Download chapter 7 - TestBankTop

CHAPTER 7
CONSUMER CHOICE AND ELASTICITY
QUESTIONS 1 THROUGH 10 ARE A SUGGESTED CHAPTER QUIZ.
1.
If Mr. Smith thinks the last dollar spent on shirts yields less satisfaction than the last dollar spent on
cola, and Smith is a utility-maximizing consumer, he should
a. decrease his spending on cola.
b. decrease his spending on cola and increase his spending on shirts.
c. increase his spending on shirts.
d. increase his spending on cola and decrease his spending on shirts.
2.
A 10 percent increase in the price of sugar reduces sugar consumption by about 5 percent. The
increase causes households to
a. spend more on sugar.
b. spend less on sugar.
c. spend the same amount on sugar.
d. consume more goods like coffee and tea that are complements of sugar.
3.
Which of the following would be the best example of consumer surplus?
a. Jane does not get cell-phone service because she feels that it is worth less than the $30 a month
fee.
b. Sam pays $8 for a haircut that is worth $10 to him.
c. Ralph buys a house for $104,000, the maximum amount that he would be willing to pay for it.
d. Sue purchases a book for $20 and uses a credit card to pay for it.
4.
“I like ice cream, but after eating homemade ice cream last night, I want to have something else for
dessert today.” This statement most clearly reflects
a. the budget constraint.
b. consumer irrationality.
c. the second law of demand: Price elasticity increases with time.
d. the law of diminishing marginal utility.
5.
If Sarah’s income rises by 20 percent, and, as a result, she purchases 40 percent more designer
clothing, her income elasticity for designer clothing is
a. 0.5.
b. 1.0.
c. 2.0.
d. Not enough information is given to answer this question.
6.
Studies indicate that the demand for fresh tomatoes is much more elastic than the demand for salt.
These findings reflect that
a. tomatoes are a necessity while salt is a luxury.
b. it takes longer for consumers to adjust to a change in the price of salt than to a change in the
price of tomatoes.
c. salt will not spoil as easily as fresh tomatoes.
d. more good substitutes exist for fresh tomatoes than for salt.
279
280
Chapter 7/Consumer Choice and Elasticity
7.
Suppose the state of New York imposes a one dollar per pack tax on cigarettes, which increases
their price by 30 percent, and as a result, the quantity sold declines by 20 percent. The price
elasticity of demand for cigarettes is equal to
a. –0.20.
b. –0.67.
c. –1.50.
d. –3.00.
8.
Suppose that the quantity of DVD players sold increased from 200 to 400 when the price fell from
$225 to $175. Over this price range, the absolute value of the price elasticity of demand for DVD
players is
a. 0.25.
b. 0.375.
c. 1.0.
d. 2.67.
e. 4.0.
9.
If a Krispy Kreme doughnut shop near campus increases its prices by 5 percent, but revenues from
its sales are unchanged, the price elasticity of demand for the services offered by the doughnut shop
must be
a. elastic.
b. of unitary elasticity.
c. inelastic.
d. equal to 0.5.
10.
If the price of gasoline goes up, and Dan now buys fewer candy bars because he has to spend more
on gas, this would best be explained by
a. the substitution effect.
b. the income effect.
c. the highly elastic demand for gasoline.
d. all of the above.
ANSWER KEY 1 THROUGH 10
*1. (d), 2. (a), 3. (b), 4. (d), 5. (c), 6. (d), 7. (b), 8. (d), 9. (b), 10. (b)
FUNDAMENTALS OF CONSUMER CHOICE
11.
*
12.
*
Elaine values the utility of her first cup of coffee at $1; a second cup, $.75; and a third cup, $.50. If
Elaine drinks three cups of coffee for breakfast, her marginal utility is equal to
a. $.50, the value of her last cup of coffee.
b. $1.00, the value of her first cup of coffee.
c. $2.25.
d. $1.50.
Marginal utility is the change in
a. total utility when an extra unit of output is produced.
b. total utility when an extra unit of output is consumed.
c. marginal utility when an extra unit of output is produced.
d. average utility when an extra unit of output is consumed.
Chapter 7/Consumer Choice and Elasticity
13.
*
14.
*
15.
*
281
The principle of diminishing marginal utility says that
a. as more of a good or service is consumed, demand will decrease.
b. as more of a good or service is consumed, the price will rise.
c. the marginal utility of additional units consumed will increase.
d. the marginal utility of additional units consumed will decline.
Diminishing marginal utility means that
a. as you consume more of a good, other things constant, the total satisfaction you obtain from
consuming this good tends to fall.
b. as you hire more labor, other things constant, the total amount produced begins to fall.
c. as you consume more of a good, other things constant, the additional satisfaction you obtain
from each additional unit of the good tends to fall.
d. as you consume more of a good, other things constant, the extra satisfaction you obtain from
each additional unit becomes negative.
Which of the following most directly reflects the law of diminishing marginal utility?
a. After watching two football games, Terry decides to watch a third game.
b. A sports fan enjoys watching Monday night football rather than going to the theater.
c. After listening to three compact discs, Kim decides to go bowling rather than listen to a fourth
disc.
d. A musician receives the biggest ovation of the evening after playing the final number of a
recital.
16.
*
Which of the following relates most directly to the law of diminishing marginal utility?
a. After watching two football games, Terry decides to play golf rather than watch a third game.
b. A sports fan enjoys watching Monday night football rather than going to the theater.
c. Two carpenters build their own house rather than hiring a contractor.
d. A musician receives the biggest ovation of the evening after playing the final work of a recital.
17.
After eating six chocolate candy bars in ten minutes, Jody says, “You would have to pay me to eat
another chocolate candy bar!” This statement best illustrates
a. the law of demand.
b. the substitutability among goods.
c. the law of diminishing marginal utility.
d. that chocolate candy bars are an inferior good.
*
18.
*
A local restaurant offers an “all you can eat” ribs special. You pay $11.95, and then you can eat as
many servings as you desire at no additional cost. It would follow that you will stop eating when
a. your marginal utility (or value) derived from eating another serving is zero.
b. your total utility (or value) derived from all of the servings consumed just equals $11.95.
c. your marginal utility (or value) derived from another serving equals $11.95.
d. it is physically impossible for you to eat any more.
MARGINAL UTILITY, CONSUMER CHOICE, AND THE DEMAND CURVE
OF AN INDIVIDUAL
19.
*
If the price of a good is $0, a consumer will
a. consume an infinite quantity.
b. consume all units with positive marginal utility.
c. consume the entire amount supplied.
d. consume until total utility becomes 0.
282
20.
*
21.
*
22.
*
23.
*
24.
Chapter 7/Consumer Choice and Elasticity
The fact that a gallon of gasoline commands a higher market price than a gallon of water indicates
that
a. gasoline is an economic good but water is not.
b. the marginal utility of gasoline is greater than the marginal utility of a gallon of water.
c. the average utility of a gallon of gasoline is greater than the average utility of a gallon of water.
d. the total utility of gasoline exceeds the total utility of water.
The marginal value of a commodity to a consumer
a. increases as more of the good is consumed.
b. is exactly equal to price for all units purchased by the consumer.
c. is measured by the height of the individual consumer’s demand curve.
d. is equal to the area above the price and below the individual consumer’s demand curve.
Ceteris paribus, an increase in the price of a good will cause the
a. quantity demanded of the good to increase.
b. quantity supplied of the good to decrease.
c. consumer surplus derived from the good to decrease.
d. demand of the good to increase.
The difference between the amount consumers would be willing to pay and the amount they actually
pay for a good is called
a. price elasticity of demand.
b. consumer surplus.
c. the substitution effect.
d. income elasticity of demand.
John’s demand schedule for pizza is indicated below. If the current price of pizza is $1.10 per slice,
what is John’s consumer surplus if he buys five slices of pizza?
Price
(dollars)
1.50
1.40
1.30
1.20
1.10
1.00
*
25.
*
a.
b.
c.
d.
Q
(slices)
1
2
3
4
5
6
$0
$1.00
$1.10
$6.50
If John’s marginal benefit derived from the consumption of another candy bar is greater than the
price of the candy bar,
a. John will not purchase any more candy bars.
b. John will increase his total satisfaction by purchasing the candy bar.
c. the opportunity cost of the candy bar is lower than the price.
d. John will decrease his total utility if he purchases the candy bar.
Chapter 7/Consumer Choice and Elasticity
26.
*
283
If Jane’s marginal benefit as a consumer in the jeans market is larger than the price of a pair of
jeans,
a. Jane will not purchase any more jeans.
b. Jane can benefit by purchasing more jeans.
c. the opportunity cost of a pair of jeans is lower than the price.
d. Jane will decrease her total utility by purchasing more jeans.
Table 7-1
Price of the Good
$0.00
0.50
1.00
1.50
2.00
2.50
27.
*
28.
*
29.
*
30.
*
31.
