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Exam 5: Elasticity and Its Application

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Question 151

Multiple Choice

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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.

E) A) and C)
F) All of the above

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Question 152

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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.

E) A) and D)
F) C) and D)

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Question 153

Multiple Choice

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Economists compute the price elasticity of demand as the

The price elasticity of demand measures

Table 5-2 -Refer to Table 5-2. Using the midpoint method, if the price falls from $200 to $150, the absolute value of the price elasticity of demand is

Cross-price elasticity of demand measures how the quantity demanded of one good changes as the price of another good changes.

Given the market for illegal drugs, when the government is successful in reducing the flow of drugs into the United States,

Which of the following is likely to have the most price inelastic demand?

Figure 5-2 -Refer to Figure 5-2. As price falls from Pa to Pb, we could use the three demand curves to calculate three different values of the price elasticity of demand. Which of the three demand curves would produce the smallest elasticity?

Figure 5-3 -Refer to Figure 5-3. Which demand curve is unit elastic?

Suppose that good X has few close substitutes and that good Y has many close substitutes. Which good would you expect to have more price elastic demand?

Drug interdiction, which reduces the supply of drugs, will likely be a less effective policy than educating consumers to reduce their demand for drugs because the drug interdiction policy will lower drug prices and reduce the quantity of drugs demanded.

When demand is inelastic, the price elasticity of demand is

Demand for a good is said to be inelastic if the quantity demanded increases substantially when the price falls by a small amount.

Which of the following is likely to have the most price inelastic demand?

The cross-price elasticity of garlic salt and onion salt is -2, which indicates that garlic salt and onion salt are substitutes.

The flatter the demand curve that passes through a given point, the more inelastic the demand.

Using the midpoint method, the price elasticity of demand for a good is computed to be approximately 0.75. Which of the following events is consistent with a 10 percent decrease in the quantity of the good demanded?

Scenario 5-8 Consider the markets for mobile and landline telephone service. Suppose that when the average income of residents of Plainville is $55,000 per year, the quantity demanded of landline telephone service is 12,500 and the quantity demanded of mobile service is 28,000. Suppose that when the price of mobile service rises from $100 to $120 per month, the quantity demanded of landline service decreases to 11,000. Suppose also that when the average income increases to $60,000, the quantity demanded of mobile service increases to 33,000. -Refer to Scenario 5-8. Using the midpoint method, what is the cross price elasticity of demand for landline and mobile service?

Scenario 5-8 Consider the markets for mobile and landline telephone service. Suppose that when the average income of residents of Plainville is $55,000 per year, the quantity demanded of landline telephone service is 12,500 and the quantity demanded of mobile service is 28,000. Suppose that when the price of mobile service rises from $100 to $120 per month, the quantity demanded of landline service decreases to 11,000. Suppose also that when the average income increases to $60,000, the quantity demanded of mobile service increases to 33,000. -Refer to Scenario 5-8. Considering the income elasticity, what type of good is mobile telephone service?