Introductory Microeconomics_ECON1010

Practice 4

A. Multiple choice

1. 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.

2. 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. do 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.

3. Which of the following statements about the price elasticity of demand is correct?
a. The price elasticity of demand for a good measure 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.

4. If the price of walnuts rises, many people would switch from consuming walnuts to consuming
pecans. But if the price of salt rises, people would have difficulty purchasing something to use in its
place. These examples illustrate the importance of
a. the availability of close substitutes in determining the price elasticity of demand.
b. a necessity versus a luxury in determining the price elasticity of demand.
c. the definition of a market in determining the price elasticity of demand.
d. the time horizon in determining the price elasticity of demand.

5. Suppose that Juan Carlos is filling out a survey that he received in the mail. The survey asks him
what he would do if the price of his favorite toothpaste increased. Juan Carlos reports that he would
switch to a different brand. The survey asks what he would do if the price of all toothpastes
increased. Juan Carlos reports that he must use toothpaste, so he would have to adjust his spending
elsewhere. These examples illustrate the importance of
a. changes in total revenue in determining the price elasticity of demand.
b. a necessity versus a luxury in determining the price elasticity of demand.
c. the definition of a market in determining the price elasticity of demand.
d. the time horizon in determining the price elasticity of demand.

6. When the price of candy bars is $1.00, the quantity demanded is 500 per day. When the price falls
to $0.80, the quantity demanded increases to 600. Given this information and using the midpoint
method, we know that the demand for candy bars is
a. inelastic.
b. elastic.
c. unit elastic.
d. perfectly inelastic.

7. Using the midpoint method, the price elasticity of demand for a good is computed to be
approximately 0.75. Which of the following events is consistent with a 10 percent decrease in the
quantity of the good demanded?
a. a 7.5 increase in the price of the good
b. a 13.33 percent increase in the price of the good
c. an increase in the price of the good from $7.50 to $10
d. an increase in the price of the good from $10 to $17.50

8. When the price of a good is $5, the quantity demanded is 120 units per month; when the price is
$7, the quantity demanded is 100 units per month. Using the midpoint method, the price elasticity of
demand is about
a. 0.55.
b. 1.83.
c. 2.
d. 10.

8. Suppose that 50 ice cream cones are demanded at a particular price. If the price of ice cream cones
rises from that price by 4 percent, the number of ice cream cones demanded falls to 46. Using the
midpoint approach to calculate the price elasticity of demand, it follows that the
a. demand for ice cream cones in this price range is elastic.
b. demand for ice cream cones in this price range is inelastic.
c. demand for ice cream cones in this price range is unit elastic.
d. price elasticity of demand for ice cream cones in this price range is 0.

2
9. If a 20% increase in price for a good result in a 15% decrease in quantity demanded, the price
elasticity of demand is
a. 0.75.
b. 1.25.
c. 1.33.
d. 1.60.

10. If the price elasticity of demand for a good is 1.4, then a 14 percent increase in the quantity
demanded must be the result of
a. a 0.1 percent decrease in the price.
b. a 1 percent decrease in the price.
c. a 10 percent decrease in the price.
d. a 19.6 percent decrease in the price.

11. When demand is inelastic, the price elasticity of demand is

a. less than 1, and price and total revenue will move in the same direction.
b. less than 1, and price and total revenue will move in opposite directions.
c. greater than 1, and price and total revenue will move in the same direction.
d. greater than 1, and price and total revenue will move in opposite directions.

12. When demand is inelastic, a decrease in price will cause

a. an increase in total revenue.
b. a decrease in total revenue.
c. no change in total revenue but an increase in quantity demanded.
d. no change in total revenue but a decrease in quantity demanded.

13. In which of the following situations will total revenue increase?

a. Price elasticity of demand is 1.2, and the price of the good decreases.
b. Price elasticity of demand is 0.5, and the price of the good increases.
c. Price elasticity of demand is 3.0, and the price of the good decreases.
d. All of the above are correct.

14. When a university bookstore prices chemistry textbooks at $200 each, it generally sells 120
books per month. If it lowers the price to $160, sales increase to 160 books per month. Given this
information, we know that the price elasticity of demand for chemistry books is about
a. 1.29, and a decrease in price from $200 to $160 results in an increase in total revenue.
b. 1.29, and a decrease in price from $200 to $160 results in a decrease in total revenue.

3
 c. 0.78, and a decrease in price from $200 to $160 results in an increase in total revenue.
d. 0.78, and a decrease in price from $200 to $160 results in a decrease in total revenue.