*
Aaron
20
18
14
12
6
0
Angela
16
12
10
8
6
4
Austin
4
6
2
0
0
0
Alyssa
8
6
5
4
2
0
Refer to Table 7-1. When the price of the good is $1.00, the quantity demanded in this market
would be
a. 42 units.
b. 31 units.
c. 24 units.
d. 14 units.
Refer to Table 7-1. If the price increases from $1.00 to $1.50,
a. the market demand decreases by 20 units.
b. individual demand curves, when drawn, will shift to the left.
c. the quantity demanded in the market decreases by 2 units.
d. the quantity demanded in the market decreases by 7 units.
Refer to Table 7-1. Whose demand does not conform to the law of demand?
a. Aaron’s
b. Angela’s
c. Austin’s
d. Alyssa’s
If Mr. McLean thinks the last dollar spent on bowling yields more satisfaction than the last dollar
spent on hamburgers, and McLean is a utility-maximizing consumer, he should
a. bowl less, so the marginal satisfaction from expenditures in this area will increase.
b. spend more on hamburgers, so total satisfaction from that activity will increase.
c. eliminate spending on hamburgers.
d. bowl more and spend less on hamburgers.
If Mr. Smith thinks the last dollar spent on shirts yields more satisfaction than the last dollar spent
on cola, and Smith is a utility-maximizing consumer, he should
a. decrease his spending on cola.
b. decrease his spending on cola and increase his spending on shirts.
c. increase his spending on shirts.
d. increase his spending on cola and decrease his spending on shirts.
284
32.
*
33.
*
34.
*
35.
*
Chapter 7/Consumer Choice and Elasticity
Consider a consumer who purchases two goods, X and Y. If the price of good Y falls, then the
substitution effect by itself will
a. cause the consumer to buy more of good Y and less of good X.
b. cause the consumer to buy more of good X and less of good Y.
c. not affect the amount of goods X and Y that the consumer buys.
d. result in an upward-sloping demand for good Y because of the substitution effect.
Jeff likes Pepsi and pizza. When the price of pizza rises, the substitution effect causes Pepsi to be
relatively
a. more expensive, so Jeff buys more Pepsi.
b. more expensive, so Jeff buys less Pepsi.
c. less expensive, so Jeff buys more Pepsi.
d. less expensive, so Jeff buys less Pepsi.
Assume that a college student purchases only coffee and Snickers. The substitution effect associated
with a decrease in the price of a Snickers will result in
a. an increase in the consumption of coffee only.
b. a decrease in the consumption of coffee only.
c. an increase in the consumption of Snickers and a decrease in the consumption of coffee.
d. a decrease in the consumption of Snickers and an increase in the consumption of coffee.
If the price of hamburger increases, the substitution effect works to
a. decrease the quantity of hamburger supplied.
b. increase the number of hamburger buns demanded.
c. decrease the quantity of hamburger demanded.
d. increase the number of hamburger buns supplied.
Use the following information to answer the next two questions.
JoAnn considers cola and plain sparkling water to be good substitutes. Suppose the price of
sugar, a key ingredient used to produce cola, falls.
36.
*
37.
*
38.
*
According to the substitution effect, which of the following is most likely to occur?
a. JoAnn will purchase less cola and more sparkling water.
b. JoAnn will purchase more cola and less sparkling water.
c. JoAnn will purchase more of all goods due to her higher real income.
d. JoAnn’s demand curve will decrease (shift in), causing her to purchase less cola.
According to the income effect, which of the following is most likely to occur?
a. JoAnn will purchase less cola and more sparkling water.
b. JoAnn will purchase more cola and less sparkling water.
c. JoAnn will purchase more of most goods due to her higher real income.
d. JoAnn’s demand curve will decrease (shift in), causing her to purchase less cola.
Suppose there are only two goods, apples and oranges. What happens if the price of each good
increases by 15 percent?
a. The consumer will substitute apples for oranges.
b. The consumer will substitute oranges for apples.
c. There is no substitution effect because relative prices have remained constant.
d. Demand for both goods increases.
e. Demand for both goods decreases.
Chapter 7/Consumer Choice and Elasticity
39.
*
40.
*
285
According to the income effect, when the price of automobiles rises, people buy fewer automobiles
because
a. they substitute other forms of transportation for driving.
b. the nominal amount of their paychecks is smaller.
c. the purchasing power of their income is reduced.
d. their demand for automobiles is very elastic.
When the price of a good falls, consumers buy more of the good because it is cheaper relative to
competing goods. This statement describes the
a. consumer equilibrium effect.
b. price effect.
c. income effect.
d. substitution effect.
41.
*
Which of the following is the best example of the substitution effect?
a. Joe buys fewer apples and more oranges as the result of an increase in the price of apples.
b. Joe buys more apples when his income increases.
c. Joe buys an apple slicer when the price of apples decreases.
d. Joe buys less sugar as the result of an increase in price of apples.
42.
An increase in the consumption of a good resulting from a reduction in price that makes the good
cheaper in relation to other goods is called the
a. substitution effect.
b. income effect.
c. real balance effect.
d. inelasticity effect.
*
43.
*
44.
*
45.
*
When a reduction in the price of a good allows a consumer to purchase more of all goods, this effect
is called the
a. income effect.
b. substitution effect.
c. elasticity effect.
d. monetary effect.
High-wage consumers are overrepresented among airline and taxi passengers because
a. the opportunity cost of spending more time on transportation is higher for low-wage
consumers.
b. these commodities have income elasticities of less than 1.
c. the opportunity cost of spending more time on transportation is higher for high-wage
consumers.
d. the price elasticity of demand for airline and taxi services is quite high.
Time costs, unlike money prices, differ among individuals. Therefore,
a. money prices are essentially irrelevant when time costs matter.
b. high-wage consumers generally choose fewer time-intensive commodities than do low-income
consumers.
c. low-wage consumers generally choose more time-saving commodities than do persons with
higher time costs.
d. there is no predictable relationship between income level and the amount of time-saving
commodities chosen by a consumer.
286
46.
*
Chapter 7/Consumer Choice and Elasticity
Mr. Jones always buys gasoline at the corner station with his credit card. Now a new station (that
does not accept credit cards) is built on the other corner and offers the same quality of gasoline for
$.05 less per gallon. Is Jones irrational if he continues to buy gasoline at the old station?
a. Yes; such action would clearly violate the law of demand. If the price is lower across the street,
Jones should go there.
b. Not necessarily; he may think the ease and convenience of using the credit card is worth the
extra cost.
c. Yes; his actions imply that the law of diminishing returns does not apply to gasoline.
d. Not enough information is given to determine if his actions are rational.
MARKET DEMAND REFLECTS THE DEMAND OF INDIVIDUAL
CONSUMERS
47.
*
An individual's demand curve for a good is derived by
a. varying the income level and observing the resulting total utility derived from both goods.
b. varying the price of one good and observing the resulting quantities of the other good.
c. shifting the budget line to the left and calculating the loss in total utility.
d. varying the price of one good and observing the resulting quantities demanded of that good.
48.
*
The market demand for an item is
a. the sum of individual demands.
b. steeper for any given price change than the individual demand curves.
c. independent of the number of individuals in the market.
d. determined by dividing the quantity demanded by each individual by the number of individuals
in the market.
49.
*
In economic theory, the word “demand” refers to
a. the amount people are willing to purchase at various prices.
b. those wants or needs that are urgent or pressing.
c. wants that are economic in character rather than social, cultural, or spiritual.
d. the desire of persons for a good, regardless of whether they’re willing to purchase the good.
50.
The schedule of the amount of a product that consumers would be willing to purchase at alternative
prices during a specific time period is the
a. total utility schedule.
b. marginal utility schedule.
c. supply schedule.
d. demand schedule.
*
51.
*
Which of the following statements is true?
a. The demand curve for a group of consumers in a market is simply the horizontal summation of
each individual’s demand.
b. The single demand curve shows the quantity of a good that people will buy, allowing all
factors (price, income, expected future prices, etc.) to vary.
c. An increase in income will cause a person to move down and to the right along her demand
curve.
d. All of the above are true.
Chapter 7/Consumer Choice and Elasticity
287
ELASTICITY OF DEMAND
52.
*
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. Without elasticity, we would not be able to address the direction in which price is likely to
move in response to a surplus.
c. Without elasticity, we would not be able to address the direction in which price is likely to
move in response to a shortage.
d. Without elasticity, it is very difficult to assess the degree of competition within a market.
53.
*
Other things equal, the demand for a good tends to be more inelastic,
a. the fewer the available substitutes.
b. the longer the time period considered.
c. the more the good is considered a luxury good.
d. the more narrowly defined is the market for the good.
54.
The demand for Chocolate Chip Cookie Dough ice cream is likely quite elastic because
a. ice cream must be eaten quickly.
b. this particular flavor of ice cream is viewed as a necessity by many ice-cream lovers.
c. the market is broadly defined.
d. other flavors of ice cream are good substitutes for this particular flavor.
*
55.
