Chapter 3 : ELASTICITY AND ITS APPLICATION PRINCIPLES OF MICROECONOMICS

Chapter 3 : ELASTICITY AND ITS APPLICATION PRINCIPLES OF MICROECONOMICS of Microeconomics Seventh Edition 7th N.Greogory Mankiw Business Administration (Faculty of Business Administration) Exercises for practice. Bài tập môn Kinh tế Vi mô

PRINCIPLES OF MICROECONOMICS INSTRUCTOR: NGUYEN VIET HOA (0378418749) CHAPTER 3: ELASTICITY AND ITS APPLICATION PART 1: TRUE OR FALSE, EXPLAIN? If an increase in the price of pencils from $0.1 to $0.2 reduces the quantity demanded from 1000 pencils to 500 pencils, then the demand for pencils is perfectly inelastic All points in a linear demand curve has the same value of price elasticity of demand (point elasticity) but different value of slope Price elasticity of demand at the intersection of demand curve and horizontal axis is equal to price elasticity of demand at the intersection of demand curve and vertical axis When demand is perfectly elastic, total revenue is maximum If demand for a good is inelastic, a rise in its price will result in a decline in total revenue If a good has many substitutes, an increase in its price will result in a rise in total revenue An advance in technology which shifts the market supply curve to the right always raise total revenue received by producers If 10% increase in good A’s price leads to 10% increase in total revenue, demand for good A is unitary-elastic When moving along a linear demand curve from the left to the right, total revenue initially decreases and then increases 10 Considering two demand curves that parallel with each other, at the same price, the closer to the origin the demand curve is, the more price elastic it is 11 An increase in Iphone’s price makes the demand curve of Samsung (D1) shift to the right to (D2) and this (D2) is more elastic than (D1) at any quantity level (in absolute value) 12 If government imposes a binding price floor and does not buy all the surplus amount then the absolute value of price elasticity of demand (point elasticity) will decrease in comparison with the initial equibrium status 13 When there is a surplus in the market, sellers who sell the goods of which demand are relatively elastic must reduce their price slightly so as to make it come back to the equilibrium price level 14 When there is a shortage in the market, sellers who sell the goods of which demand are inelastic must raise their price significantly so as to return to the equilibrium price level 15 The demand for milk should be more elastic than the demand for TH True Milk 16 The demand for gasoline over weeks is more elastic than that over years 17 The demand for laptop over months is less elastic than that over years 18 If cross-price elasticity between good A and B is negative, an increase in price of good A will lead to a rightward shift in the demand curve of good B viethoa.k52@ftu.edu.vn PRINCIPLES OF MICROECONOMICS INSTRUCTOR: NGUYEN VIET HOA (0378418749) 19 If the income elasticity of demand for a bus ticket is -2, then it is an inferior good 20 If percent increase in consumer’s income produces percent decrease in the quantity demanded of good X, the coefficient of income elasticity of demand is negative and therefore, X is a normal good 21 If percent increase in consumer’s income produces percent increase in the quantity demanded of good X, the coefficient of income elasticity of demand is positive and therefore, X is an inferior good 22 Price elasticity of demand for good X is -0,8 Cross-price elasticity of demand between good X and Y is 1.5 If the price of good X and Y both rise by 10 percent, quantity demanded of good X will increase by 23 percent 23 Price elasticity of demand for good X is -1,2 Cross-price elasticity of demand between good X and Y is 1.5 If the price of good X and Y both rise by 10 percent, quantity demanded of good X will increase by percent 24 All the supply curves going through the origin have constant price elasticity of supply 25 At the market equilibrium point, the absolute value of price elasticity of demand is always equal to price elasticity of supply 26 Per-unit tax imposed on the producer always makes that producer bears a larger part in total tax amount in comparison with consumer’s part 27 Per-unit tax imposed on the seller when the absolute value of price elasticity of demand is greater than that of supply will make buyer suffer a larger tax burden 28 If demand is less elastic than supply, when government imposes a tax per unit on sellers, buyers will suffer a larger tax burden 29 When government imposes a tax per unit on producer and demand is perfectly inelastic, producer will suffer all the tax incidence 30 Per-unit tax imposed on the producer of good which demand is perfectly elastic will make consumer bear all the tax incidence 31 If supply is less elastic than demand, when