Chapter 05 Test Bank Final new PDF

Preview

Summary

Download Chapter 05 Test Bank Final new PDF

Description

Chapter 5 Elasticity and Its Application MULTIPLE CHOICE 1. In general, elasticity is a measure of a. the extent to which advances in technology are adopted by producers. b. the extent to which a market is competitive. c. how firms’ profits respond to changes in market prices. d. how much buyers and sellers respond to changes in market conditions. ANS: D PTS: 1 DIF: 1 REF: 5-0 NAT: Analytic LOC: Elasticity TOP: Elasticity MSC: Definitional 2. Elasticity is a. a measure of how much buyers and sellers respond to changes in market conditions. b. the study of how the allocation of resources affects economic well-being. c. the maximum amount that a buyer will pay for a good. d. the value of everything a seller must give up to produce a good. ANS: A PTS: 1 DIF: 1 REF: 5-0 NAT: Analytic LOC: Elasticity TOP: Elasticity MSC: Definitional 3. When studying how some event or policy affects a market, elasticity provides information on the a. equity effects on the market by identifying the winners and losers. b. magnitude of the effect on the market. c. speed of adjustment of the market in response to the event or policy. d. number of market participants who are directly affected by the event or policy. ANS: B PTS: 1 DIF: 2 REF: 5-0 NAT: Analytic LOC: Elasticity TOP: Elasticity MSC: Interpretive 4. When studying how some event or policy affects a market, elasticity provides information on the a. government expenditures associated with the policy. b. costs and benefits of the effect. c. allocative efficiency of the effect. d. direction and magnitude of the effect. ANS: D PTS: 1 DIF: 2 REF: 5-0 NAT: Analytic LOC: Elasticity TOP: Elasticity MSC: Interpretive 5. How does the concept of elasticity allow us to improve upon our understanding of supply and demand? a. Elasticity allows us to analyze supply and demand with greater precision than would be the case in the absence of the elasticity concept. b. Elasticity provides us with a better rationale for statements such as “an increase in x will lead to a decrease in y” than we would have in the absence of the elasticity concept. c. Without elasticity, we would not be able to address the direction in which price is likely to move in response to a surplus or a shortage. d. Without elasticity, it is very difficult to assess the degree of competition within a market. ANS: A PTS: 1 DIF: 2 REF: 5-0 NAT: Analytic LOC: Elasticity TOP: Elasticity MSC: Interpretive 6. When consumers face rising gasoline prices, they typically a. reduce their quantity demanded more in the long run than in the short run. b. reduce their quantity demanded more in the short run than in the long run. c. do not reduce their quantity demanded in the short run or the long run. d. increase their quantity demanded in the short run but reduce their quantity demanded in the long run. ANS: A PTS: 1 DIF: 2 REF: 5-0 NAT: Analytic LOC: Elasticity TOP: Elasticity MSC: Applicative

1 © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

2 ❖ Chapter 5/Elasticity and Its Application 7. A 10 percent increase in gasoline prices reduces gasoline consumption by about a. 6 percent after one year and 2.5 percent after five years. b. 2.5 percent after one year and 6 percent after five years. c. 10 percent after one year and 20 percent after five years. d. 0 percent after one year and 1 percent after five years. ANS: B PTS: 1 DIF: 2 REF: 5-0 NAT: Analytic LOC: Elasticity TOP: Elasticity MSC: Applicative 8. Which of the following statements about the consumers’ responses to rising gasoline prices is correct? a. About 10 percent of the long-run reduction in quantity demanded arises because people drive less and about 90 percent arises because they switch to more fuel-efficient cars. b. About 90 percent of the long-run reduction in quantity demanded arises because people drive less and about 10 percent arises because they switch to more fuel-efficient cars. c. About half of the long-run reduction in quantity demanded arises because people drive less and about half arises because they switch to more fuel-efficient cars. d. Because gasoline is a necessity, consumers do not decrease their quantity demanded in either the short run or the long run. ANS: C PTS: 1 DIF: 2 REF: 5-0 NAT: Analytic LOC: Elasticity TOP: Elasticity MSC: Applicative THE ELASTICITY OF DEMAND 1. The price elasticity of demand measures how much a. quantity demanded responds to a change in price. b. quantity demanded responds to a change in income. c. price responds to a change in demand. d. demand responds to a change in supply. ANS: A PTS: 1 DIF: 1 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Definitional 2. The price elasticity of demand measures a. buyers’ responsiveness to a change in the price of a good. b. the extent to which demand increases as additional buyers enter the market. c. how much more of a good consumers will demand when incomes rise. d. the movement along a supply curve when there is a change in demand. ANS: A PTS: 1 DIF: 1 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Definitional 3. The price elasticity of demand for a good measures the willingness of a. consumers to buy less of the good as price rises. b. consumers to avoid monopolistic markets in favor of competitive markets. c. firms to produce more of a good as price rises. d. firms to respond to the tastes of consumers. ANS: A PTS: 1 DIF: 1 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Interpretive

