Question

Question 11 pts

Using the midpoint method, calculate the price elasticity of demand of Good X using the following information: When the price of good X is $50, the quantity demanded of good X is 400 units. When the price of good X rises to $60, the quantity demanded of good X falls to 300 units.

Group of answer choices

The price elasticity of demand for good X = 1.57.

The price elasticity of demand for good X = 1.23.

The price elasticity of demand for good X = 0.64.

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Question 21 pts

When a 5% increase in income causes a 3% drop in quantity demanded of a good

Group of answer choices

the income elasticity is .6 and the good is an inferior good.

the cross-price elasticity is .6 and the good is an inferior good.

the income elasticity is 1.67 and the good is a normal good.

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Question 31 pts

Teenage workers are assumed to have ________ labor supply, therefore a 5% increase in wage would result in ________ percentage change in quantity of labor supplied.

Group of answer choices

elastic, less

inelastic, greater

elastic, greater

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Question 41 pts

You are the manager of a restaurant and would like to increase revenue. The host staff suggests that you should increase the price of drinks and food, but the servers suggest decreasing the price of drinks and food. You are unsure if you should increase or decrease price, but you know that

Group of answer choices

the servers thinks demand for drinks and food is elastic.

the host staff thinks demand for drinks and food is elastic.

the servers think demand for drinks and food is inelastic.

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Question 51 pts

Suppose you are in charge of sales at a pharmaceutical company, and your firm has a new drug that causes bald men to grow hair. Assume that the company wants to earn as much revenue as possible from this drug. If the elasticity of demand for your company’s product at the current price is 1.4, what would you advise the company to do?

Group of answer choices

keep the price the same

lower the price

raise the price

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Question 61 pts

A person who takes life-saving prescription drugs most likely has a(n) ________demand for that drug. Therefore an increase in the price of the drug will result in ________ total revenue for the drug company.

Group of answer choices

inelastic; decreased

inelastic; increased

elastic; increased

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Question 71 pts

Suppose there is a major technological advance in the production of a good that causes production costs to fall. If demand for the product is relatively inelastic, what will happen in the market?

Group of answer choices

Price will relatively decrease less than the increase in quantity.

Price and quantity will change by the same amount.

Price will relatively decrease greater than the increase in quantity.

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Question 81 pts

When income increases and the demand for a good increases, the good is considered a

Group of answer choices

complementary good.

normal good.

inferior good.

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Question 91 pts

If consumers find cola and iced tea good substitutes, then it is likely that

Group of answer choices

the goods’ price elasticities of demand are less than one.

the goods’ income elasticities are less than zero.

the goods’ cross price elasticities are greater than zero.

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Question 101 pts

Suppose there is a major technological advance in the production of a good that causes production costs to fall. If demand for the product is relatively inelastic, what will happen in the market?

Group of answer choices

Price and quantity will change by the same amount.

Price will relatively decrease less than the increase in quantity.

Price will relatively decrease greater than the increase in quantity.

Answer 1

11.) Using the midpoint method, calculate the price elasticity of demand for Good X. When the price of good X is $50, the quantity demanded of good X is 400 units. When the price of good X rises to $60, the quantity demanded of good X falls to 300 units.

Answer: The price elasticity of demand for good X = 1.57.

Given:

By midpoint method. the elasticity of demand:

As by midpoint method, the percentage change in quantity demanded is:

Therefore, the Price elasticity of demand by the midpoint method is:

Therefore Price elasticity of demand is -1.57. Option A is correct.

That is The price elasticity of demand for good X = 1.57.

21) When a 5% increase in income causes a 3% drop in quantity demanded of a good.

Answer: the income elasticity is 0.6 and the good is an inferior good.

Here, the change in income results in a change in quantity demanded. Therefore there exist a relationship between income and quantity demanded.

Income elasticity of demand shows the responsiveness of the demand as the income changes.

As here quantity demanded fall, therefore percentage change in quantity demanded is = -3%

Percentage change in income = 5%

Therefore income elasticity of demand is -0.6. As the income elasticity has a negative sign, it means that there exists a negative relationship between income and quantity demanded of the good. So as the income increases, the quantity demanded falls. As we know that inferior goods are those that have a negative relationship between income and quantity demanded. The demand for inferior good falls as the income increases, as consumers shift to coming superior goods. Therefore the good is inferior.

Option A is correct. Income elasticity is 0.6 and good is inferior.

31.)

Teenage workers are assumed to have an elastic labor supply, therefore a 5% increase in wage would result in a greater percentage change in the quantity of labor supplied.

Answer: Elastic, Greater

Teenage workers are more responsive to the change in the wage rate. Therefore the labor supply of teenagers is wage elastic. That is with the increase in wage, labor supplied increases at a greater percentage. Here, only the combinations elastic and greater is correct. When the labor supply is elastic, it means that labor is more wage responsive. So a 5% increase in wage would result in a greater percentage change in the quantity of labor supplied.

Whereas, when the labor supplied is inelastic, it means that labor is less wage responsive. So the 5% increase in wage would result in a lesser percentage change in the quantity of labor supplied. In the options firstly, elastic must be accompanied by a greater percentage change in the quantity of labor supplied. Secondly, if the supply of labor is inelastic, it must result in a lesser percentage change in the quantity of labor supplied.