government imposes a tax of 5.000 VND/unit on producers, the market price will increase by 5.000 VND 32 If supply is more elastic than demand, when government imposes a tax of 5.000 VND/unit on producers, the market price will increase by less than 2.500 VND 33 If demand is perfectly inelastic, when the government imposes a tax of 5$/unit on the seller, the market price will remain unchange 34 If demand is perfectly elastic, when the government imposes a tax per unit on seller, the market price will increase by the same amount as tax viethoa.k52@ftu.edu.vn PRINCIPLES OF MICROECONOMICS INSTRUCTOR: NGUYEN VIET HOA (0378418749) PART 2: MULTIPLE CHOICE QUESTIONS The price elasticity of demand is defined as A the percentage change in the quantity demanded divided by the percentage change in income B the percentage change in income divided by the percentage change in the quantity demanded C the percentage change in the quantity demanded of a good divided by the percentage change in the price of that good D the percentage change in price of a good divided by the percentage change in the quantity demanded of that good If a small percentage increase in the price of a good greatly reduces the quantity demanded for that good, the demand for that good is A income inelastic C price elastic B price inelastic D unit price elastic In general, a flatter demand curve is more likely to be A price elastic C price inelastic B unit price elastic D none of the above Which of the following would cause a demand curve for a good to be price inelastic? A The good is a luxury B There are a great number of substitutes for the good C The good is a necessity D The good is an inferior good The demand for which of the following is likely to be the most price inelastic? A Transportation C bus tickets B taxi rides D airline tickets If demand curve is linear (a straight line), then price elasticity of demand is A elastic in the upper portion and inelastic in the lower portion B inelastic in the upper portion and elastic in the lower portion C inelastic throughout D constant along the demand curve If the slope of a demand curve is constant, then the price elasticity of demand for the good will A be constant B become more elastic as price increases viethoa.k52@ftu.edu.vn PRINCIPLES OF MICROECONOMICS INSTRUCTOR: NGUYEN VIET HOA (0378418749) C become more elastic as price decreases D There is not enough information to conclude If demand for a good is perfectly inelastic, then the demand curve will be A a horizontal line B a vertical line C a straight line with a constant negative slope D flatter and flatter as the price of the good falls A perfectly elastic demand is represented graphically by a A relatively steep demand curve B relatively flat demand curve C vertical demand curve D horizontal demand curve 10 A decrease in supply (shift to the left) will increase total revenue in that market if A demand is price inelastic B supply is price elastic C supply is price inelastic D demand is price elastic 11 If an increase in the price of a good has no impact on the total revenue in that market, demand must be A price inelastic B unit price elastic C price elastic D All of the above 12 In which of the following instances will total revenue decline? A price rises and supply is elastic B price falls and demand is elastic C price rises and demand is inelastic D price rises and demand is elastic 13 Technological improvements in agriculture that shift the supply of agricultural commodities to the right tend to A increase total revenue to farmers as a whole because the demand for food is elastic B increase total revenue to farmers as a whole because the demand for food is inelastic C reduce total revenue to farmers as a whole because the demand for food is elastic D reduce total revenue to farmers as a whole because the demand for food is inelastic viethoa.k52@ftu.edu.vn PRINCIPLES OF MICROECONOMICS INSTRUCTOR: NGUYEN VIET HOA (0378418749) 14 If the demand for farm products is price inelastic, a good harvest will cause farm revenues to A increase B decrease C be unchanged D either increase or decrease, depending on what happens to supply 15 Assume that the demand for wheat is inelastic and that the momentary supply of wheat is perfectly inelastic Then, a poor harvest will result in which of the following? A an increase in wheat farmers' revenue B an increase in the demand for wheat because it is in short supply C a fall in the price of wheat D an increase in the momentary supply of wheat 16 When the supply curve of corn shifts leftward, farmers' revenue because _ A decreases; supply is elastic B increases; supply is inelastic C decreases; demand is elastic D increases; demand is inelastic 17 What effect will an increase in the price have on total revenue if demand is elastic? A Total revenue will increase B Total revenue