Quiz 1 - Chapter 20 Elasticity of Demand and Supply 1. Use the following diagram to answer the next question. P $10 $8 D 18 22 Q Refer to the diagram. Between the prices of $10 and $8, the price elasticity of demand is: a. .5 b. .9 c. 1.11 d. 2 Answer: b Feedback: Using the midpoint formula, the elasticity is calculated as (22 – 18) / 20 ÷ (10 – 8) / 9 = .9. 2. Suppose that as the price of a good rises from $3.90 to $4.10, the quantity demanded falls from 210 to 190. Then the price elasticity of demand is: a. .5 b. .8 c. 1.25 d. 2 Answer: d Feedback: Using the midpoint formula, the elasticity is calculated as (210 – 190) / 200 ÷ (4.10 – 3.90) / 4.00 = 2. 3. While it is relatively easy to shift land from production from one type of grain to another, the process takes a considerable amount of time. This implies that: a. a change in the demand for wheat will not affect its price in the short run b. the long run supply of oats is more elastic than the long run supply of wheat c. a change in the demand for corn will change quantity supplied more in the short run than the long run d. the supply of barley is more elastic in the long run than the short run Answer: d Feedback: In the short run, resources are difficult to shift from one grain to another so that increases in price elicit very little change in quantity supplied. In the long run, however, more or less land can be planted in response to price changes. 4. If the short run supply of good X is perfectly inelastic: a. the price elasticity coefficient of supply is infinite b. the price elasticity coefficient of supply is one c. the short-run supply curve graphs as a vertical line d. the short-run supply curve graphs as a horizontal line Answer: c Feedback: A good whose supply is perfectly inelastic is one whose quantity supplied does not change in response to a change in price. This implies a vertical supply curve. 5. Use the following diagram to answer the next question. Refer to the diagram. If total revenue at price P3 is the same at price P 2 , the in the P2 P3 price range, demand is: a. relatively elastic b. relatively inelastic c. of unit elasticity d. perfectly elastic Answer: c Feedback: If demand is unit elastic, a change in price is exactly offset by a proportional change in quantity demanded, leaving total revenue unchanged. 6. An increase in demand for a product whose supply is perfectly elastic will: a. increase quantity but leave price unchanged b. increase quantity and price proportionally c. increase price but leave quantity unchanged d. leave both price and quantity unchanged Answer: a Feedback: The supply curve will be horizontal in this instance. Quantity supplied will increase to meet any increase in demand with no increase in price. 7. Suppose there is an inverse relationship between the price of one good and the quantity demanded of another. We could conclude that: a. the demand for one is elastic while the demand for the other is inelastic b. the cross elasticity of demand is negative and the two goods are complements c. the two goods are inferior d. the cross elasticity of demand is negative and the two goods are substitutes Answer: b Feedback: The cross elasticity of demand is measured by the ratio of the change in quantity demanded of one good to the change in the price of another good. If two goods are complements, an increase in the price of one reduces the quantity demanded of the other and the cross price elasticity is negative. 8. Suppose that a 2% increase in income in the economy decreases the quantity of gadgets demanded by 1% at every possible price. This implies that: a. the supply of gadgets is elastic b. income elasticity is positive and gadgets are a normal good c. income elasticity is negative and gadgets are a normal good d. income elasticity is negative and gadgets are an inferior good Answer: d Feedback: The coefficient of income elasticity is –.5 in this example and the good is inferior. 9. Assume that the price of product Y decreases by 5% and the quantity supplied decreases by 2%. The coefficient of price elasticity of supply for good Y is: a. negative and therefore Y is an inferior good b. less than one and therefore supply is inelastic c. more than one and therefore supply is elastic d. negative and therefore the supply curve is downward sloping Answer: b Feedback: In this example, the coefficient of price elasticity of supply is 2/5, which is less than one and implies that supply is inelastic. 10. Use the following diagram to answer the next question. Refer to the diagram. Over the range of P 1 to P 2 we know that demand is: a. elastic because area D exceeds area A b. elastic because area B exceeds area C c. inelastic because area D exceeds area B d. inelastic because area D exceeds area A Answer: a Feedback: Demand is elastic if a decrease in price increases quantity more than proportionally, implying that a decrease in price increases revenue. Revenue at price P 1 is area A + B while revenue at price P2 is area B + D; the change in revenue is thus area D minus area A. Since area D is bigger than area A, revenue increases with the drop in price and demand is therefore elastic over this range.
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