Universidad de Alicante

INTRODUCCION A LA MICROECONOMÍA - 22001 (2015-2016)

TOPIC 03 Elasticity

Extra Homework 03. Solutions

The following are multiple-choice questions. Choose the response you think is correct. Please take
note of the marking scheme: correct answer = +1, no answer = 0, incorrect response =- 0.25

1. According to the Law of Supply, with an increase in the price of a good x (and keeping
everything else constant):
a) The supply curve shifts to the right.
b) The supply curve shifts to the left.
c) There is a shift to the right along the supply curve.
d) There is a leftward shift along the supply curve.
2. According to the Law of Demand:
a) The demand for cheap goods is greater than the demand for expensive goods.
b) If two goods are complements, we tend to observe that the quantities demanded of them
tend to increase and decrease simultaneously.
c) If two goods are substitutes, we tend to observe that the quantities demanded of them
tend to increase and decrease simultaneously.
d) The quantity demanded of some good tends to be higher when its price is
lower.
3. A few months ago several scienti…c studies were published in journals that claimed that mod-
erate consumption of red wine might help lower cholesterol levels. In light of this information
we might expect in the market of wines
a) An increase in both equilibrium price and quantity.
b) An increase in the equilibrium price and a decrease in the equilibrium quantity.
c) A shift of the supply curve to the right of the demand curve, and therefore the equilibrium
price will go down.
d) The information has no e¤ects on the equilibrium in the market for wines.
4. When you increase the price of a factor necessary for the production of a particular good:
a) There is an upward movement along the supply curve.
b) There is a leftward shift of the entire supply curve.
c) There is a rightward shift of the entire supply curve.
d) There is a downward movement along the supply curve.
5. Suppose x is an inferior good. An increase in the income of the consumers of good x will
imply:
a) The demand for x increases.
b) The demand for x decreases.
c) The supply of x increases.
d) The supply of x decreases.

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 6. Consider a competitive market for a particular good which is initially in equilibrium. Choose
the correct option:
a) If it is a normal good, an increase in consumers’incomes tend to give rise to
an increase in both the price and quantity traded of the good.
b) If it is an inferior good, an increase in consumers’incomes tend to give rise to an increase
in the price and a decrease in the quantity exchanged of the good.
c) If it is a normal good, an increase in consumers’incomes tend to give rise to a decrease in
the price and an increase in the quantity traded of the good.
d) None of the above is correct.

7. Suppose the market for milk is in equilibrium. We observe that the equilibrium is shifted so
that now the new price is higher than the previous one and the total amount bought and sold
of milk is also higher. Indicates which of the following reasons may have caused such a shift:
a) The price of feed for cows has increased.
b) Health authorities have issued a report on the bene…ts of milk.
c) The method of extraction of milk has been improved.
d) Has appeared on the market a healthier substitute for milk.

8. In the market for good x, which is an inferior good, the following changes occur: …rst consumer
income increases and secondly there is a technological innovation allowing savings on costs
production. We also know that the impact of using innovative technological on the equilibrium
quantity is less than the impact of the increase in consumer income on equilibrium quantity.
On this basis, the new equilibrium in the market for good x involves:
a) A reduction in both the equilibrium price and quantity.
b) No increase in either the equilibrium price or the equilibrium quantity.
c) A reduction in the price, while the e¤ect on the quantity is unknown.
d) A reduction in the quantity, while the e¤ect on the price is unknown.

9. Pedro consumes two goods, potatoes and beef. When his income decreases he buys more
potatoes and less meat. Which of the following statements is correct?
a) Meat and potatoes are complements.
b) Meat and potatoes are real substitutes.
c) Potatoes are an inferior good.
d) Meat is an inferior good.

10. Assume that shampoo and conditioner are complementary goods. If the price of shampoo
increases
a) The quantity demanded of shampoo increases.
b) The demand curve for shampoo shifts to the right.
c) The demand curve for the conditioner shifts to the left.
d) Neither the demand for shampoo or of the conditioner changes.

11. The price elasticity in a linear demand curve (with a negative slope):
a) Is constant and independent of the price of the good.
b) Is greater (in absolute terms) the higher the price of the good.

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 c) Is greater (in absolute terms) the lower the price of the good.
d) On a linear demand curve the price elasticity is always equal to one in absolute terms.

12. The price elasticity of demand for a commodity tends to be more elastic when:
a) The number of substitutes available for the good increases.
b) The income of consumers increases.
c) The price elasticity of supply decreases.
d) The time horizon to adjust to changes is lower.

