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# Price Elasticity of Supply and Demand

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Questions

1. Price elasticity of demand is the percentage change in price divided by the percentage change in quantity demanded.

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2. If the price of a good goes up by 20 percent and the quantity demanded falls by 40 percent, the price elasticity of demand is 2.

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3. If the price of corn goes up by \$1 a bushel and the quantity supplied rises by 100 bushels, the price elasticity of supply has to be 100.

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4 When demand is perfectly inelastic, there is no change in quantity demanded following a change in price.

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5. Most likely, the elasticity of demand for transportation is greater than the elasticity of demand for cars.

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6. Revenue remains unchanged along a straight-line demand curve.

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6. Refer to the graph below.

If price is currently at B and rises, total revenue will rise.

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7. The cross-price elasticity of demand is the percentage change in price divided by the percentage change in price of another good.

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change in price of another good.

8. If demand is highly inelastic and supply shifts to the right, then the equilibrium price will rise significantly while quantity will remain virtually constant.

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9. When the demand curve is highly inelastic, there is a strong incentive for suppliers to find a way to reduce the quantity sold in the market, and raise the price of the product.

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10. Price elasticity of demand is the:
a. change in the quantity of a good demanded divided by the change in the price of that good.
b. change in the price of a good divided by the change in the quantity of that good demanded.
c. percentage change in price of that good divided by the percentage change in the quantity of that good demanded.
d. percentage change in quantity of a good demanded divided by the percentage change in the price of that good.

11. In general, the greater the elasticity the:
a. smaller the responsiveness of price to changes in quantity.
b. smaller the responsiveness of quantity to changes in price.
c. larger the responsiveness of price to changes in quantity.
d. larger the responsiveness of quantity to changes in price.

12. Demand is said to be elastic when the:
a. percentage change in quantity demanded is less than the percentage change in price.
b. percentage change in quantity demanded is greater than the percentage change in price.
c. change in quantity demanded is less than the change in price.
d. change in quantity demanded is greater than the change in price.

13. In 2004, the Wall Street Journal reported that Starbucks was set to raise some of its prices. The article stated that unlike Starbucks, "mass-market grocery brands such as Kraft Foods Inc.'s Folgers and Maxwell House coffees tend to be much more price-elastic." Which of the following best explains the implications of this quotation?
a. When Starbucks raises prices, it causes sales of Folgers and Maxwell House to rise a lot.
b. When Starbucks raises prices, it causes sales of Folgers and Maxwell House to fall a lot.
c. When the price of Folgers or Maxwell House coffee rises, consumers buy only slightly less.
d. When the price of Folgers or Maxwell House coffee rises, consumers buy a lot less.

14. In 2004, the Wall Street Journal reported that Starbucks was set to raise some of its prices. The article stated that "mass-market grocery brands such as Kraft Foods Inc.'s Folgers and Maxwell House coffees tend to be much more price-elastic" than Starbucks' coffees. This information about elasticities is telling us that:
a. Starbucks' coffee is a luxury good, while the grocery brands are inferior goods.
b. Starbucks and the grocery brands are close substitutes.
c. Starbucks and the grocery brands are poor substitutes.
d. Starbucks' customers are not as responsive to price changes as are the customers of the grocery brands.

15. If the amount of land supplied remains the same even when the price of land has risen, then the:
a. supply of land must be perfectly elastic.
b. supply of land must be perfectly inelastic.
c. demand for land must be perfectly elastic.
d. demand for land must be perfectly inelastic

16. The short-run elasticity of demand for gasoline sold at gasoline stations is 0.20. If terrorism causes the supply of gasoline to fall, resulting in a 5 percent drop in quantity, other things the same, the price per gallon will increase by:
a. 4 percent.
b. 5 percent.
c. 20 percent.
d. 25 percent.

17. According to Exhibitor Relations Co., between 2003 and 2004, average movie ticket prices rose by about 3.58 percent and attendance fell by about 1.66 percent. Other things equal, the data imply that the elasticity of demand for movie tickets is about:
a. 0.17.
b. 0.36.
c. 0.46.
d. 2.16.

18. According to Exhibitor Relations Co., in 2003 average movie ticket prices were \$6.03 and attendance was 243 million; in 2004, average movie ticket prices were \$6.25 and attendance was 239 million. Other things equal, the data imply that the elasticity of demand for movie tickets is about:
a. 0.166.
b. 0.358.
c. 0.464.
d. 2.157.

