ANS: C NAT: Analytic MSC: Applicative DIF: LOC: Elasticity REF: TOP: 5-2 Perfectly inelastic supply Chapter /Elasticity and Its Application ❖ 104 Sec03 - Elasticity and Its Application - Three Applications of Supply, Demand, and Elasticity MULTIPLE CHOICE Scenario 5-2 The supply of aged cheddar cheese is inelastic, and the supply of bread is elastic Both goods are considered to be normal goods by a majority of consumers Suppose that a large income tax increase decreases the demand for both goods by 10% Refer to Scenario 5-2 The equilibrium price will a increase in the aged cheddar cheese market and increase in the bread market b increase in the aged cheddar cheese market and decrease in the bread market c decrease in the aged cheddar cheese market and increase in the bread market d decrease in the aged cheddar cheese market and decrease in the bread market ANS: D DIF: REF: 5-3 NAT: Analytic LOC: Elasticity TOP: Equilibrium | Normal goods | Price elasticity of supply Refer to Scenario 5-2 The equilibrium quantity will a increase in the aged cheddar cheese market and increase in the bread market b increase in the aged cheddar cheese market and decrease in the bread market c decrease in the aged cheddar cheese market and increase in the bread market d decrease in the aged cheddar cheese market and decrease in the bread market ANS: D DIF: REF: 5-3 NAT: Analytic LOC: Elasticity TOP: Equilibrium | Normal goods | Price elasticity of supply DIF: LOC: Elasticity REF: TOP: 5-3 Equilibrium | Price elasticity of supply Refer to Scenario 5-2 The change in equilibrium quantity will be a greater in the aged cheddar cheese market than in the bread market b greater in the bread market than in the aged cheddar cheese market c the same in the aged cheddar cheese and bread markets d may be greater in either the aged cheddar cheese market or the bread market ANS: B NAT: Analytic MSC: Analytical MSC: Applicative Refer to Scenario 5-2 The change in equilibrium price will be a greater in the aged cheddar cheese market than in the bread market b greater in the bread market than in the aged cheddar cheese market c the same in the aged cheddar cheese and bread markets d may be greater in either the aged cheddar cheese market or the bread market ANS: A NAT: Analytic MSC: Analytical MSC: Applicative DIF: LOC: Elasticity REF: TOP: 5-3 Equilibrium | Price elasticity of supply Refer to Scenario 5-2 Total consumer spending on aged cheddar cheese will a increase, and total consumer spending on bread will increase b increase, and total consumer spending on bread will decrease c decrease, and total consumer spending on bread will increase d decrease, and total consumer spending on bread will decrease ANS: D NAT: Analytic MSC: Analytical DIF: LOC: Elasticity REF: TOP: 5-3 Equilibrium | Total consumer spending 105 ❖ Chapter /Elasticity and Its Application Scenario 5-3 Milk has an inelastic demand and beef has an elastic demand Suppose that a mysterious increase in bovine infertility decreases both the population of dairy cows and the population of beef cattle by 50 percent Refer to Scenario 5-3 The equilibrium price will a increase in the milk market and increase in the beef market b increase in the milk market and decrease in the beef market c decrease in the milk market and increase in the beef market d decrease in the milk market and decrease in the beef market ANS: A DIF: REF: 5-3 NAT: Analytic LOC: Elasticity TOP: Equilibrium | Productivity | Price elasticity of demand Refer to Scenario 5-3 The equilibrium quantity will a increase in the milk market and increase in the beef market b increase in the milk market and decrease in the beef market c decrease in the milk market and increase in the beef market d decrease in the milk market and decrease in the beef market ANS: D DIF: REF: 5-3 NAT: Analytic LOC: Elasticity TOP: Equilibrium | Productivity | Price elasticity of demand REF: TOP: 5-3 Equilibrium | Price elasticity of demand DIF: LOC: Elasticity REF: TOP: 5-3 Equilibrium | Price elasticity of demand Refer to Scenario 5-3 Total consumer spending on milk will a increase, and total consumer spending on beef will increase b increase, and total consumer spending on beef will decrease c decrease, and total consumer spending on beef will increase d decrease, and total consumer spending on beef will decrease ANS: NAT: TOP: MSC: 11 DIF: LOC: Elasticity Refer to Scenario 5-3 The change in equilibrium quantity will be a greater in the milk market than in the beef market b greater in the beef market than in the milk market c the same in the milk and beef markets d may be greater in either the milk market or the beef market ANS: B NAT: Analytic MSC: Analytical 10 MSC: Applicative Refer to Scenario 5-3 The change in equilibrium price will be a greater in the milk market than in the beef market b greater in the beef market than in the milk market c the same in the milk and beef markets d may be greater in either the milk market or the beef market ANS: A NAT: Analytic MSC: Analytical MSC: Applicative B DIF: REF: 5-3 Analytic LOC: Elasticity Equilibrium | Price elasticity of demand | Total consumer spending Analytical The discovery of a new hybrid wheat would increase the supply of wheat As a result, wheat farmers would realize an increase in total revenue if a the supply of wheat is elastic b the supply of wheat is inelastic c the demand for wheat is inelastic d the demand for wheat is elastic ANS: D