will decrease C Total revenue will first decrease and then increase D Total revenue will remain unchanged 18 When the percentage change in price is greater than the resulting percentage change in quantity demanded A a decrease in price will increase total revenue B demand may be either elastic or inelastic C an increase in price will increase total revenue D demand is elastic 19 The price elasticity of demand tends to be more elastic A at points further up and to the left along the demand curve B at points further down and to the right along the demand curve C when the demand curve becomes steeper D when the demand curve is vertical 20 If consumers think that there are very few substitutes for a good, then viethoa.k52@ftu.edu.vn PRINCIPLES OF MICROECONOMICS INSTRUCTOR: NGUYEN VIET HOA (0378418749) A supply would tend to be price elastic B demand would tend to be price inelastic C demand would tend to be price elastic D supply would tend to be price inelastic 21 A good will tend to have an inelastic demand if A the good has many close substitutes B the good is a luxury C the market is defined very broadly D the time horizon is long 22 The elasticity of demand for a product is likely to be greater A if the product is a necessity, rather than a luxury good B the greater the amount of time over which buyers adjust to a price change C the smaller the proportion of one's income spent on the product D the smaller the number of substitute products available 23 A firm can sell more or less output at a constant price Demand is thus A perfectly inelastic C relatively inelastic B perfectly elastic D relatively elastic 24 Ceteris paribus, the fewer substitutes there are for a good the more the demand for the good, and the longer period of time people have to adjust to a price change of a non-durable good, the more the demand is A elastic; elastic B elastic; inelastic C inelastic; elastic D inelastic; inelastic 25 The Illinois Central Railroad once asked the Illinois Commerce Commission for permission to increase its commuter rates by 20% The railroad argued that declining revenues made this rate increase essential Opponents of the rate increase contended that the railroad's revenues would fall because of the rate hike It can be concluded that A both groups felt that the demand was elastic but for different reasons B both groups felt that the demand was inelastic but for different reasons C the railroad felt that the demand for passenger service was inelastic and opponents of the rate increase felt it was elastic D the railroad felt that the demand for passenger service was elastic and opponents of the rate increase felt it was inelastic viethoa.k52@ftu.edu.vn PRINCIPLES OF MICROECONOMICS INSTRUCTOR: NGUYEN VIET HOA (0378418749) 26 Which of the following statements is not correct? A If the relative change in price is greater than the relative change in the quantity demanded associated with it, demand is inelastic B In the range of prices in which demand is elastic, total revenue will diminish as price decreases C Total revenue will not change if price varies within a range where the elasticity coefficient is unity D Demand tends to be elastic at high prices and inelastic at low prices 27 If the price elasticity of demand for a good is -1.5, then a 5% decrease in the price of the good will cause a A 7.5% increase in the quantity demanded B 7.5% decrease in the quantity demanded C 3.33% increase in the quantity demanded D 3.33% decrease in the quantity demanded 28 Suppose you produce tie-dyed t-shirts You notice that when you charge $10 per shirt, you sell 200 shirts Also, when you raise the price to $12, you sell 150 shirts As the price goes up from $10 to $12, your total revenue , therefore the demand for tiedyed t-shirts must be A increases; elastic C decreases; elastic B increases; inelastic D decreases; inelastic 29 Suppose that at a price of €30 per month, there are 30,000 subscribers to cable television in Small Town If Small Town Cablevision raises its price to €40 per month, the number of subscribers will fall to 20,000 Using the midpoint method for calculating the elasticity, what is the price elasticity of demand for cable TV in Small Town? A -1.4 C -0.75 B -0.66 D -2.0 30 If a firm needs to decrease its total revenue, the firm should the price if the demand for its product is A raise, inelastic C drop, elastic B raise, elastic D drop, unit elastic 31 Suppose that General Cars increases the price of its Cadiclap model from $13,500 to $16,500 As a result of this, the quantity demanded of the Cadiclap model decreases from 600,000 to 400,000 per year Find the price elasticity of demand of the Cadiclap using the mid-point method viethoa.k52@ftu.edu.vn PRINCIPLES OF MICROECONOMICS INSTRUCTOR: NGUYEN VIET HOA (0378418749) A -3.0 C -2.0 B -0.5 D -0.3 32 Suppose that consumers' incomes