Therefore option C is correct. Elastic and greater.

41.)

You are the manager of a restaurant and would like to increase revenue. The host staff suggests that you should increase the price of drinks and food, but the servers suggest decreasing the price of drinks and food. You are unsure if you should increase or decrease the price, but you know that

Answer: the servers think the demand for drinks and food is elastic.

By the total revenue rule, when the demand is elastic, there exists a negative relationship between price and total revenue. When the demand is inelastic, there exists a positive relationship between price and total revenue. And when the demand is unitary, the change in price results in no change in total revenue.

Here, the manager wants to increase the total revenue. The host staff suggests increasing the price which means they think the demand to be inelastic. As when the demand is inelastic, the change in price will have a positive relationship with total revenue. So the increase in price will increase the total revenue. So according to the question, host staff think the demand to be inelastic.

Whereas, the servers suggest decreasing the price which means that they think the demand to be elastic. As when the demand is elastic, the change in price will have a negative relationship between price and total revenue. So a decrease in price will increase the total revenue. So according to the question, servers think the demand to be elastic.

From these two conclusions, option A satisfies the second one. Servers think the demand for food and drink to be elastic.

51.) Suppose you are in charge of sales at a pharmaceutical company, and your firm has a new drug that causes bald men to grow hair. Assume that the company wants to earn as much revenue as possible from this drug. If the elasticity of demand for your company’s product at the current price is 1.4, what would you advise the company to do?

Answer: lower the price

As from the total revenue test we discussed above.

As here the elasticity of demand is 1.6. It means that the magnitude of the elasticity is greater than 1. Therefore the demand is elastic. From the total revenue test, when the demand is elastic. There exist a negative relationship between price and total revenue. That is, an increase in price will result in a decrease in total revenue and vice versa.

As the company wants to maximize the total revenue, and demand for the product is elastic. Therefore I would suggest lowering the price. Lowering the price with the elastic demand will increase the total revenue.

So the answer: lower the price is correct.

61.) A person who takes life-saving prescription drugs most likely has an inelastic demand for that drug. Therefore an increase in the price of the drug will result in increased total revenue for the drug company.

Answer: inelastic; increased

The life-saving prescription drug is of supreme importance, so it is a pure necessity good. Its demand is less responsive to the change in price. Therefore the demand for life-saving prescription drugs is inelastic.

From the total revenue test discussed above:

As the demand for life-saving drugs is inelastic, therefore increase in the price will result in relatively no change in quantity demanded. Therefore the company would be earning more at a higher price. the total revenue increases with the increase in price.

71.) Suppose there is a major technological advance in the production of a good that causes production costs to fall. If demand for the product is relatively inelastic, what will happen in the market?

Answer: The price will relatively decrease greater than the increase in quantity.

As production costs fall, it results in a decrease in the price of the goods. From the law of demand, there exists a negative relationship between price and quantity demanded of the given goods. So a decrease in the price result in increases in the quantity demanded.

Now as it is given that the demand is inelastic. Inelastic demand means that the demand for the good is less responsive to the change in price. The percentage change in price is more than the percentage change in quantity demanded.

When the demand is inelastic, the price elasticity of demand magnitude is less than 1.

When the demand is inelastic:

So the percentage decrease in price will be relatively more than the percentage increase in quantity.

So option C is correct. The price will relatively decrease greater than the increase in quantity.

81.) When income increases and the demand for a good increase, the good is considered a

Answer: normal good.

Normal goods are those that have a positive relationship with income and quantity demanded. Inferior goods are those that have a negative relationship with income and quantity demanded. And complementary goods are those that are used jointly and which have a negative cross elasticity of demand.

Here, as income rises, the demand for the good increases. Therefore there exist a positive relationship between income and demand. So it is a normal good.

91.) If consumers find cola and iced tea good substitutes, then it is likely that

Answer: the goods’ cross-price elasticities are greater than zero.

Cross price elasticity of demand is the responsiveness of the demand as the price of related goods changes.

Here, these goods are substitute goods. Therefore there exist cross-price elasticity of demand.

Substitutes' goods are those that are used in place of each other. there exists a positive relationship between the price of substitute goods and demand for the given goods. That is, as the price of substitute goods increases, the given good becomes cheaper for the consumer, and the demand for the given good increases.

As there exists a positive relationship between the price of the substitute good and the demand for the given good. Therefore cross-price elasticity of demand for substitute goods is positive, so it is greater than zero.

101.) Suppose there is a major technological advance in the production of a good that causes production costs to fall. If demand for the product is relatively inelastic, what will happen in the market?

Answer: The price will relatively decrease greater than the increase in quantity.

As production costs fall, it results in a decrease in the price of the goods. From the law of demand, a decrease in the price result in increases in the quantity demanded. Now as it is given that the demand is inelastic. Inelastic demand means that the demand for the good is less responsive to the change in price. The percentage change in price is more than the percentage change in quantity demanded.

When the demand is inelastic, the price elasticity of demand magnitude is less than 1.

When the demand is inelastic

Therefore, The price will relatively decrease greater than the increase in quantity.