NAT: Analytic MSC: Applicative DIF: LOC: Elasticity REF: TOP: 5-3 Supply | Price elasticity of demand | Total revenue Chapter /Elasticity and Its Application ❖ 106 12 Because the demand for wheat tends to be inelastic, the development of a new, more productive hybrid wheat would tend to a increase the total revenue of wheat farmers b decrease the total revenue of wheat farmers c decrease the demand for wheat d decrease the supply of wheat ANS: B NAT: Analytic MSC: Applicative 13 REF: TOP: 5-3 Supply | Price elasticity of demand | Total revenue DIF: LOC: Elasticity REF: TOP: 5-3 Price elasticity of demand | Total revenue DIF: LOC: Elasticity REF: TOP: 5-3 Technology | Inelastic demand How did the farm population in the United States change between 1950 and 2008? a It dropped from 10 million to fewer than million people b It dropped from 20 million to fewer than million people c It dropped from 30 million to just over million people d It increased from 10 million to almost 13 million people ANS: A NAT: Analytic 17 DIF: LOC: Elasticity There are fewer farmers in the United States today than 200 years ago because of a increases in farm technology b increased government regulations in farming c an elastic demand for food d environmental programs designed to reduce soil erosion ANS: A NAT: Analytic MSC: Applicative 16 5-3 Supply | Price elasticity of demand | Total revenue If corn farmers know that the demand for corn is inelastic, and they want to increase their total revenue, they should all a plant more corn so that they would be able to sell more each year b increase spending on fertilizer in an attempt to produce more corn on the acres they farm c reduce the number of acres they plant in corn d contribute to a fund that promotes technological advances in corn production ANS: C NAT: Analytic MSC: Applicative 15 REF: TOP: Knowing that the demand for wheat is inelastic, if all farmers voluntarily did not plant wheat on 10 percent of their land, then a consumers of wheat would buy more wheat b wheat farmers would suffer a reduction in their total revenue c wheat farmers would experience an increase in their total revenue d the demand for wheat would decrease ANS: C NAT: Analytic MSC: Applicative 14 DIF: LOC: Elasticity DIF: LOC: Elasticity REF: TOP: 5-3 Population MSC: Definitional Between 1950 and 2008 there was a a 20 percent drop in the number of farmers, but farm output more than tripled b 30 percent drop in the number of farmers, but farm output more than tripled c 50 percent drop in the number of farmers, but farm output more than doubled d 70 percent drop in the number of farmers, but farm output more than doubled ANS: D NAT: Analytic MSC: Definitional DIF: LOC: Elasticity REF: TOP: 5-3 Population | Output 107 ❖ Chapter /Elasticity and Its Application 18 An advance in farm technology that results in an increased market supply is a good for farmers because it raises prices for their products but bad for consumers because it raises prices consumers pay for food b bad for farmers because total revenue will fall but good for consumers because prices for food will fall c good for farmers because it raises prices for their products and also good for consumers because more output is available for consumption d bad for farmers because total revenue will fall and bad for consumers because farmers will raise the price of food to increase their total revenue ANS: B NAT: Analytic MSC: Applicative 19 DIF: LOC: Elasticity REF: TOP: 5-3 Total revenue DIF: LOC: Elasticity REF: TOP: 5-3 OPEC DIF: LOC: Elasticity REF: TOP: 5-3 OPEC MSC: Applicative In the market for oil in the short run, demand a and supply are both elastic b and supply are both inelastic c is elastic and supply is inelastic d is inelastic and supply is elastic ANS: B DIF: REF: 5-3 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand | Price elasticity of supply 23 MSC: Applicative OPEC successfully raised the world price of oil in the 1970s and early 1980s, primarily due to a an inelastic demand for oil and a reduction in the amount of oil supplied b a reduction in the amount of oil supplied and a world-wide oil embargo c a world-wide oil embargo and an elastic demand for oil d a reduction in the amount of oil supplied and an elastic demand for oil ANS: A NAT: Analytic 22 5-3 Technology | Supply Which of the following was not a reason OPEC failed to keep the price of oil high? a Over the long run, producers of oil outside of OPEC responded to higher prices by increasing oil exploration and by building new extraction capacity b Consumers responded to higher prices with greater conservation c Consumers replaced old inefficient cars with newer efficient ones d The agreement OPEC members signed allowed each country to produce as much oil as each wanted ANS: D NAT: Analytic 21 REF: TOP: Farm programs that pay farmers not to plant crops on all their land a hurt farmers by lowering their total revenue and hurt consumers by causing shortages of some food items b help farmers by cutting costs, which helps consumers by lowering food prices c help farmers by increasing total revenue in the market but hurt consumers by raising prices d help farmers directly since they receive government payments but have no real effects on consumers ANS: C NAT: Analytic MSC: Applicative 20 DIF: LOC: Elasticity MSC: Interpretive A decrease in supply will cause the largest increase in price when a both supply and demand are