19. A newspaper recently lowered its price from 50 cents to 30 cents, causing the number of newspapers sold to increase from 240,000 to 280,000. Other things equal, the data imply that the elasticity of demand for this newspaper is about:
a. 3.25.
b. 0.5.
c. 0.3.
d. 0.15.

20. If the price of a good goes up by 5% and, in response, the quantity demanded falls by 15%, the price elasticity of demand would be:
a. .05.
b. 3.
c. 0.3333.
d. 0.15.

21. As the manager of a ski resort, you want to increase the number of lift tickets sold by 8%. Your staff economist has determined that the price elasticity of demand for lift tickets is 2. To increase sales by the desired amount, you should decrease the price of a lift ticket by:
a. 2%.
b. 4%.
c. 8%.
d. 16%.

22. It has been estimated that the price elasticity of demand for attending baseball games is 0.23. Other things constant, a 10 percent increase in attendance can be explained by a:
a. 43.48% fall in the price of a ticket.
b. 43.48% rise in the price of a ticket.
c. 23% fall in the price of a ticket.
d. 23% rise in the price of a ticket.

23. It has been estimated that the price elasticity for cigarettes is 0.164. Assuming there are currently no taxes on cigarettes, to reduce cigarette purchases 5%, government would need to tax cigarettes enough to:
a. raise the price by 0.82%.
b. lower the price by 0.82%.
c. raise the price by 30.5%.
d. lower the price by 30.5%.

24. The Wall Street Journal article reported in 2004 when gas prices rose to over \$2 a gallon that, "In dispersed metropolitan areas like Tampa, the new jobs are far from affordable housing&#61628;That leaves low-income workers with little choice but to shoulder the cost of a car-and, when the price of gas shoots up, to bear it." From this quote, how would you characterize demand for gasoline by low-income workers in Tampa?
a. Gasoline is a luxury good.
b. Gasoline is an inferior good.
c. Demand for gasoline is elastic.
d. Demand for gasoline is inelastic.

25. The demand for a good is inelastic. Which of the following would be an explanation for this?
a. The good is a necessity.
b. The good is specifically defined.
c. The good is a large portion of one's total income.
d. The time interval considered is long.

26. The demand for a good is inelastic. Which of the following would be the most likely explanation for this?
a. The good is narrowly defined.
b. The good is broadly defined.
c. The good is a large portion of one's total income.
d. The time interval considered is long.

27. The demand for a good is elastic. Which of the following would be the most likely explanation for this?
a. The good is a necessity.
b. The good is broadly defined.
c. The good is a large portion of one's total income.
d. The time interval considered is short.

28. The demand for a good is elastic. Which of the following would be the most likely explanation for this?
a. The good is a necessity.
b. The good is broadly defined.
c. The good is a small portion of one's total income.
d. The time interval considered is long.

29. The price elasticity of demand for insulin by diabetics is much smaller than the price elasticity of demand for leather shoes. This is an example of how the price elasticity of demand:
a. falls the less specifically the good is defined.
b. rises the less specifically the good is defined.
c. falls the more a good is a necessity.
d. rises the more a good is a necessity.

30. Which of the following most likely correctly orders goods from most to least demand elastic?
a. cars, motor transportation, transportation.
b. transportation, bicycles, non-motor transportation.

31. Economist Kuo S. Huang estimated the elasticity of demand for beef to be 0.62 and the elasticity of demand for milk to be 0.04. Which of the following is a possible explanation of the difference in elasticities?
a. Milk comprises a greater portion of one's income.
b. Milk has fewer substitutes than does beef.
c. Milk is more of a luxury good than beef.
d. Milk is more narrowly defined than beef.

32. Refer to the table below to answer the question. A local government is looking to reduce "undesirable" behavior on the part of its citizens: drinking alcoholic beverages and smoking. Assuming people cannot shop for alcoholic beverages out of town, a 10% sin tax would have the largest proportionate effect on the sale of:

a. Cigarettes
b. Liquor
c. Beer
d. Wine

33. In an April 2002 article in Contemporary Economic Policy, Erik Craft analyzes state's pricing of vanity plates. For California, he finds that the price elasticity is .53 and the price they charge for vanity plates is \$28.75, which indicates that California is:
a. maximizing revenue since elasticity is less than one and revenue will increase following a price increase when demand is inelastic.
b. not maximizing revenue since elasticity is less than one and revenue will increase following a price increase when demand is inelastic.
c. maximizing revenue since elasticity is less than one and revenue will decrease following a price increase when demand is inelastic.
d. not maximizing revenue since elasticity is less than one and revenue will decrease following a price increase when demand is inelastic.