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 5/Elasticity and Its Application/ ❖ 3 4. Which of the following statements about the price elasticity of demand is correct? a. The price elasticity of demand for a good measures the willingness of buyers of the good to buy less of the good as its price increases. b. Price elasticity of demand reflects the many economic, psychological, and social forces that shape consumer tastes. c. Other things equal, if good x has close substitutes and good y does not have close substitutes, then the demand for good x will be more elastic than the demand for good y . d. All of the above are correct. ANS: D PTS: 1 DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Interpretive 5. If the price of natural gas rises, when is the price elasticity of demand likely to be the highest? a. immediately after the price increase b. one month after the price increase c. three months after the price increase d. one year after the price increase ANS: D PTS: 1 DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Applicative 6. If the price of gasoline rises, when is the price elasticity of demand likely to be the highest? a. immediately after the price increases b. one month after the price increase c. three months after the price increase d. one year after the price increase ANS: D PTS: 1 DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Applicative 7. If the price of milk rises, when is the price elasticity of demand likely to be the lowest? a. immediately after the price increase b. one month after the price increase c. three months after the price increase d. one year after the price increase ANS: A PTS: 1 DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Applicative 8. Holding all other forces constant, when the price of gasoline rises, the number of gallons of gasoline demanded would fall substantially over a ten-year period because a. buyers tend to be much less sensitive to a change in price when given more time to react. b. buyers tend to be much more sensitive to a change in price when given more time to react. c. buyers will have substantially more real income over a ten-year period. d. the quantity supplied of gasoline increases very little in response to an increase in the price of gasoline. ANS: B PTS: 1 DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Interpretive

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

4 ❖ Chapter 5/Elasticity and Its Application 9. Which of the following is not a determinant of the price elasticity of demand for a good? a. the time horizon b. the steepness or flatness of the supply curve for the good c. the definition of the market for the good d. the availability of substitutes for the good ANS: B PTS: 1 DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Interpretive 10. The greater the price elasticity of demand, the a. more likely the product is a necessity. b. smaller the responsiveness of quantity demanded to a change in price. c. greater the percentage change in price over the percentage change in quantity demanded. d. greater the responsiveness of quantity demanded to a change in price. ANS: D PTS: 1 DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Interpretive 11. Whether a good is a luxury or necessity depends on the a. price of the good. b. preferences of the buyer. c. intrinsic properties of the good. d. scarcity of the good. ANS: B PTS: 1 DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Interpretive 12. The price elasticity of demand for bread a. is computed as the percentage change in quantity demanded of bread divided by the percentage change in price of bread. b. depends, in part, on the availability of close substitutes for bread. c. reflects the many economic, social, and psychological forces that influence consumers' tastes for bread. d. All of the above are correct. ANS: D PTS: 1 DIF: 1 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Interpretive 13. The price elasticity of demand for eggs a. is computed as the percentage change in quantity demanded of eggs divided by the percentage change in price of eggs. b. will be lower if there is a new invention that is a close substitute for eggs. c. will be higher if consumers consider eggs to be a necessity. d. All of the above are correct. ANS: A PTS: 1 DIF: 1 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Interpretive 14. The price elasticity of demand measures the a. magnitude of the response in quantity demanded to a change in price. b. direction of the shift in the demand curve in response to a market event. c. size of the shortage created by the increase in demand. d. responsiveness of quantity demanded to a change in income. ANS: A PTS: 1 DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Definitional

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 5/Elasticity and Its Application/ ❖ 5 15. If the price of walnuts rises, many people would switch from consuming walnuts to consuming pecans. But if the price of salt rises, people would have difficulty purchasing something to use in its place. These examples illustrate the importance of a. the availability of close substitutes in determining the price elasticity of demand. b. a necessity versus a luxury in determining the price elasticity of demand. c. the definition of a market in determining the price elasticity of demand. d. the time horizon in determining the price elasticity of demand. ANS: A PTS: 1 DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Applicative 16. Suppose that Jane enjoys Diet Coke so much that she consumes one can every day. Although she enjoys gourmet cheese, she consumes it sporadically. If the price of Diet Coke rises, Jane decreases her consumption by only a very small amount. But if the price of gourmet cheese rises, Jane decreases her consumption by a lot. These examples illustrate the importance of a. the availability of close substitutes in determining the price elasticity of demand. b. a necessity versus a luxury in determining the price elasticity of demand. c. the definition of a market in determining the price elasticity of demand. d. the time horizon in determining the price elasticity of demand. ANS: B PTS: 1 DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Applicative 17. Suppose that Juan Carlos is filling out a survey that he received in the mail. The survey asks him what he would do if the price of his favorite toothpaste increased. Juan Carlos reports that he would switch to a different brand. The survey asks what he would do if the price of all toothpastes increased. Juan Carlos reports that he must use toothpaste, so he would have to adjust his spending elsewhere. These examples illustrate the importance of a. changes in total revenue in determining the price elasticity of demand. b. a necessity versus a luxury in determining the price elasticity of demand. c. the definition of a market in determining the price elasticity of demand. d. the time horizon in determining the price elasticity of demand. ANS: C PTS: 1 DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Applicative 18. Suppose that gasoline prices increase dramatically this month. Lola commutes 100 miles to work each weekday. Over the next few months, Lola drives less on the weekends to try to save money. Within the year, she sells her home and purchases one only 10 miles from her place of employment. These examples illustrate the importance of a. the availability of substitutes in determining the price elasticity of demand. b. a necessity versus a luxury in determining the price elasticity of demand. c. the definition of a market in determining the price elasticity of demand. d. the time horizon in determining the price elasticity of demand. ANS: D PTS: 1 DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Applicative 19. Economists compute the price elasticity of demand as the a. percentage change in price divided by the percentage change in quantity demanded. b. change in quantity demanded divided by the change in the price. c. percentage change in quantity demanded divided by the percentage change in price. d. percentage change in quantity demanded divided by the percentage change in income. ANS: C PTS: 1 DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Definitional