rise by 3% and this causes demand for a good to increase by 4.5% What is the income elasticity of demand? A 1.50 C -1.50 B 0.67 D -0.67 33 Suppose that a good has an income elasticity of demand of -2.0 This means that the good is A Normal good C A substitute B Inferior good D A complement 34 The price of good A increases from $4.50 to $5.50 This causes the quantity demanded of good B to increase from 900 to 1100 units per month Find the cross price elasticity of demand using the mid-point method A -1.0 C +1.0 B +2.0 D -2.0 35 Suppose that two goods have a cross-price elasticity of demand of -0.8 This means that these goods are A Normal C substitutes B Inferior D complements 36 If the income elasticity of demand for a good is negative, it must be A an elastic good C a normal good B an inferior good D a luxury good 37 If the cross-price elasticity between two goods is negative, they are likely to be A substitutes C necessities B complements D luxuries 38 If the income elasticity of demand for cereal is -.25 and the income elasticity of demand for peaches is 1.5 then A cereal and peaches are substitutes B cereal and peaches are complements C cereal is a normal good and peaches are an inferior good D cereal is an inferior good and peaches are normal goods 39 If a supply curve for a good is price elastic, then A the quantity supplied is sensitive to changes in the price of that good B the quantity demanded is insensitive to changes in the price of that good viethoa.k52@ftu.edu.vn PRINCIPLES OF MICROECONOMICS INSTRUCTOR: NGUYEN VIET HOA (0378418749) C the quantity demanded is sensitive to changes in the price of that good D the quantity supplied is insensitive to changes in the price of that good 40 In general, a steeper supply curve is more likely to be A price elastic C price inelastic B unit price elastic D none of the above 41 If a fisherman must sell all of his daily catch before it spoils for whatever price he is offered, once the fish are caught the fisherman's price elasticity of supply for fresh fish is A zero B infinite C one D unable to be determined from this information 42 The price elasticity of supply measures how A easily labor and capital can be substituted for one another in the production process B responsive the quantity supplied of X is to changes in the price of X C responsive the quantity supplied of Y is to changes in the price of X D responsive quantity supplied is to a change in incomes 43 If supply is price inelastic, the value of the price elasticity of supply must be A infinite B zero C less than D greater than 44 The main determinant of elasticity of supply is the A number of close substitutes for the product available to consumers B amount of time the producer has to adjust inputs in response to a price change C urgency of consumer wants for the product D number of uses for the product 45 If the supply of product X is perfectly elastic, an increase in its demand will raise A equilibrium quantity but reduce equilibrium price B equilibrium quantity but equilibrium price will be unchanged C equilibrium price but reduce equilibrium quantity D equilibrium price but equilibrium quantity will be unchanged 46 Suppose that a 20% increase in the price of normal good Y causes a 10% decline in the quantity demanded of normal good X The coefficient of cross elasticity of demand is viethoa.k52@ftu.edu.vn PRINCIPLES OF MICROECONOMICS INSTRUCTOR: NGUYEN VIET HOA (0378418749) A negative and therefore these goods are substitutes B negative and therefore these goods are complements C positive and therefore these goods are substitutes D positive and therefore these goods are complements 47 The larger the positive cross-price elasticity coefficient of demand between products X and Y, the A stronger their complementariness B greater their substitutability C smaller the price elasticity of demand for both products D the less sensitive purchases of each are to increases in income 48 Which of the following statements is not correct? A The larger an item is in one's budget, the greater the price elasticity of demand B The price elasticity of demand is greater for necessities than it is for luxuries C The larger the number of close substitutes available, the greater will be the price elasticity of demand for a particular product D The price elasticity of demand is greater the longer the time period under consideration in terms of non-durable goods 49 Which of the following elasticities represents the movement along demand curve? A Cross-price elasticity of demand B Income elasticity of demand C Price elasticity of demand D Price elasticity of supply 50 The surplus caused by a binding price floor will be greatest if A demand is inelastic and supply is elastic B supply is inelastic and demand is elastic C both supply and demand are elastic D both supply and demand are inelastic 