inelastic b both supply and demand are elastic c demand is elastic and supply is inelastic d demand is inelastic and supply is elastic ANS: A DIF: REF: 5-3 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand | Price elasticity of supply MSC: Analytical Chapter /Elasticity and Its Application ❖ 108 24 A decrease in supply will cause the smallest increase in price when a both supply and demand are inelastic b demand is elastic and supply is inelastic c both supply and demand are elastic d demand is inelastic and supply is elastic ANS: C DIF: REF: 5-3 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand | Price elasticity of supply 25 Which of the following statements does not help to explain why government drug interdiction increases drugrelated crime? a The demand for illegal drugs is inelastic b Interdiction results in drug addicts having a greater need for quick cash c Interdiction results in an increase in the amount of money needed to buy the same amount of drugs d Government drug programs are more lenient now with drug offenders than they were in the 1980s ANS: D NAT: Analytic MSC: Applicative 26 5-3 Government | Price elasticity of demand DIF: LOC: Elasticity REF: TOP: 5-3 Government | Price elasticity of demand DIF: LOC: Elasticity REF: TOP: 5-3 Government | Demand | Supply Given the market for illegal drugs, when the government is successful in reducing the flow of drugs into the United States, a supply decreases, demand is unaffected, and price increases b demand decreases, supply is unaffected, and price decreases c demand and supply both decrease, leaving price essentially unchanged d supply decreases, demand increases, and price increases substantially as a result ANS: A NAT: Analytic MSC: Applicative 29 REF: TOP: Which of the following statements is not correct concerning government attempts to reduce the flow of illegal drugs into the country? a Drug interdiction raises prices and total revenue in the drug market b Drug interdiction can increase drug-related crime c Drug interdiction shifts the demand curve for drugs to the left d Drug interdiction shifts the supply curve of drugs to the left ANS: C NAT: Analytic MSC: Applicative 28 DIF: LOC: Elasticity Which of the following statements helps to explain why government drug interdiction increases drug-related crime? a The direct impact is on buyers, not sellers b Successful drug interdiction policies reduce the demand for illegal drugs c Drug addicts will have an even greater need for quick cash to support their habits d In the short run, both equilibrium quantities and prices will fall in the markets for illegal drugs ANS: C NAT: Analytic MSC: Applicative 27 MSC: Analytical DIF: LOC: Elasticity REF: TOP: 5-3 Government | Demand | Supply If marijuana were legalized, it is likely that there would be an increase in the supply of marijuana Advocates of marijuana legalization argue that this would significantly reduce the amount of revenue going to the criminal organizations that currently supply marijuana These advocates believe that the a supply for marijuana is elastic b demand for marijuana is elastic c supply for marijuana is inelastic d demand for marijuana is inelastic ANS: D NAT: Analytic MSC: Applicative DIF: LOC: Elasticity REF: TOP: 5-3 Price elasticity of demand | Total revenue 109 ❖ Chapter /Elasticity and Its Application 30 Under which of the following conditions would the interdiction of illegal drugs result in a decrease in the quantity of drugs sold and in a decrease in total spending on illegal drugs by drug users? a The interdiction has the effect of shifting the demand curve for illegal drugs to the right b The price elasticity of demand for illegal drugs is 1.3 c The price elasticity of supply for illegal drugs is 0.8 d As a result of the interdiction, the price of illegal drugs increases by 20 percent and the quantity of illegal drugs sold decreases by 16 percent ANS: B NAT: Analytic MSC: Applicative DIF: LOC: Elasticity REF: TOP: 5-3 Price elasticity of demand | Total revenue Scenario 5-4 Suppose the government is concerned about firms in the United States importing illegal caviar As a result, the government increases border patrols to catch illegal shipments U.S Customs agents perform DNA testing on the caviar to determine if it comes from endangered species of fish If so, the government destroys the caviar 31 Refer to Scenario 5-4 What would we expect to observe in the caviar market? a Equilibrium prices and quantities will increase b Equilibrium prices will increase by more if the demand for caviar is elastic than if demand is inelastic c Total revenues to caviar firms will increase if the demand for caviar is inelastic d All of the above are correct ANS: C NAT: Analytic MSC: Applicative DIF: LOC: Elasticity REF: TOP: 5-3 Price elasticity of demand | Total revenue ... LOC: Elasticity REF: TOP: 5- 1 Total revenue | Price elasticity of demand Chapter /Elasticity and Its Application ❖ 78 Figure 5- 11 Price 55 50 45 40 35 30 25 20 15 10 Demand 50 100 150 200 250 300... of demand between $8 and $12? a 0 .56 b 0. 75 c 1.33 d 1.80 53 ❖ Chapter /Elasticity and Its Application ANS: A NAT: Analytic MSC: Analytical 72 5- 1 Income elasticity of demand DIF: LOC: Elasticity. .. TOP: 5- 1 Elastic demand Chapter /Elasticity and Its Application ❖ 54 ANS: D NAT: Analytic MSC: Definitional 78 5- 1 Elastic demand DIF: LOC: Elasticity REF: TOP: 5- 1 Inelastic demand DIF: LOC: Elasticity