13. Consider two normal goods whose price increases by the same percentage in both cases: the
percentage variation in the quantity demanded would be higher for:
a) The good whose price elasticity in absolute terms is greater.
b) The good whose price elasticity in absolute terms is lower.
c) The good that is more expensive.
d) The good that is cheaper.

14. The price elasticity of demand:

a) Is a measure of sensitivity of demand to price changes.
b) Tells us the percentage change in quantity demanded when the price changes by one
percent.
1 p
c) Is related to the slope of the demand curve given by the formula: "pd = Slope q:
d) All of the above statements are true.

15. If the price of goods increased by 5% and the quantity demanded decreases by 10%:
a) The demand for the good is inelastic.
b) The income (of the supplier) decreases if the price increases.
c) The income (of the supplier) decreases if the price decreases.
d) The income (of the supplier) does not change when the price varies.

16. If a 2% decrease in the price of a particular good increases quantity demanded by 1%, the
price elasticity of demand is:
a) -4.
b) -2.
c) -1.
d) -0.5.

17. If the market demand for a good is given by q = 24 6p and the supply by q = 2p. What is
the elasticity of demand and supply in equilibrium?
a) -2 and 2.
b) -1 and 2.
c) -3 and 1.
d) -5 and 1.

18. We know that demand for cherries is highly inelastic. We can therefore conclude that a poor
harvest that reduces the cherry harvest will:
a) Adversely a¤ect the quality of life of farmers by making their farms less pro…table.
b) Increase the total income of farmers.
c) Reduce the total income of farmers.

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 d) Causes a shortage of cherries as demand for cherries is greater than the supply at the
market equilibrium price.

19. If the demand for a commodity is given by 2q = 10 p:

a) The price elasticity of demand at the point q = 1; p = 8 is -4.
b) The price elasticity of demand at the point q = 1; p = 8 is -0.5.
c) At the point q = 1; p = 8 demand is inelastic.
d) The price elasticity of demand is constant throughout the entire demand curve.

20. In the U.S., if tobacco consumption among adolescents has not dropped by 60 percent by the
year 2007, the tobacco companies will have to pay a …ne of 2,000 million dollars in application
of the agreement on the Tobacco act of 1997. The agreement is expected to raise prices of
cigarettes by about 62 cents per pack, which represents a percentage increase of 25 percent.
Will this price increase be su¢ cient to reduce consumption by the amount required? Note:
it is estimated that the price elasticity of demand for cigarettes among adolescents is -1.3.
a) No, because the demand is inelastic therefore the decline will be less than 25%.
b) Yes, as the demand for tobacco among young people is elastic.
c) No, the demand for tobacco will be reduced by 32.5% less than desired.
d) Yes, as the demand for tobacco will decrease by 80,6%.

21. Suppose the price elasticity of demand for movies of adolescents is -0.2 and that of adults is
-2. What policy will a cinema implement to increase total revenues?
a) Increase the price of admission for adolescents and decrease that of adults.
b) Increase the price of admission.
c) Reducing the price of admission.
d) Increase the price of admission for adults and decrease those of adolescents.

22. The aggregate demand for good q is given by q = 600 20p where p denotes the price. Choose
the correct answer.
a) Along the demand curve the price elasticity is constant.
b) For any p 10 the price elasticity of demand is more than or equal (in absolute
value) to 0.5.
c) For any p 10 the price elasticity of demand is more than or equal (in absolute value) to
20.
d) For any price p 10 the elasticity of demand is more than or equal (in absolute value) to
0.5.

23. Suppose the local soccer team decides to provide a discount on tickets for every 20 rings cans
of Coca-Cola that people present. Cost of Admission is 30 euros and with the discount it costs
10 euros. If both the income from tickets sold as well as income from Coca-Cola increases,
which of the following statements is correct:
a) The demand for Coca-Cola is elastic, but the price elasticity of demand for tickets for
soccer cannot be determined.
b) Demand for Coca-Cola is inelastic, but the price elasticity of demand for tickets for soccer
cannot be determined.
c) Demand for tickets for soccer is elastic, but the price elasticity of demand for

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 Coca-Cola cannot be determined.
d) Demand for soccer tickets is inelastic, but the price elasticity of demand for Coca-Cola
cannot be determined.

24. Suppose the market demand is given by q = 100 2p and that initially the price is p = 25:
If the price decreases:
a) Income decreases.
b) Income increases.
c) There is no variation in income.
d) None of the above is correct.