51 Assume the demand for a product is perfectly inelastic If government establishes a price floor that is $2 above the equilibrium price, the resulting A shortage will be greater the more elastic the supply B shortage will be greater the less elastic the supply C surplus will be greater the more elastic the supply D surplus will be greater the less elastic the supply 52 Other things equal, the shortage associated with a price ceiling will be greater the viethoa.k52@ftu.edu.vn 10 PRINCIPLES OF MICROECONOMICS INSTRUCTOR: NGUYEN VIET HOA (0378418749) A smaller the elasticity of both demand and supply B greater the elasticity of both demand and supply C greater the elasticity of supply and the smaller the elasticity of demand D greater the elasticity of demand and the smaller the elasticity of supply 53 Which of the following statements about the burden of a tax is correct? A The tax burden generated from a tax placed on a good consumers perceive to be a necessity will fall most heavily on the sellers of the good B The burden of a tax falls on the side of the market (buyers or sellers) from which it is collected C The distribution of the burden of a tax is determined by the relative elasticities of supply and demand and is not determined by legislation D The tax burden falls most heavily on the side of the market (buyers or sellers) that is most willing to leave the market when price movements are unfavourable to them 54 A tax is imposed on the sale of a product As long as neither the supply nor the demand is perfectly elastic or inelastic, A the price paid by the consumer will increase by more than the amount of the tax B the price paid by the consumer will increase by less than the amount of the tax C there will be no change in the price paid by the consumer D the price paid by the consumer will increase by the full amount of the tax 55 The tax incidence is determined by the A federal government in all cases B greed of the seller C level of government which imposes the tax D price elasticities of supply and demand 56 A tax placed on a good that is a necessity for consumers will likely generate a tax burden that A falls more heavily on sellers B falls entirely on sellers C falls more heavily on buyers D is evenly distributed between buyers and sellers 57 The burden of a tax falls more heavily on the buyers in a market when A both supply and demand are inelastic B demand is elastic and supply is inelastic C both supply and demand are elastic viethoa.k52@ftu.edu.vn 11 PRINCIPLES OF MICROECONOMICS INSTRUCTOR: NGUYEN VIET HOA (0378418749) D demand is inelastic and supply is elastic 58 The burden of a tax falls more heavily on the sellers in a market when A both supply and demand are elastic B both supply and demand are inelastic C demand is inelastic and supply is elastic D demand is elastic and supply is inelastic 59 Which of the following leads to the buyers paying all of a tax? A The demand is perfectly elastic B The supply is unit elastic C The demand is perfectly inelastic D The supply is perfectly inelastic 60 Which of the following leads to the producers paying all of a tax? A The supply is perfectly inelastic B The demand is unit elastic C The supply is perfectly elastic D The demand is perfectly inelastic 61 The amount of a tax paid by the buyer will be larger A the more inelastic are both the supply and demand B the more elastic are both the supply and demand C the more inelastic the demand and the more elastic the supply D the more elastic the demand and the more inelastic the supply 62 If a tax is imposed on a good and the incidence of the tax ends up falling more heavily on the sellers than on the buyers, we can tell that A demand is more elastic than supply for that good B demand is less elastic than supply for that good C the tax was imposed on the buyers of the good D the tax was imposed on the sellers of the good 63 If a tax is imposed on a good and the incidence of the tax ends up falling more heavily on the buyers than on the sellers, we can tell that A demand is more elastic than supply for that good B demand is less elastic than supply for that good C the tax was imposed on the buyers of the good D the tax was imposed on the sellers of the good viethoa.k52@ftu.edu.vn 12 ... 10 PRINCIPLES OF MICROECONOMICS INSTRUCTOR: NGUYEN VIET HOA ( 037 8418749) A smaller the elasticity of both demand and supply B greater the elasticity of both demand and supply C greater the elasticity. .. elasticity of supply and the smaller the elasticity of demand D greater the elasticity of demand and the smaller the elasticity of supply 53 Which of the following statements about the burden of a... by 3% and this causes demand for a good to increase by 4.5% What is the income elasticity of demand? A 1.50 C -1.50 B 0.67 D -0.67 33 Suppose that a good has an income elasticity of demand of