15. If the price elasticity of demand for apples is 0.8, then a 2.4% increase in the price of apples will
decrease the quantity demanded of apples by
a. 1.92%, and apples sellers' total revenue will increase as a result.
b. 1.92%, and apples sellers' total revenue will decrease as a result.
c. 3%, and apples sellers' total revenue will increase as a result.
d. 3%, and apples sellers' total revenue will decrease as a result.

16. For which of the following goods is the income elasticity of demand likely highest?
a. water
b. diamonds
c. hamburgers
d. housing

17. You and your college roommate eat three packages of Ramen noodles each week. After
graduation last month, both of you were hired at several times your college income. You still enjoy
Ramen noodles very much and buy even more, but your roommate plans to buy fewer Ramen
noodles in favor of foods she prefers more. When looking at income elasticity of demand for Ramen
noodles, yours would
a. be negative, and your roommate's would be positive.
b. be positive, and your roommate's would be negative.
c. be zero, and your roommate's would approach infinity.
d. approach infinity, and your roommate's would be zero.

18. Suppose that when the price of good X falls from $10 to $8, the quantity demanded of good Y
rises from 20 units to 25 units. Using the midpoint method, the cross-price elasticity of demand is
a. -1.0, and X and Y are complements.
b. -1.0, and X and Y are substitutes.
c. 1.0, and X and Y are complements.
d. 1.0, and X and Y are substitutes.

19. If a 15% change in price results in a 20% change in quantity supplied, then the price elasticity of
supply is about
a. 1.33, and supply is elastic.
b. 1.33, and supply is inelastic.
c. 0.75, and supply is elastic.
d. 0.75, and supply is inelastic.

4
20. Suppose the price elasticity of supply for soccer balls is 0.3 in the short run and 1.2 in the long
run. If an increase in the demand for soccer balls causes the price of soccer balls to increase by 20%,
then the quantity supplied of soccer balls will increase by about
a. 0.67% in the short run and 0.17% in the long run.
b. 3% in the short run and 1.2% in the long run.
c. 6% in the short run and 24% in the long run.
d. 66.7% in the short run and 16.7% in the long run.

21. Suppose that an increase in the price of melons from $1.30 to $1.80 per pound increases the
quantity of melons that melon 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

22. At price of $1.25, a paper manufacturer is willing to supply 150 spiral notebooks per day. At a
price of $1.50, the paper manufacturer is willing to supply 175 spiral notebooks per day. Using the
midpoint method, the price elasticity of supply is about
a. 1.18.
b. 1.00.
c. 0.85.
d. 0.25.

23. 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.

24. 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.

5
25. The federal government is concerned about the negative effects of cigarette smoking in the
United States. Suppose Congress is considering two plans. One plan would limit the production of
cigarettes. The other would require manufacturers to include graphic photos on cigarette packages of
people suffering cancer’s effects. Which of the following statements is true?
a. Both programs would increase the price of cigarettes.
b. Both programs would reduce the quantity of cigarettes sold.
c. Both programs would decrease revenues for cigarette manufacturers.
d. All of the above are correct.

B. Problem solving

1. Sandy Wiches sells fresh sandwiches at a beach location. Management has determined that on a
typical day, demand can be described by the following demand equation: Q = 1,200 - 200P.
a. If P = $3.00, determine the number of sandwiches sold and the elasticity of demand at this price.
b. If price is increased to $4.00, determine the elasticity of demand at this new price. Is demand more
or less elastic after the price increase?

2. 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

3. Suppose demand is given by the equation:

Using the midpoint method, what is the price elasticity of demand between $7 and $8

4. Scenario 1: Consider the markets for mobile and landline telephone service. Suppose that when the
average income of residents of Plainville is $55,000 per year, the quantity demanded of landline
telephone service is 12,500 and the quantity demanded of mobile service is 28,000. Suppose that when
the price of mobile service rises from $100 to $120 per month, the quantity demanded of landline
service decreases to 11,000. Suppose also that when the average income increases to $60,000, the
quantity demanded of mobile service increases to 33,000.

a. Refer to Scenario 1. Considering the income elasticity, what type of good is mobile telephone
service?

6
b. Refer to Scenario 1. Using the midpoint method, what is the income elasticity of demand for
mobile service?

c. Refer to Scenario 1. Considering the cross-price elasticity of demand for mobile and landline
telephone service, is the cross-price elasticity of demand positive or negative and do the consumers
of Plainville regard these goods as substitutes or complements?

d. Refer to Scenario 1. Using the midpoint method, what is the cross-price elasticity of demand for
landline and mobile service?

5. 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?