*
56.
*
57.
*
58.
*
Along the inelastic portion of a demand curve,
a. the change in price will always be less than the change in quantity demanded.
b. the percentage change in price will be less than the percentage change in quantity demanded.
c. the change in price will always be more than the change in quantity demanded.
d. the percentage change in price will be more than the percentage change in quantity demanded.
If the elasticity of demand for cigarettes is 0.4, then an increase in the price of a pack of cigarettes
from $1.00 to $1.30 would reduce quantities demanded by about
a. 27 percent.
b. 40 percent.
c. 12 percent.
d. 95 percent.
If the price of apples decreases by 2 percent and causes apple consumption to increase by 4 percent,
the price elasticity of demand is ____, indicating the demand is ____.
a. 2, elastic
b. 2, inelastic
c. 0.5, elastic
d. 0.5, inelastic
If a 10 percent rise in price leads to a reduction in quantity demanded of more than 10 percent,
a. demand is elastic.
b. demand is inelastic.
c. elasticity of demand is unitary.
d. None of the above is correct.
288
59.
*
60.
*
61.
*
62.
*
Chapter 7/Consumer Choice and Elasticity
For a particular good, a 3 percent increase in price causes a 10 percent decrease in quantity
demanded. Which of the following statements is most likely applicable to this good?
a. The relevant time horizon is short.
b. The good is a necessity.
c. The market for the good is broadly defined.
d. There are many close substitutes for this good.
The more broadly a good is defined,
a. the more substitutes it has so the more elastic is its demand.
b. the fewer substitutes it has so the more elastic is its demand.
c. the more substitutes it has so the less elastic is its demand.
d. the fewer substitutes it has so the less elastic is its demand.
A successful advertising campaign would likely
a. increase price elasticity of demand by stressing the uniqueness of the product.
b. reduce price elasticity of demand by stressing the uniqueness of the product.
c. reduce price elasticity of demand by informing consumers of the availability of substitutes.
d. not alter the demand curve.
e. generally make the demand curve shift inward.
The more broadly a good is defined
a. the more substitutes it has, so demand will be more price-elastic.
b. the less substitutes it has, so demand will be more price-elastic.
c. the more substitutes it has, so demand will be less price-elastic.
d. the less substitutes it has, so demand will be less price-elastic
63.
*
A good that takes up a very large percentage of the consumer's budget will tend to have
a. an elastic demand.
b. a perfectly elastic demand.
c. an inelastic demand.
d. an upward-sloping demand curve.
e. very many substitutes.
64.
The demand for flour is
a. inelastic because there are few substitutes for flour and it represents a large percentage of a
consumer's budget.
b. inelastic because there are many substitutes for flour and it represents a large percentage of a
consumer's budget.
c. inelastic because there are few substitutes for flour and it represents a small percentage of a
consumer's budget.
d. elastic because there are no substitutes for flour and it represents a large percentage of a
consumer's budget.
e. elastic because there are many substitutes for flour and it represents a large percentage of a
consumer's budget.
*
65.
*
As people have more time to adjust to a price change,
a. demand becomes more elastic, and supply becomes less elastic.
b. demand becomes less elastic, and supply becomes more elastic.
c. both supply and demand become less elastic.
d. both supply and demand become more elastic.
e. elasticity of both demand and supply tends toward unity.
Chapter 7/Consumer Choice and Elasticity
66.
*
67.
*
68.
*
69.
*
70.
*
71.
*
289
If the price elasticity of demand is computed for two products, and product A measures .79, and
product B measures 1.6, then
a. product A is more price elastic than product B.
b. product B is more price elastic than product A.
c. consumers are more sensitive to price changes in product A than in product B.
d. product B is more price inelastic than product A.
e. products A and B must be substitutes.
If demand price elasticity measures 2, this implies that consumers would
a. buy twice as much of the product if the price drops 10 percent.
b. require a 2 percent drop in price to increase their purchases by 1 percent.
c. buy 2 percent more of the product in response to a 1 percent drop in price.
d. require at least a $2 increase in price before showing any response to the price increase.
e. buy twice as much of the product if the price drops 1 percent.
If the price elasticity of demand for football tickets is estimated to be 4.5, then a 10 percent increase
in football ticket prices would be expected to cause a
a. 4.5 percent decrease in quantity demanded.
b. 4.5 percent increase in quantity demanded.
c. 45 percent decrease in quantity demanded.
d. 45 percent increase in quantity demanded.
e. 450 percent increase in quantity demanded
Suppose the Pleasant Corporation cuts the price of its American Girl dolls by 10 percent, and as a
result, the quantity of the dolls sold increases by 25 percent. This indicates that the price elasticity of
demand for the dolls over this range is
a. 2.5.
b. 0.4.
c. 0.5.
d. 5.
e. inelastic.
When the price of Nike tennis shoes goes from $100 to $80, the quantity demanded increases from
20 to 30 million. Over this price range, the absolute value of the price elasticity of demand is
a. 0.55.
b. 1.
c. 1.25.
d. 1.80.
e. 2.50.
Suppose that Starbucks reduces the price of its premium coffee from $2.20 to $1.80 per cup, and as
a result, the quantity sold per day increased from 350 to 450. Over this price range, the absolute
value of the price elasticity of demand for Starbucks coffee is
a. 0.40.
b. 0.80.
c. 1.25.
d. 2.50.
e. 4.
290
72.
*
73.
*
74.
*
75.
*
76.
*
77.
*
78.
*
Chapter 7/Consumer Choice and Elasticity
If an increase in the excise tax imposed on cigarettes pushes the price per pack up by 20 percent,
and the quantity sold declines by 8 percent as a result, the price elasticity of demand for cigarettes is
equal to
a. –0.2.
b. –0.4.
c. –0.8.
d. –5.
If admission to a Shania Twain concert in a football stadium is lowered from $60 to $40, and
attendance increases from 25,000 to 35,000, the price elasticity of demand for attending the concert
is approximately
a. –0.25.
b. –0.5.
c. –0.83.
d. –1.2.
A recent increase in the supply of oranges caused the price to drop from $5 to $3 per bushel, and
quantity demanded to rise from 10,000 bushels to 25,000 bushels. This indicates that the price
elasticity of demand for oranges in this price range is
a. –0.33.
b. –0.58.
c. –1.
d. –1.71.
If the quantity demanded of a product fell from 11,000 to 10,000 when price rose from $9 to $10,
the price elasticity of demand over this range is equal to approximately
a. –0.1.
b. –0.05.
c. –0.9.
d. –1.1.
If the quantity of oranges purchased decreases by 30 percent as the result of a 15 percent increase in
the price of oranges, the price elasticity of demand for oranges is
a. –0.25.
b. –0.50.
c. –1.25.
d. –2.
If a 20 percent reduction in the price of airline tickets between Chicago and New York leads to a 50
percent increase in the quantity of tickets purchased, the price elasticity of demand for the tickets is
a. –0.20.
b. –0.40.
c. –0.50.
d. –2.50.
A local Krispy Kreme doughnut shop reduced its prices by 10 percent, and as a result, the quantity
of doughnuts sold increased by 25 percent. Over this range, the absolute value of the price elasticity
of demand was
a. 0.4.
b. 1.
c. 2.
d. 2.5
Chapter 7/Consumer Choice and Elasticity
79.
*
80.
*
81.
*
82.
*
83.
*
84.
*
85.
*
291
Suppose you are the manager of a local water company, and you are instructed to get consumers to
reduce their water consumption by 10 percent. If the price elasticity of demand for water is – .25, by
how much would you have to raise the price of water?
a. 10 percent
b. 25 percent
c. 40 percent
d. 100 percent
If the price of tickets to Disney World increases 10 percent, and as a result, attendance falls by 15
percent, the demand for the tickets is
a. elastic.
b. inelastic.
c. of unitary elasticity.
d. indeterminate.
If the quantity demanded increases by 20 percent in response to a 10 percent decrease in price,
demand is classified as
a. unstable.
b. relatively inelastic.
c. relatively elastic.
d. of unitary elasticity.
The price of product X increases from $35 to $40, and as a result, the quantity demanded decreases
from 250 to 200. Over this price range,
a. demand is elastic.
b. demand is inelastic.
c. demand is of unitary elasticity.
d. there is insufficient information to determine the price elasticity of demand.
The price of a product falls from $3.00 to $2.50, and as a result, the quantity demanded increases
from 100,000 to 120,000 units. From this, we can conclude that over this range the price elasticity
of demand for the product is
a. elastic.
b. inelastic.
c. of unitary elasticity.
d. –1.14.
A local Krispy Kreme doughnut shop reduced the price of its doughnuts from $4 per dozen to $3.50
per dozen, and as a result, the daily sales increased from 300 to 400 dozen. This indicates that the
price elasticity of demand for the doughnuts was
a. elastic.
b inelastic.
c. of unitary elasticity.
d. indeterminate; more information is needed to determine the price elasticity of demand.
