ECN 104 Lecture Notes - Motor Oil, Chocolate Chip Cookie, Twinkie

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Chapter 5
1. What does the price elasticity of demand measure?
a. how responsive buyers are to a change in income
b. how responsive sellers are to a change in price
c. how responsive buyers are to a change in price
d. how responsive sellers are to a change in buyers’ incomes
2. When is demand said to be elastic?
a. if the price of the good responds substantially to changes in demand
b. if demand shifts substantially when the price of the good changes
c. if buyers do not respond much to changes in the price of the good
d. if the quantity demanded responds substantially to changes in the price of the good
3. When quantity demanded responds only slightly to changes in price, what is demand said to be?
a. unit elastic
b. elastic
c. inelastic
d. perfectly inelastic
4. If a good is a necessity, what would demand for the good tend to be?
a. elastic
b. horizontal
c. unit elastic
d. inelastic
5. What does the elasticity of demand for luxuries tend to be?
a. greater than 1
b. less than 1
c. equal to 1
d. equal to 0
6. Why would chocolate chip cookie dough ice cream tend to have very elastic demand?
a. because it has many complements
b. because the market is broadly defined
c. because there are few substitutes
d. because other flavours of ice cream are almost perfect substitutes
7. There are very few, if any, good substitutes for motor oil. What does this imply?
a. The supply of motor oil would tend to be price elastic.
b. The demand for motor oil would tend to be price elastic.
c. The demand for motor oil would tend to be price inelastic.
d. The demand for motor oil would tend to be income elastic.
8. How do economists compute the price elasticity of demand?
a. the percentage change in the price divided by the percentage change in quantity demanded
b. the change in quantity demanded divided by the change in the price
c. the percentage change in the quantity demanded divided by the percentage change in price
d. the percentage change in the quantity demanded divided by the percentage change in
income
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9. Holding all other forces constant, when the price of gasoline rises, why would the number of gallons of
gasoline demanded fall substantially over a ten-year period?
a. because buyers tend to be much less sensitive to a change in price when given more time
to react
b. because buyers will have substantially more income over a ten-year period
c. because buyers tend to be much more sensitive to a change in price when given more time
to react
d. because gasoline has no substitutes
10. Suppose the price of Twinkies is reduced from $1.45 to $1.25 and, as a result, the quantity of Twinkies
demanded increases from 2,000 to 2,200. Using the midpoint method, what is the price elasticity of
demand for Twinkies in the given price range?
a. 0.64
b. 1.00
c. 0.75
d. 1.56
Figure 5-1
11. Refer to Figure 5-1. What is the elasticity of demand from point A to point B, using the midpoint method?
a. 0.4
b. 1
c. 1.5
d. 2.5
12. Refer to Figure 5-1. If the price decreased from $18 to $6, what would happen to total revenue? What would
this imply about demand elasticity?
a. Total revenue would increase by $1200 and demand would be elastic.
b. Total revenue would increase by $800 and demand would be elastic.
c. Total revenue would decrease by $1200 and demand would be inelastic.
d. Total revenue would decrease by $800 and demand would be inelastic.
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Figure 5-2
13. Refer to Figure 5-2. As price falls from P
A
to P
B
, which demand curve is most elastic?
a. D
1
b. D
2
c. D
3
d. All of the above are equally elastic.
14. What does a flatter demand curve represent?
a. greater price elasticity of demand
b. smaller price elasticity of demand
c. price elasticity of demand that is close to the slope of the curve
d. price elasticity of demand that is equal o the slope of the curve
15. What is true about a downward sloping linear demand curve?
a. The slope and elasticity are both constant.
b. The slope changes but elasticity is constant.
c. The slope and elasticity both change.
d. The slope is constant but elasticity changes.
16. Moving down a linear demand curve, what happens to elasticity?
a. It gets smaller, then larger.
b. It gets larger.
c. It gets smaller.
d. It gets larger, then smaller.
17. Get Smart University is contemplating increasing tuition to increase revenue. What must the school believe?
a. The law of demand does not apply.
b. The demand for university education is elastic.
c. The demand for university education is inelastic.
d. The supply of university education is elastic.
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Document Summary

Using the midpoint method, what is the price elasticity of demand for twinkies in the given price range: 0. 64, 1. 00, 0. 75, 1. 56. What is the elasticity of demand from point a to point b, using the midpoint method: 0. 4, 1, 1. 5, 2. 5, refer to figure 5-1. It gets smaller, then larger: it gets larger, it gets larger, then smaller. It gets smaller: get smart university is contemplating increasing tuition to increase revenue. Advocates of marijuana legalization argue that this would significantly reduce the amount of revenue going to the criminal organizations that currently supply marijuana. It gets flatter and the price elasticity of demand will eventually be less than 1: it gets steeper and the price elasticity of demand will eventually be greater than 1. It gets flatter and the price elasticity of demand will eventually be greater than 1: it gets steeper and the price elasticity of demand will eventually be less than 1.

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