Question

An increase in price will result in no change in total revenue if: *

A) the percentage change in price is large enough to cause quantity demanded to fall to zero.

B) the coefficient of elasticity is equal to zero.

C) the percentage change in quantity demanded is equal to the percentage change in price (in absolute values).

D) the demand function is perfectly elastic.

Assume the demand for a good is price inelastic, i.e., ed < 1 (in absolute value). This means that if price decreases by 50 percent, quantity demanded will: *

A) increase by more than 50 percent.

B) decrease by more than 50 percent.

C) increase by less than 50 percent.

D) decrease by less than 50 percent.

As the percentage of the consumer's income accounted for by a particular good decreases, demand for the good will: *

A) tend to become more price elastic.

B) tend to become more price inelastic.

C) tend to become closer to unit elastic.

D) tend toward being perfectly elastic.

For an inferior good, the income elasticity of demand is: *

A) positive or negative depending on the share of income accounted for by the good.

B) always negative

C) positive if income increases and negative when income declines.

D) always equal to 1.

"Supply" is best defined as the relationship between: *

A) the current price of a good and the quantity supplied at that price.

B) the price of a good or service and the quantity supplied by producers at each price during a period of time.

C) the cost of producing a good and the price consumers are willing to pay for it.

D) the quantity supplied and the price people are willing to pay for a good.

Which of the following would cause a change in supply, as opposed to a change in quantity supplied, in the market for purchasing new homes? *

A) A decrease in the price of rental housing.

B) A decrease in the price of new homes

C) An increase in the incomes of home buyers.

D) An increase in the number of buyers in the market for used homes.

Many people consider lentils to be an inferior good. For such people, all else held constant, an increase in income would cause their demand for lentils to: *

A) increase.

B) stay the same.

C) decrease.

D) cannot be determined with the information given.

Suppose the demand for good X is given by Q_x^d = 300 – 15Px + 20Py - 60I , where Px is the price of good X. Py is the price of some other good Y, and I is income. Assume that Px is currently $50, Py is currently $100, and I is currently $1200 *

A) Goods X and Y are complement goods

B) The supply is elastic

C) Good Y is a normal good

D) Good X is an inferior good

The price elasticity of demand is calculated as: *

A) the change in price divided by the change in quantity demanded.

B) the change in quantity demanded divided by the change in price.

C) the percentage change in price divided by the percentage change in quantity demanded.

D) the percentage change in quantity demanded divided by the percentage change in price.

Which of the following pairs of goods would be expected to have a positive cross-price elasticity of demand? *

A) coffee and tea.

B) gasoline and cars

C) tennis racquets and tennis balls.

D) hot dogs and hot dog buns.

As the price of socks increases, what would reasonably be expected to happen to the equilibrium price and equilibrium quantity of shoes? (Socks and shoes are complements.) *

A) Equilibrium price would increase and equilibrium quantity would decrease.

B) Equilibrium price and quantity would both decrease.

C) Equilibrium price would decrease and equilibrium quantity would increase.

D) Equilibrium price and quantity would both increase.

As we move up the demand curve, the price elasticity of demand *

A) increases

B) decreases

C) becomes unitary

D) does not change

If the price of lemonade increases relative to the price of grape juice, the demand for: *

A) grape juice will decrease.

B) grape juice will increase.

C) lemonade will decrease.

D) lemonade will increase.

Suppose a consumer's income increases from $30,000 to $36,000. As a result, the consumer increases her purchases of compact disks (CDs) from 25 CDs to 30 CDs. What is the consumer's income elasticity of demand for CDs? *

A) 0.5

B) 1.0

C) 1.5

D) 2.0

Answer 1

Answer

1. C) The percentage change in quantity demanded is equal to the percentage change in price (in absolute values).

An increase in price will result in no change in total revenue if the percentage change in quantity demanded is equal to the percentage change in price (in absolute values).