34. In an April 2002 article in Contemporary Economic Policy, Erik Craft analyzes state's pricing of vanity plates. For Massachusetts, he finds that the price elasticity is 3.52 and the price they charge for vanity plates is \$50, which indicates that Massachusetts is:
a. maximizing revenue since elasticity is greater than one and revenue will increase following a price decrease when demand is elastic.
b. not maximizing revenue since elasticity is greater than one and revenue will increase following a price decrease when demand is elastic.
c. maximizing revenue since elasticity is greater than one and revenue will decrease following a price decrease when demand is elastic.
d. not maximizing revenue since elasticity is greater than one and revenue will decrease following a price decrease when demand is elastic.

35. Under which of the following two scenarios would demand for hot dogs be more elastic? Explain.
(a) You are at a baseball game at Wrigley Field and want to eat a hot dog.
(b) It's Tuesday, you are planning the menu for a picnic you are going to have on Saturday and you decide to serve hot dogs.

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36. Under which of the following two scenarios would demand be more elastic? Explain.
(a) Demand for a camera.
(b) Demand for a 35 mm SLR camera with auto rewind, advance, zoom and flash.

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37. Suppose you own two Domino's Pizza franchises in your town. After reading the latest issue of Pizza Monthly, you have concluded that both of your locations are generating below average revenue. You hire a local economics professor to conduct a pricing experiment. Here is her report:
Location 1: A 10% increase in price resulted in a 5% drop in the quantity demanded.
Location 2: A 10% increase in the price resulted in a 20% drop in the quantity demanded.

Using this information, how should you alter your pricing policy to increase your revenue at each location?

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#### Solution Preview

Please refer attached file for complete solutions. Graphs and some of the formulas are missing here.
Solutions:

1. Price elasticity of demand is the percentage change in price divided by the percentage change in quantity demanded.

Ans: False/ Price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price.

2. If the price of a good goes up by 20 percent and the quantity demanded falls by 40 percent, the price elasticity of demand is 2.

Ans: True/ Price elasticity of demand=40%/20%=2 (we ignore negative sign as price elasticity of demand is always negative)

3. If the price of corn goes up by \$1 a bushel and the quantity supplied rises by 100 bushels, the price elasticity of supply has to be 100.

Ans: True/ Price elasticity of supply=100/1=100

4 When demand is perfectly inelastic, there is no change in quantity demanded following a change in price.

Ans: True

5. Most likely, the elasticity of demand for transportation is greater than the elasticity of demand for cars.

Ans: False.

6. Revenue remains unchanged along a straight-line demand curve.

Ans: False

6. Refer to the graph below.

If price is currently at B and rises, total revenue will rise.

Ans: False

7. The cross-price elasticity of demand is the percentage change in price divided by the percentage change in price of another good.

Ans: False/ The cross-price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price of another good.

8. If demand is highly inelastic and supply shifts to the right, then the equilibrium price will rise significantly while quantity will remain virtually constant.

Ans: False, Price should fall while quantity will remain virtually constant.

9. When the demand curve is highly inelastic, there is a strong incentive for suppliers to find a way to reduce the quantity sold in the market, and raise the price of the product.

Ans: True as quantity demanded will not change significantly.

10. Price elasticity of demand is the:
a. change in the quantity of a good demanded divided by the change in the price of that good.
b. change in the price of a good divided by the change in the quantity of that good demanded.
c. percentage change in price of that good divided by the percentage change in the quantity of that good demanded.
d. percentage change in quantity of a good demanded divided by the percentage change in the price of that good.

11. In general, the greater the elasticity the:
a. smaller the responsiveness of price to changes in quantity.
b. smaller the responsiveness of quantity to changes in price.
c. larger the responsiveness of price to changes in quantity.
d. larger the responsiveness of quantity to changes in price.

12. Demand is said to be elastic when the:
a. percentage change in quantity demanded is less than the percentage change in price.
b. percentage change in quantity demanded is greater than the percentage change in price.
c. change in quantity demanded is less than the change in price.
d. change in quantity demanded is greater than the change in price.