When the price of designer jeans goes from $85 to $60, the quantity demanded increases from
100,000 to 120,000. Over this price range, the
a. demand for the jeans is elastic.
b. demand for the jeans is inelastic.
c. demand for the jeans is of unitary elasticity.
d. arc elasticity of demand for the jeans is –4.
292
86.
*
87.
*
88.
*
89.
*
90.
*
91.
*
92.
*
Chapter 7/Consumer Choice and Elasticity
A completely vertical demand curve implies a price elasticity of demand that is
a. perfectly elastic.
b. perfectly inelastic.
c. of unitary elasticity.
d. equal to infinity.
If a demand curve for a good were completely vertical, it would be considered
a. perfectly elastic.
b. perfectly inelastic.
c. of unitary elasticity.
d. relatively inelastic.
If consumers would be willing to purchase the same quantity of a good no matter what its price was,
the demand curve would
a. be a vertical line, and demand would be perfectly inelastic.
b. be a horizontal line, and the demand would be perfectly elastic.
c. not exist.
d. be identical to the supply curve for the good.
The demand curve for a good is very unlikely to be perfectly vertical because
a. scarcity and limited income restrict the ability of consumers to afford goods as they become
very expensive.
b. as the price of a good rises to high enough levels, the incentive for other suppliers to invent
new substitutes for the good increases.
c. consumers generally do not care about the price of the goods they consume.
d. both a and b are true.
If a large percentage increase in the price of a good results in a small percentage reduction in the
quantity demanded of the good, demand is said to be
a. of unitary elasticity.
b. relatively inelastic.
c. relatively elastic.
d. perfectly elastic.
When economists say the demand for a good is highly inelastic, they mean that
a. even if the price rose substantially, suppliers would be unwilling to offer much more of the
good.
b. the facilities utilized by producers of the good are inflexible; producers cannot easily expand
their facilities, even in the long run.
c. consumers will respond to a change in the price of the good by purchasing substantially more
of it.
d. a large (percentage) change in the price of a good will result in only a small (percentage)
change in the quantity demanded.
If the demand for cigarettes is highly inelastic, this indicates that
a. higher cigarette prices will increase the demand for cigarettes.
b. the price elasticity coefficient of cigarettes exceeds 1.
c. the price elasticity coefficient of cigarettes equals 1.
d. the quantity of cigarettes purchased by consumers is not very responsive to a change in the
price of cigarettes.
Chapter 7/Consumer Choice and Elasticity
93.
*
94.
*
95.
*
96.
*
97.
*
98.
*
99.
*
The price elasticity of demand for gasoline measures the
a. responsiveness of gasoline producers to changes in the quality of gasoline.
b. responsiveness of customers to changes in the price of gasoline.
c. responsiveness of consumer preferences to changes in the quality of gasoline.
d. both a and c above.
Why do economists use the concept of elasticity in addition to measurement of the slope of the
demand curve?
a. Mathematical equations are favored over graphical analysis.
b. Elasticities are independent of the units of measure.
c. The concept of elasticity can be used in other areas of economics, whereas the slope of the
demand curve is only useful in demand analysis.
d. These terms are interchangeable, but elasticity has the more professional sound.
The demand for which one of the following goods is most likely to be quite inelastic?
a. fresh green peas
b. provolone cheese
c. General Electric television sets
d. legal services
The demand for which one of the following is most likely to be highly elastic?
a. gasoline
b. fresh green spinach
c. tickets to the Super Bowl football game
d. the services of a physician
The demand for which one of the following will be most inelastic?
a. black-eyed peas
b. peas
c. vegetables
d. food products
The demand for which one of the following is most likely to be highly inelastic?
a. fresh green beans
b. Old Navy brand shirts
c. health-care services
d. haircutting services
Of the following goods, which is most likely to have the lowest elasticity of demand?
a. coffee
b. Chevrolet automobiles
c. fresh tomatoes
d. provolone cheese
100. For which one of the following goods would you expect the demand to be most elastic?
a. salt
b. gasoline, short run
c. automobiles
*
d. Chevrolet automobiles
293
294
Chapter 7/Consumer Choice and Elasticity
101. 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 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.
102. 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.
103. For which one of the following goods would you expect the demand to be most elastic?
a. gasoline
b. premium gasoline
c. unleaded gasoline
*
d. Exxon unleaded gasoline
104. Members of Alpha fraternity have developed a strong liking for Coca-Cola. Beta fraternity members
buy the same amount of Coke but believe Pepsi is just about as good. From this, we can infer that
a. Alpha members will not care what the price of Coke is.
b. compared to Alpha members, Betas will have a smaller price elasticity of demand for Coke.
*
c. compared to Alpha members, Betas will have a larger price elasticity of demand for Coke.
d. Alpha members will increase their purchases by a larger amount of Pepsi than Beta members in
response to a “50 cents off” sale on a case of Pepsi.
105. The price elasticity of demand for a commodity is determined primarily by the
a. size of the consumer surplus.
*
b. attractiveness of the substitutes for the good.
c. incomes of consumers.
d. availability of complementary goods.
106. Demand will be more inelastic,
*
a. the shorter the time the consumer has to adjust to price changes.
b. the higher the price of the good.
c. the more the number of good substitutes.
d. the less essential the consumption of the good.
107. Compared to the long run, consumers typically ___________ to price changes in the short run.
a. are very responsive
b. are more demand sensitive
*
c. are less demand sensitive
d. do not respond at all
e. overreact
108. Demand will be more elastic,
a. the shorter the time the consumer has to adjust to price changes.
b. the lower the price of the good.
*
c. the larger the number of good substitutes.
d. the more essential the consumption of the good.
Chapter 7/Consumer Choice and Elasticity
295
109. The demand for a product is likely to be more elastic
a. the smaller the share of the total budget spent on the product.
b. when more complementary products are available.
c. in the short run than in the long run.
*
d. when more good substitutes for the product are available.
110. The price elasticity of demand for a product tends to be large (more elastic) when
*
a. people spend a large share of their income on the product.
b. the population in the market area is small.
c. few good substitutes for the product are available.
d. many complementary products are available.
111. Other things constant, the price elasticity of demand for a product will tend to be smaller (more
inelastic) if
a. people spend a large share of their income on the product.
*
b. people spend an insignificant share of their income on the product.
c. the population in the market area is large.
d. there are many good substitutes for the product.
112. If you compared the short-run demand and long-run demand for education at your college, you
would almost certainly find that
a. the long-run demand curve was steeper than the short-run demand curve.
*
b. a tuition increase would reduce enrollment more in the long run than in the short run.
c. a reduction in tuition would increase enrollment in the short run but not in the long run.
d. the short-run and long-run demand curves were identical.
113. If Publix supermarket were to raise the prices of its bakery items, other things equal, we would
expect that
a. people would buy fewer baked goods at Publix, but the decrease in sales would diminish over
time.
*
b. people would buy fewer baked goods at Publix, and the decrease in sales would grow larger
over time.
c. people would buy fewer baked goods at Publix, and the reduction in quantity would stay the
same as time goes by.
d. sales of baked goods at Publix would initially fall but would eventually increase back to their
original level.
HOW DEMAND ELASTICITY AND PRICE CHANGES AFFECT TOTAL
EXPENDITURES (OR REVENUES) ON A PRODUCT
114. If the demand for a good is elastic, then total revenue
a. increases as price increases.
b. remains constant as quantity demanded increases.
*
c. increases as price decreases.
d. decreases as quantity demanded increases.
e. decreases as price decreases.
296
Chapter 7/Consumer Choice and Elasticity
115. If the price of Pepsi-Cola increases from 50 cents to 60 cents per can and the quantity demanded
decreases from 100 cans to 50 cans, then the Pepsi-Cola Company could increase its total revenue
by
*
a. lowering price.
b. decreasing quantity supplied.
c. leaving price the same.
d. raising price.
e. decreasing supply.
116. When the price of Pepsi-Cola increases from 50 cents to 60 cents per can the quantity demanded
decreases from 100 cans to 50 cans. Over this price range the demand for Pepsi-Cola is
a. inelastic.
*
b. elastic.
c. unitary elastic.
d. -0.83.
e. both a and d are correct.
117. Which of the following describes a situation in which demand must be elastic?
a. The price of pens rises by 10 cents, and quantity of pens demanded falls by 50.
b. The price of pens rises by 10 cents, and total revenue rises.
c. A 20 percent increase in the price of pens leads to a 20 percent decrease in the quantity of pens
demanded.
d. Total revenue does not change when the price of pens rises.
*
e. Total revenue decreases when the price of pencils rises.
118. Which of the following describes a situation in which demand must be inelastic?
a. The price of pens rises by 10 cents, and quantity of pens demanded falls by 50.
*
b. The price of pens rises by 10 cents, and total revenue rises.
c. A 20 percent increase in the price of pens leads to a 20 percent decrease in the quantity of pens
demanded.
d. Total revenue does not change when the price of pens rises.
e. Total revenue decreases when the price of pens rises.