Total Revenue = Price * Quantity

The total revenue is the product of price and quantity demanded or sold. The price of a good and the quantity demanded for the good are inversely related. Now, if the percentage change in quantity demanded is equal to the percentage change in price, then the revenue will remain as same as before.

Example: If price increases by 10% and quantity decreases by 10%, then there will be no change in revenue.

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2. C) Increase by less than 50 percent.

Assume the demand for a good is price inelastic, i.e., ed < 1 (in absolute value). This means that if price decreases by 50 percent, quantity demanded will increase by less than 50 percent.

Price elasticity of demand = Percentage change in quantity demanded / Percentage change in price

If the percentage change in quantity demanded for a good is less than the percentage change in its price, then the price elasticity of demand for the good is inelastic.

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3. B) Tend to become more price inelastic

As the percentage of the consumer's income accounted for by a particular good decreases, demand for the good will tend to become more price inelastic.

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4. B) Always negative

For an inferior good, the income elasticity of demand is always negative.

For an inferior good, the income and the demand for the good move in opposite direction. If income rises, then the demand for the good decreases.

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5. B) The price of a good or service and the quantity supplied by producers at each price during a period of time

"Supply" is best defined as the relationship between the price of a good or service and the quantity supplied by producers at each price during a period of time.

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6. B) A decrease in the price of new homes.

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7. C) Decrease.

Many people consider lentils to be an inferior good. For such people, all else held constant, an increase in income would cause their demand for lentils to decrease.

For an inferior good, if the income rises, the demand for the inferior good falls.

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8. D) Good X is an inferior good.

The demand for good X is given by,

Q_xd = 300 – 15Px + 20Py - 60I..........(1)

For an inferior good, the income and the quantity demanded for the good move in opposite direction and hence the slope of the Engel curve( shows the relationship between income and quantity demanded for a good), is negative.

All else equal, let us see the slope of engel curve in equation(1),

Differentiating equation(1) with restect to 'I' , keeping 'Px' and 'Py' constant.

d(Q_xd) / dI = - 60

From above, we see that the quantity demanded of X is negatively related to the income 'I' , i.e., if income rises, then quantity demaned for good X falls. So, we can say that good X is an inferior good.

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9. D) The percentage change in quantity demanded divided by the percentage change in price.

The price elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in price.

The price elasticity of demand for a good shows the responsiveness of quantity demanded for the good for the change in its price. Thus, it is calculated as the percentage change in quantity demanded divided by the percentage change in price.

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10. A) coffee and tea.

The coffee and tea are substitutes to each other. If the price of coffee rises, the quantity demanded for coffee will decrease, and hence the demand for tea will increase, assuming the price of tea remains unchanged.

So, the coffe and tea would have a positive cross-price elasticity of demand.

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11. B) Equilibrium price and quantity would both decrease.

As the price of socks increases, the quantity demanded for socks decreases and hence the demand for shoes also decreases as socks and shoes are complementary to each other. As the demand for shoes decreases, the demand curve for shoes will shift leftward. The supply curve of shoes remains unchanged. Therefore both the equilibrium price and quantity of shoeswill decrease.

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12. A) Increases

As we move up the demand curve, the price elasticity of demand increases.

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13. B) Grape juice will increase

If the price of lemonade increases relative to the price of grape juice, the demand for grape juice will increase.

The lemonade and grape juice are substitutes to each other. If the price of lemonade increases relative to the price of grape juice, the quantity demanded for lemonade will fall and hence the demand for grape juice will increase.

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14. B) 1.0

Income increases from $30,000 to $36,000

Purchases of compact disks (CDs) increases from 25 CDs to 30 CDs

Percentage rise in income = ($36,000 - $30,000) * 100 / $30,000

Percentage rise in income = 20%

Percentage rise in CD = (30 - 25) * 100 / 25

Percentage rise in CD = 20%

Consumer's income elasticity of demand for CDs = Percentage change in CD / Percentage change in income

Consumer's income elasticity of demand for CDs = 20% / 20% = 1

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