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

6 ❖ Chapter 5/Elasticity and Its Application

Table 5-1 Good A B

Price Elasticity of Demand 1.3 2.1

20. Refer to Table 5-1. Which of the following is consistent with the elasticities given in Table 5-2? a. A is a luxury, and B is a necessity. b. A is a good several years after a price increase, and B is that same good several days after the price increase. c. A is a Kit Kat bar, and B is candy. d. A has fewer substitutes than B. ANS: D PTS: 1 DIF: 3 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Analytical 21. Refer to Table 5-1. Which of the following is consistent with the elasticities given in Table 5-2? a. A is grapes, and B is fruit. b. A is T-shirts, and B is socks. c. A is train tickets before cars were invented, and B is train tickets after cars were invented. d. A is diamond necklaces, and B is beds. ANS: C PTS: 1 DIF: 3 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Analytical 22. Refer to Table 5-1. Which of the following is consistent with the elasticities given in Table 5-2? a. A is root beer, and B is carbonated beverages. b. A is bicycles, and B is mopeds. c. A is airline tickets in the short run, and B is airline tickets in the long run. d. A is gourmet coffee, and B is dentist’s visits. ANS: C PTS: 1 DIF: 3 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Analytical 23. Suppose there is a 6 percent increase in the price of good X and a resulting 6 percent decrease in the quantity of X demanded. Price elasticity of demand for X is a. 0. b. 1. c. 6. d. 36. ANS: B PTS: 1 DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Applicative 24. If the price elasticity of demand for a good is 4.0, then a 10 percent increase in price results in a a. 0.4 percent decrease in the quantity demanded. b. 2.5 percent decrease in the quantity demanded. c. 4 percent decrease in the quantity demanded. d. 40 percent decrease in the quantity demanded. ANS: D PTS: 1 DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Applicative

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 5/Elasticity and Its Application/ ❖ 7 25. If the price elasticity of demand for a good is 10.0, then a 4 percent increase in price results in a a. 0.4 percent decrease in the quantity demanded. b. 2.5 percent decrease in the quantity demanded. c. 4 percent decrease in the quantity demanded. d. 40 percent decrease in the quantity demanded. ANS: D PTS: 1 DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Applicative 26. If the price elasticity of demand for a good is 0.4, then a 10 percent increase in price results in a a. 0.4 percent decrease in the quantity demanded. b. 2.5 percent decrease in the quantity demanded. c. 4 percent decrease in the quantity demanded. d. 40 percent decrease in the quantity demanded. ANS: C PTS: 1 DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Applicative 27. If the price elasticity of demand for a good is 0.25, then a 20 percent decrease in price results in a a. 0.0125 percent increase in the quantity demanded. b. 4 percent increase in the quantity demanded. c. 5 percent increase in the quantity demanded. d. 80 percent increase in the quantity demanded. ANS: C PTS: 1 DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Applicative 28. If the price elasticity of demand for a good is 1.5, then a 3 percent decrease in price results in a a. 0.5 percent increase in the quantity demanded. b. 2 percent increase in the quantity demanded. c. 4.5 percent increase in the quantity demanded. d. 5 percent increase in the quantity demanded. ANS: C PTS: 1 DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Applicative 29. If the price elasticity of demand for a good is 0.2, then a 3 percent decrease in price results in a a. 0.6 percent increase in the quantity demanded. b. 1.5 percent increase in the quantity demanded. c. 2 percent increase in the quantity demanded. d. 6 percent increase in the quantity demanded. ANS: A PTS: 1 DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Applicative 30. If the price elasticity of demand for a good is 1, then a 3 percent decrease in price results in a a. 0.1 percent increase in the quantity demanded. b. 1 percent increase in the quantity demanded. c. 3 percent increase in the quantity demanded. d. 4 percent increase in the quantity demanded. ANS: C PTS: 1 DIF: 1 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Applicative

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

8 ❖ Chapter 5/Elasticity and Its Application 31. If the price elasticity of demand for a good is 4, then a 12 percent decrease in price results in a a. 0.33 percent increase in the quantity demanded. b. 3 percent increase in the quantity demanded. c. 30 percent increase in the quantity demanded. d. 48 percent increase in the quantity demanded. ANS: D PTS: 1 DIF: 1 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Price elasticity of demand MSC: Applicative 32. If the price elasticity of demand for a good is 0.8, then which of the fol...