119. Which of the following describes a situation in which demand must be inelastic?
a. Total revenue decreases by 10 percent when the price of jeans rises by 10 percent.
b. Total revenue decreases by less than 10 percent when the price of jeans rises by 10 percent.
*
c. Total revenue increases by more than 10 percent when the price of jeans rises by 10 percent.
d. Total revenue decreases by $10 when the price of jeans rises by $10.
e. Total revenue decreases by more than $10 when the price of jeans rises by $10.
120. Which of the following describes a situation in which demand must be elastic?
a. Total revenue increases by 15 percent when the price of corndogs rises by 15 percent.
b. Total revenue increases by less than 15 percent when the price of corndogs rises by 15 percent.
*
c. Total revenue decreases by more than 15 percent when the price of corndogs rises by 15
percent.
d. Total revenue increases by $15 when the price of corndogs rises by $15.
e. Total revenue increases by more than $15 when the price of corndogs rises by $15.
121. If the price of apples increases, total expenditures on apples will decline if
a. the demand for apples is inelastic.
*
b. the demand for apples is elastic.
c. the quantity of apples purchased is unresponsive to changes in price.
d. there are few good substitutes for apples.
Chapter 7/Consumer Choice and Elasticity
297
122. If a Pizza Hut restaurant near campus increases its prices by 10 percent, and as a result, its sales
revenue increases by 3 percent, the price elasticity of demand for the services offered by the
restaurant must be
a. elastic.
b. of unitary elasticity.
*
c. inelastic.
d. equal to 0.5.
e. equal to 2.
123. If a Pizza Hut restaurant near campus reduces its pizza prices by 15 percent, and as a result, its total
revenue from pizza sales increases, this indicates that the price elasticity of demand for the firm’s
pizza was
*
a. elastic.
b. of unitary elasticity.
c. inelastic.
d. equal to 0.15.
124. A 20 percent increase in the price of sugar reduces sugar consumption by about 10 percent. Such a
price increase causes households to
a. spend less on sugar.
*
b. spend more on sugar.
c. spend the same amount on sugar as before.
d. consume more goods like coffee and tea, which are sugar complements.
125. Suppose a city that operates local electric and natural gas companies wants to raise revenues by
increasing its rates for electricity and natural gas. The price rise will increase city revenues if the
elasticity of demand for electricity and natural gas is
*
a. less than 1 in absolute value.
b. elastic.
c. negative.
d. equal to –1.
126. A 20 percent increase in the price of sugar reduces the consumption of sugar by about 10 percent.
The increase in the price of sugar causes households to
*
a. spend more on sugar.
b. spend less on sugar.
c. spend the same amount on sugar as they did before the price rose.
d. consume more goods like coffee and tea, which are complements to sugar.
127. Julia knows the price elasticity of movie rentals is 3. She knows, therefore, that if she raises her
price from $2 to $2.50, her rentals will drop by approximately
a. 150 percent.
b. 100 percent.
*
c. 66 percent.
d. 33 percent.
128. Tele-Com, Inc., the nation's largest cable TV company, tested the effect of a price reduction for the
Disney Channel. It lowered prices from $10.75 to $7.95 and found that the number of customers
more than doubled. This means the
a. demand curve for the Disney Channel shifted to the right.
b. supply curve of the Disney Channel shifted to the left.
*
c. demand for the Disney Channel is elastic in this price range.
d. demand for the Disney Channel is inelastic in this price range.
298
Chapter 7/Consumer Choice and Elasticity
129. A recent study on enrollment at a liberal arts college concluded that demand elasticity is 0.91. The
administration is considering a tuition increase to help balance the budget. The revenue-maximizing
decision is to
a. decrease tuition, which should boost enrollment enough to balance the budget.
b. decrease tuition, which would bring in more revenue.
c. leave tuition as is-an increase would not help balance the budget.
*
d. increase tuition, which would generate more revenue.
130. The price of an airline ticket rises as the amount of time between purchase and flight departure gets
smaller. The airlines base the policy on the assumption that
a. consumers are not aware of airline prices.
b. consumer demand is unrelated to prices.
c. consumer demand becomes more elastic as departure time approaches.
*
d. consumer demand becomes less elastic as departure time approaches.
131. New York City increased regulated taxi fares by 17.5 percent and expected taxi revenue to increase
by the same amount. The taxi commission believed taxi demand was
a. unit elastic.
b. somewhat elastic.
c. perfectly elastic.
*
d. perfectly inelastic.
e. somewhat inelastic
132. In which of the following cases will the total spending on a good decrease?
a. Demand is inelastic, and price increases.
*
b. Demand is elastic, and price increases.
c. Demand is inelastic, and price increases.
d. Demand is of unit elasticity, and price decreases.
133. When demand is price inelastic,
*
a. price and total revenue move in the same direction.
b. price and total revenue move in the opposite direction.
c. total revenue increases whether price goes up or down.
d. total revenue decreases whether price goes up or down.
134. If an increase in the price of “Mom’s Apple Pie” from $8 per pie to $10 decreases cash receipts by 2
percent, the price elasticity of demand (in the $8 to $10 range) is
*
a. elastic.
b. inelastic.
c. 0.02.
d. 0.25.
135. Suppose Microsoft announces it is cutting the prices of some of its software titles (mainly games)
by 25 percent. Assuming that Microsoft is seeking to increase revenues, it must believe that the
elasticity of demand for these products is
*
a. elastic.
b. inelastic.
c. of unitary elasticity.
d. perfectly inelastic.
Chapter 7/Consumer Choice and Elasticity
299
136. If a 10 percent rise in airfares leads to a 5 percent increase in total expenditures on air travel, the
price elasticity of demand for air travel in this range must be
a. 2.
b. elastic.
c. 0.5.
*
d. inelastic.
137. If a 30 percent decline in the price of gasoline leads to a 15 percent rise in expenditures on gasoline,
the price elasticity of demand for gasoline in this range must be
a. 2.
*
b. elastic.
c. 0.5.
d. inelastic.
138. If the board of regents of a major state university system plans to raise tuition in order to increase
revenues, the regents must believe student demand is
a. elastic.
*
b. inelastic.
c. of unitary elasticity.
d. perfectly elastic.
139. If demand is inelastic, an increase in the price of a good will cause total expenditures on the good to
a. fall.
b. remain constant since the decrease in quantity sold is exactly offset by the price increase.
*
c. rise.
d. rise if it is a normal good and fall if it is an inferior good.
140. An increase in the price of computer diskettes leads to an increase in total expenditures on the
diskettes. Which of the following is true for this price change?
a. Computer diskettes are an inferior good.
b. The demand for computer diskettes is perfectly elastic.
*
c. The demand for computer diskettes is inelastic.
d. The demand for computer diskettes is elastic.
141. If the price of apples increases, total expenditures on apples will decline if
a. there are few substitutes for apples.
b. the supply of apples is inelastic.
*
c. the demand for apples is elastic.
d. apples are a normal good.
142. If you cut your prices by 10 percent and total revenues rise, the price elasticity of demand is
a. less than 0.5 in absolute value.
b. inelastic.
c. zero.
*
d. greater than 1 in absolute value.
143. Suppose the athletic department wanted to increase revenues by decreasing ticket prices to football
games. This would make sense only if the price elasticity of demand for football games was (in
absolute value)
*
a. greater than 1.
b. equal to 1.
c. less than 1.
d. perfectly inelastic.
300
Chapter 7/Consumer Choice and Elasticity
144. If the price of a good falls by 5 percent, and as a result, total revenue increases by 5 percent, the
good’s price elasticity of demand is
a. –1.
*
b. elastic.
c. –10.
d. inelastic.
145. Elaine, a small grocer, is planning to cut certain prices to increase her sales revenues. What will be
the likely result of a price decrease for matches, a good for which the demand is inelastic, and a
price decrease for fresh green tomatoes, an item for which consumer demand is elastic?
a. The total revenue derived from both will go up.
b. The total revenue derived from matches will increase, but total revenue derived from tomatoes
will decline.
*
c. The total revenue derived from matches will decline, but total revenues derived from tomatoes
will increase.
d. The total revenues derived from both will decline.
146. People can travel within Washington D.C. via the Metro subway system or by taxi. Suppose taxi
fares increase by 20 percent, while the subway fares remain constant. As the result of the higher taxi
fares, the total revenue derived from subway fares __________, while the total revenue derived
from taxi fares _____________.
a. will decrease; may either increase or decrease
*
b. will increase; may either increase or decrease
c. may either increase or decrease; will increase
d. may either increase or decrease; will decrease
INCOME ELASTICITY
147. If Francis experiences a decrease in his income, we would expect that Francis’s demand for
a. each good he purchases will remain unchanged.
*
b. normal goods will decrease.
c. most goods will increase.
d. inferior goods will decrease.
148. You and your college roommate eat three packages of Ramen noodles each week. After graduation
last month, both of you were hired at several times your college income. You still enjoy Ramen
noodles very much and buy even more, but your roommate plans to buy fewer Ramen noodles in
favor of foods she prefers more. When looking at income elasticity of demand for Ramen noodles,
a. yours would be negative and your roommate's would be positive.
*
b. yours would be positive and your roommate's would be negative.
c. yours would be zero and your roommate's would approach infinity.
d. yours would approach infinity and your roommate's would be zero.
149. Muriel's income elasticity of demand for football tickets is 1.5. All else equal, this means that if her
income increases by 20 percent, she will buy
a. 150 percent more football tickets.
b. 50 percent more football tickets.
*
c. 30 percent more football tickets.
d. 20 percent more football tickets.
Chapter 7/Consumer Choice and Elasticity
301
150. The number of CDs purchased increased by 5 percent when consumer income increased by 10
percent. Assuming other factors are held constant, CDs would be classified as
a. inferior goods.
*
b. normal goods.
c. elastic goods.
d. inelastic goods.
151. If bus travel is an inferior good, then its income elasticity of demand will be
a. strictly greater than one.
b. positive.
c. equal to zero.
*
d. negative.
152. A good is classified as inferior if
a. consumers buy less when the price rises.
*
b. consumers buy less when income rises.
c. consumers buy less when the price falls.
d. consumers buy more when income rises.
153. Suppose the value of income elasticity of demand for a private college education is equal to 1.5.
This means that:
a. every $1 increase in income provides an incentive for a $1.50 increase in expenditures on
private college education.
b. every $1.50 increase in income provides an incentive for a $1 increase in expenditures on
private college education.
*
c. a 10 percent increase in income causes a 15 percent increase in the quantity of private college
education purchased.
d. a 15 percent increase in income causes a 10 percent increase in the quantity of private college
education purchased.
e. a 10 percent decrease in private college tuition will have a large enough income effect to
increase spending on private college education by 15 percent.
154. Sarah recently got a 10 percent raise. She now purchases 30 percent more in groceries on a weekly
basis. Sarah’s income elasticity for groceries is
a. 0.33.
b. 0.5.
c. 1.
*
d. 3.
155. Sally recently got a 15 percent raise. She now purchases 7.5 percent more steak dinners. Sally’s
income elasticity for steak dinners is
*
a. 0.5.
b. 0.75.
c. 1.5
d. 2.
156. If a 10 percent increase in income induced a group of consumers to reduce their yearly purchases of
potatoes by 5 percent, for these consumers,
a. the income elasticity of potatoes equals approximately 1.05.
b. the income elasticity of potatoes is 0.5.
c. potatoes are a luxury good.
*
d. potatoes are an inferior good.
302
Chapter 7/Consumer Choice and Elasticity
157. An inferior good is a good whose quantity demanded
a. rises when its price falls.
b. falls when the price of a related good falls.
c. falls when the consumer's total utility rises.
*
d. rises when the consumer's income falls.
158. The difference between normal and inferior goods is that
a. an increase in price will shift the demand curve for a normal good rightward and the demand
curve for an inferior good leftward.
b. if the price of a normal good increases, individuals who buy it are poorer; for inferior goods,
the opposite is true.
c. an inferior good is something that will not be demanded until quantities of the normal good
have been exhausted.
*
d. an increase in income will shift the demand curve for a normal good rightward and the demand
curve for an inferior good leftward.
159. If people buy less chewing gum at every price when their incomes fall, then
*
a. chewing gum is a normal good.
b. the demand for chewing gum is positively sloped.
c. demand for chewing gum has increased.
d. the price of chewing gum has increased.
e. there has been a decrease in population that changed demand.
160. A normal good is defined by economists to be a good
a. with a negatively-sloped demand curve.
b. that is purchased by at least 75 percent of the population.
c. that is bought by consumers with normal tastes.
*
d. whose demand increases when incomes increase.
e. whose demand decreases when incomes increase.
161. Assuming that bus travel is an inferior good, a decrease in consumer income, other things being
equal, will cause
a. a downward movement along the demand curve for bus travel.
b. no change in the demand curve for bus travel.
c. an upward movement along the demand curve for air travel.
*
d. a rightward shift in the demand curve for bus travel.
162. Assuming that bus travel is an inferior good, an increase in consumer income, other things being
equal, will cause
a. an upward movement along the demand curve for bus travel.
b. a downward movement along the demand curve for bus travel.
c. a rightward shift in the demand curve for bus travel.
*
d. a leftward shift in the demand curve for bus travel.
163. If the income elasticity of a good is positive, we can conclude that the good is
a. an inferior good.
*
b. a normal good.
c. a luxury good.
d. a necessity.
Chapter 7/Consumer Choice and Elasticity
303
164. If the demand for a product increases as the result of a decline in income, it can be concluded that
the
*
a. product is an inferior good.
b. demand for the product is inelastic.
c. price elasticity of demand for the product equals unity.
d. demand for the product is elastic.
165. If the income elasticity of demand for a good is negative, this implies that
a. only the poor will buy the good.
b. as incomes fall, less will be spent on the good.
*
c. as incomes rise, the demand for the good will fall.
d. the good does not obey the law of demand.
166. If rice is an inferior good,
a. the income elasticity of demand for rice will be positive.
*
b. an increase in income will cause the demand curve for rice to shift to the left.
c. an increase in income will cause consumers to buy more rice at the current market price.
d. a reduction in income would not affect the demand for rice, but it would increase the quantity
demanded.
167. A good with a high income elasticity is generally considered to be
a. an inferior good.
*
b. a luxury good.
c. a necessity.
d. inexpensive, relative to other goods.
168. Goods that consumers regard as luxuries generally have
a. an income elasticity equal to 1.
b. an income elasticity less than 1.
*
c. an income elasticity greater than 1.
d. a negative income elasticity.
PRICE ELASTICITY OF SUPPLY
169. As the period for firms to expand output is lengthened, the elasticity of the market supply curve will
a. approach zero.
*
b. increase.
c. decrease.
d. remain the same since time does not affect the elasticity of market supply.
170. All things equal, the price elasticity of supply
a. will be greater in the short run than in the long run.
*
b. will be greater in the long run than in the short run.
c. is the same for the short run and the long run.
d. approaches zero in the long run.
ADDENDUM: CONSUMER CHOICE AND INDIFFERENCE CURVES
171. Indifference curves illustrate how
a. supply and demand influence individual preferences.
*
b. an individual ranks alternative consumption bundles.
c. individual activities may be combined to reveal the preferences of a society.
d. elasticities are utilized in individual choice.
304
Chapter 7/Consumer Choice and Elasticity
172. An indifference curve slopes downward to the right because
a. more goods are preferable to fewer goods.
b. indifference curves are convex to the origin.
*
c. goods are substitutable.
d. any two bundles of goods can be compared.
173. An indifference curve slopes downward to the right because
a. more goods are preferable to fewer goods.
b. indifference curves are convex to the origin.
c. goods are not substitutable.
*
d. goods are substitutable.
174. To maximize satisfaction from a fixed money budget, a consumer buying products A and B wants to
make sure that the marginal utility of the last dollar spent on product A is
a. as great as possible.
b. as low as possible.
*
c. the same as the marginal utility of the last dollar spent on product B.
d. equal to the price of product B divided by the marginal utility of the last dollar spent on B.
175. Within the framework of indifference curve analysis, what prevents the individual from purchasing
more and more of each good?
a. legal prohibitions
*
b. a budget constraint
c. exhaustible wants
d. psychological considerations
176. What separates consumption bundles that are attainable from those that are unattainable?
a. indifference curves
b. the marginal rate of substitution
*
c. the consumption opportunity constraint
d. individual marginal utility functions
177. In indifference curve analysis, when the price of one of the goods under consideration decreases, the
*
a. slope of the budget-constraint line will change.
b. indifference curves will shift.
c. individual’s nominal income will be reduced.
d. individual’s real income will decrease.
Chapter 7/Consumer Choice and Elasticity
305
GRAPHIC QUESTIONS
Figure 1
178. Figure 1 depicts a demand curve with a price elasticity that is
a. perfectly elastic, implying that consumers will purchase as much as can be supplied at the
market price.
b. relatively inelastic, implying that a percent increase in price results in a smaller percent
reduction in sales.
*
c. unitary, implying that a percent change in price leads to an equal percent change in quantity
demanded.
d. perfectly inelastic, implying that the same amount will be purchased regardless of the price of
the good.
Figure 2
179. Figure 2 depicts a demand curve with a price elasticity that is
a. perfectly elastic, implying that as much as can be supplied will be purchased at the market
price.
b. relatively inelastic, implying that a percent increase in price results in a smaller percent
reduction in sales.
c. unitary, implying that a percent change in price leads to an equal percent change in quantity
demanded.
*
d. perfectly inelastic, implying that the same amount will be purchased regardless of the price of
the good.
306
Chapter 7/Consumer Choice and Elasticity
Figure 3
180. Figure 3 depicts a demand curve with a price elasticity that is
*
a. perfectly elastic, implying that consumers will purchase as much as can be supplied at the
market price.
b. relatively inelastic, implying that a percent increase in price results in a smaller percent
reduction in sales.
c. unitary, implying that a percent change in price leads to an equal percent change in quantity
demanded.
d. perfectly inelastic, implying that the same amount will be purchased regardless of the price of
the good.
Figure 4
181. Which of the following is true for the demand curve depicted in Figure 4?
a. An increase in price from $2 to $3 will reduce total expenditures on the product.
b. In the $2 to $3 range, the price elasticity of the demand curve is approximately unitary.
c. At a price of $2, the price elasticity of the demand curve equals approximately –2.5.
*
d. In the $2 to $3 range, the demand curve is inelastic.
Chapter 7/Consumer Choice and Elasticity
Figure 5
182. Which of the following is true for the demand curve depicted in Figure 5?
a. In the $3 to $4 range, the price elasticity of the demand curve equals 1.
b. At a price of $3, the price elasticity of the demand curve equals approximately –3.3.
*
c. In the $3 to $4 range, the demand curve is inelastic.
d. In the $3 to $4 range, the demand curve is elastic.
Use the figure below to answer the following questions.
Figure 6
183. Between $3 and $4, the price elasticity of the demand curve depicted in Figure 6 is
a. relatively inelastic.
b. approximately equal to –0.33.
c. approximately equal to –3.
*
d. both a and b.
307
308
Chapter 7/Consumer Choice and Elasticity
184. In the price range between $3 and $4, the price elasticity of the demand curve depicted in Figure 6
is
a. highly elastic.
*
b. approximately equal to –0.33.
c. approximately equal to –3.
d. of unitary elasticity.
Figure 7
185. In the price range between $3 and $4, the price elasticity of the demand curve depicted in Figure 7
is
a. highly elastic.
b. approximately equal to –0.33.
*
c. approximately equal to –3.
d. of unitary elasticity.
Figure 8
186. For a price increase from $10 to $11, the price elasticity of the demand curve depicted in Figure 8 is
a. highly inelastic.
b. relatively inelastic.
c. approximately equal to –1.
*
d. approximately equal to –2.
Chapter 7/Consumer Choice and Elasticity
309
Figure 9
187. At a price of $10, the price elasticity of the demand curve depicted in Figure 9 is
a. positive.
b. approximately equal to –0.1.
*
c. approximately equal to –1.
d. approximately equal to –2.
Figure 10
188. Figure 10 depicts a demand curve with a price elasticity that is
a. unitary, implying that a percent change in price leads to an equal percent change in quantity
demanded.
b. perfectly inelastic, implying that the same amount will be purchased regardless of the price of
the good.
c. equal to zero.
*
d. both b and c.
310
Chapter 7/Consumer Choice and Elasticity
Figure 11
189. Refer to Figure11. As price falls from PA to PB, which demand curve represents the most elastic
demand?
*
a. D1
b. D2
c. D3
d. All of the above are equally elastic.
190. Refer to Figure 11. 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?
a. D1
b. D2
*
c. D3
d. All of the above are equally elastic.
Figure 12
Chapter 7/Consumer Choice and Elasticity
311
191. Refer to Figure 12. When price falls from $50 to $40, it can be inferred that demand between those
two prices is
a. inelastic, since total revenue decreases from $8,000 to $5,000.
b. inelastic, since total revenue increases from $5,000 to $8,000.
*
c. elastic, since total revenue increases from $5,000 to $8,000.
d. unit elastic, since total revenue increases from $5,000 to $8,000.
192. Refer to Figure 12. An increase in price from $20 to $30 would
a. increase total revenue by $2,000.
b. decrease total revenue by $2,000.
*
c. increase total revenue by $1,000.
d. decrease total revenue by $1,000.
193. Refer to Figure 12. An increase in price from $30 to $35 would
a. increase total revenue by $250
*
b. decrease total revenue by $250.
c. increase total revenue by $500.
d. decrease total revenue by $500.
Figure 13
194. Refer to Figure13. If price increases from $10 to $15, total revenue will
*
a. increase by $20, so demand must be inelastic in this price range.
b. increase by $5, so demand must be inelastic in this price range.
c. decrease by $20, so demand must be elastic in this price range.
d. decrease by $10, so demand must be elastic in this price range.
195. Refer to Figure 13. A decrease in price from $15 to $10 leads to
a. a decrease in total revenue of $10, so the price elasticity of demand is greater than 1 in this
price range.
b. a decrease in total revenue of $10, so the price elasticity of demand is less than 1 in this price
range.
*
c. a decrease in total revenue of $20, so the price elasticity of demand is less than 1 in this price
range.
d. a decrease in total revenue of $20, so demand is elastic in this price range.
312
Chapter 7/Consumer Choice and Elasticity
Figure 14
196. Refer to Figure 14. Which supply curve represents perfectly inelastic supply?
*
a. S1
b. S2
c. S3
d. It is impossible to tell without more information.
Figure 15
197. Refer to Figure 15. Along which of these segments of the supply curve is supply least elastic?
*
a. between E and F
b. between C and D
c. between A and C
d. between A and B
Chapter 7/Consumer Choice and Elasticity
198. Refer to Figure 15. Along which of these segments of the supply curve is supply most elastic?
*
a. between A and B
b. between C and D
c. between D and F
d. between E and F
Figure 16
199. Which of the demand curves in Figure 16 is unit elastic?
a. the curve in graph a
b. the curve in graph b
*
c. the curve in graph c
d. the curve in graph d
e. the curve in graph e
200. Which demand curve in Figure 16 is perfectly elastic?
a. the curve in graph a
*
b. the curve in graph b
c. the curve in graph c
d. the curve in graph d
e. the curve in graph e
313
314
Chapter 7/Consumer Choice and Elasticity
Figure 17
201. Consider Figure 17. Between the prices of $5 and $6, which supply curve is most elastic and which
is least elastic?
a. S1 is most elastic; S2 is least elastic.
*
b. S1 is most elastic; S3 is least elastic.
c. S3 is most elastic; S1 is least elastic.
d. S3 is most elastic; S2 is least elastic.
e. S2 is most elastic; S3 is least elastic.
COURSEBOOK: MULTIPLE CHOICE QUESTIONS
202. A 15 percent increase in the price of beef reduces the quantity of beef consumed by 30 percent.
Thus, the demand for beef is _______, and total consumer expenditure (or total firm revenue) will
_______ as a result of the price increase. (Fill in the blanks.)
a. elastic; increase
*
b. elastic; decrease
c. inelastic; increase
d. inelastic; decrease
203. Which of the following is true about marginal benefit?
a. A consumer’s marginal benefit is equal to the height of her demand curve.
b. Consumers will continue to purchase up until the point where marginal benefit equals price.
c. Marginal benefit declines as consumption increases because of the law of diminishing marginal
utility.
*
d. All of the above are true.
204. Jane received a 10 percent increase in her salary and purchased 20 percent more jewelry. For Jane,
jewelry
a. has an income elasticity of two.
b. is a normal good.
c. is a luxury good.
*
d. is all of the above.
Chapter 7/Consumer Choice and Elasticity
315
205. An inferior good is distinguished by a
a. negative price elasticity of demand.
b. positive price elasticity of demand.
c. positive income elasticity of demand.
*
d. negative income elasticity of demand.
206. If Joe’s income increased and as a result he purchased more wine and less fast food,
*
a. wine is a normal good and fast food an inferior good for Joe.
b. wine is an inferior good and fast food a normal good for Joe.
c. both wine and fast food are inferior goods for Joe.
d. both wine and fast food are normal goods for Joe.
207. “After eating nothing but fast-food hamburgers on spring break, I was anxious to return home and
eat something different.” This statement most clearly reflects the law of
a. the budget constraint.
b. consumer irrationality.
c. greater demand elasticity with time.
*
d. diminishing marginal utility.
208. If the price elasticity of demand for grapes was 2.5,
a. the demand for grapes would be considered inelastic.
*
b. an increase in the price of grapes would decrease total consumer spending on grapes.
c. consumer purchases are less sensitive to a change in the price of grapes than to a change in the
price of bananas, which have a price elasticity of 1.6.
d. the income elasticity for grapes must also be 2.5.
209. If a 50 percent increase in the price of hula hoops led to a 10 percent reduction in the quantity of
hula hoops purchased, the price elasticity of demand is
a. 5 and the demand for hula hoops is elastic.
b. 0.2 and the demand for hula hoops is elastic.
c. 5 and the demand for hula hoops is inelastic.
*
d. 0.2 and the demand for hula hoops is inelastic.
210. “Because of the unseasonably cold weather, Florida orange growers expect (1) fewer bushels of
oranges to be harvested, (2) a higher market price for oranges, and (3) larger total revenues from
this year’s crop.” This statement would most likely be correct if the
a. demand for Florida oranges was elastic.
b. demand for Florida oranges was unitary elastic.
*
c. demand for Florida oranges was inelastic.
d. income elasticity of Florida oranges was negative.
211. Which of the following statements is true regarding the price elasticity of supply?
a. The price elasticity of supply is always negative.
*
b. The price elasticity of supply is always positive.
c. The price elasticity of supply will be greater when suppliers have a shorter time to respond to a
price change.
d. None of the above statements are true.
316
Chapter 7/Consumer Choice and Elasticity
212. Use the diagram below to answer this question.
*
For this demand curve, the price elasticity of demand is
a. more elastic at $3 than at $2.
b. more elastic at $2 than at $3.
c. identical at $2 to that at $3.
d. equal to 1.0 over the range from $3 to $2.
213. A car wash currently sells 30 car washes a day at a price of $5. Total daily revenue is now $150. If
they lower their price to $3,
a. total revenue will fall if the number of washes sold only rises to 40.
b. total revenue will remain unchanged if the number of washes sold rises to 50.
c. total revenue will increase if the number of washes sold rises to 60.
*
d. all of the above are true.
214. Coach Ballford: “To increase our revenue from football games, we need to lower ticket prices.”
University President Smith: “Coach, that would be counterproductive; a reduction in ticket prices
would reduce our revenue, not increase it.” Which of the following best explains this disagreement?
*
a. The coach thinks that demand is elastic, whereas the university president thinks that demand is
inelastic.
b. The coach thinks that demand is inelastic, whereas the university president thinks that demand
is elastic.
c. The coach believes that lower ticket prices will increase attendance, but the university
president must not believe attendance will increase when prices are lowered.
d. Although both the coach and the president believe demand is of unitary elasticity, they disagree
about how much attendance will rise.
215. All else equal, if a firm raises its price by 20 percent and the firm’s total revenue falls by 20 percent,
*
a. demand must be elastic.
b. demand must be inelastic.
c. demand must be unit elastic.
d. the price elasticity of demand must be equal to 1.
216. Which of the following is not a fundamental that underlies consumer behavior?
a. Goods can be substituted for one another.
b. Consumers make decisions purposefully based upon past experience and knowledge.
c. The law of diminishing marginal utility applies to all goods.
*
d. Consumers always make choices with perfect information.
Chapter 7/Consumer Choice and Elasticity
317
217. Terri currently consumes 10 hamburgers and 2 shirts per month. At her current rates of
consumption, her marginal utility of hamburgers is 10 and her marginal utility of shirts is 50. If the
price of hamburgers is $2 each, while the price of a shirt is $25, Terri
a. is maximizing her utility.
b. could improve her total utility by buying fewer hamburgers and more shirts.
*
c. could improve her total utility by buying fewer shirts and more hamburgers.
d. could improve her total utility by spending less on both goods.
218. If taking an airplane from Pittsburgh to Miami cost $600 and takes 5 hours, while taking a bus
would cost $150 and takes 50 hours, the minimum value of your time that would make it
worthwhile to fly would be
a. $1 per hour.
b. $3 per hour.
*
c. $10 per hour.
d. $12 per hour.
219. The exhibit illustrates two possible demand curves for a product, D1 and D2. Which of the following
is true regarding these demand curves?
a.
*
b.
c.
d.
Demand curve D1 represents a demand curve that is relatively more elastic than demand curve
D2.
Demand curve D1 represents a demand curve that is relatively more inelastic than demand
curve D2.
Demand curve D1 represents a demand curve that shows consumer purchases being more
responsive to a change in the price of the good than demand curve D2.
Both are examples of unitary elastic demand curves.
220. Making drugs, such as cocaine, illegal results in a higher price than would be present if the drugs
were legal. All else constant, the higher price results in drug users spending
*
a. more on drugs if the demand for drugs is inelastic.
b. more on drugs if the demand for drugs is elastic.
c. less on drugs if the demand for drugs is inelastic.
d. more on drugs if the demand for drugs is unitary elastic.
221. If the price of steak rises from $6 to $10 per pound, and the quantity purchased falls from 90 to 70
pounds, the price elasticity of demand (in absolute value) is
a. 0.2.
*
b. 0.5.
c. 1.0.
d. 2.0.
318
Chapter 7/Consumer Choice and Elasticity
222. When the price elasticity of demand is greater than one, it means that demand is
a. inelastic and the percent change in quantity is greater than the percent change in price.
b. inelastic and the percent change in quantity is less than the percent change in price.
*
c. elastic and the percent change in quantity is greater than the percent change in price.
d. elastic and the percent change in quantity is less than the percent change in price.
223. If Russell values a ticket to a rock concert at $100 and is able to purchase it for only $40, he has
received ______ in consumer surplus on his purchase. (Fill in the blank.)
a. $40
*
b. $60
c. $100
d. $140
224. The market demand for a good is
*
a. the horizontal sum of all individual demand curves for the good.
b. generally upward sloping, unlike individual demand curves.
c. usually a vertical line at a quantity of one hundred.
d. the average amount purchased by each individual in the market.
225. Bob goes out to dinner three times per week, usually either to the local steak house or a Chinese
restaurant in town. If the steak house were to raise its prices, Bob would probably (1) be less
inclined to eat at the steak house and more inclined to eat at the Chinese restaurant when he did go
out and (2) eat out fewer times per week because at the higher prices he cannot afford to eat out as
much.
*
a. Part 1 is an example of the substitution effect, part 2 of the income effect.
b. Part 1 is an example of the income effect, part 2 of the substitution effect.
c. Part 1 is an example of the law of diminishing marginal utility, part 2 of the substitution effect.
d. Part 1 is an example of the proportions hypothesis, part 2 of the income effect.
226. The price elasticity of demand for automobiles measures the responsiveness of
*
a. consumer purchases to a change in the price of automobiles.
b. consumer purchases to a change in the quality of automobiles.
c. supplier production levels to a change in the price of automobiles.
d. consumer purchases of automobiles to a change in their income.
227. Which of the following is true regarding the price elasticity of demand?
a. Demand is generally more elastic in the long run than in the short run.
b. Along a single demand curve, demand elasticity decreases as you move down the curve (to
lower prices).
c. A demand curve that is flatter (has a less steep slope) is relatively more elastic than a demand
curve that has a steeper slope.
*
d. All of the above are true.
ON-LINE PRACTICE QUESTIONS
228. If the price of apples rises from $.50 to $1.50 and quantity demanded falls from 1,000 to 900, we
can conclude that the price elasticity for apples is
a. – 20.
*
b. inelastic.
c. elastic.
d. unitary.
Chapter 7/Consumer Choice and Elasticity
319
229. If the quantity demanded of a product rose from 900 to 1,200 when the price of the product fell
from $11 to $9, the price elasticity of demand coefficient is equal to
a. –0.20.
b. –0.70.
c. –1.00.
*
d. –1.42.
230. Cary increases the price of her cakes from $8 to $10 per cake, but her cash receipts decrease by 2
percent. The price elasticity of demand (in the $8 to $10 range) is
*
a. elastic.
b. inelastic.
c. 0.02.
d. 0.25.
231. Rebel Records announces it is cutting the prices of its bluegrass album titles by 25 percent. If Rebel
is seeking to increase revenues, it must believe that the elasticity of demand for bluegrass albums is
*
a. elastic.
b. inelastic.
c. of unitary elasticity.
d. perfectly inelastic.
232. Since the income elasticity for food is estimated to be 0.51, it appears that the proportion of income
spent by poor people on food is ________________ the proportion spent by those with higher
incomes.
*
a. greater than
b. less than
c. about the same as
d. about half as great as
233. “I’m tired of eating cold pizza for breakfast. Today I’m going to the make some oatmeal instead.”
This statement most clearly reflects the
a. law of increasing returns to scale.
b. second law of demand.
*
c. law of diminishing marginal utility.
d. law of comparative advantage.
234. After downing three glasses of lemonade on a hot summer afternoon, Todd says, “You would have
to pay me to drink another glass!” This statement best illustrates
a. the law of demand.
b. the substitutability among goods.
*
c. the law of diminishing marginal utility.
d. that chocolate candy bars are an inferior good.
235. A 10 percent increase in the price of sugar reduces sugar consumption by about 5 percent. The
increase causes households to
*
a. spend more on sugar.
b. spend less on sugar.
c. spend the same on sugar.
d. consume more goods like coffee and tea that are complements of sugar.
320
Chapter 7/Consumer Choice and Elasticity
236. If Mr. Smith thinks the last dollar spent on shirts yields more satisfaction than the last dollar spent
on cola, and Smith is a utility-maximizing consumer, he should
*
a. decrease his spending on cola.
b. decrease his spending on cola and decrease his spending on shirts.
c. decrease his spending on shirts.
d. increase his spending on cola and decrease his spending on shirts.
237. If the income elasticity of a good is negative, we can conclude that the good is
*
a. an inferior good.
b. a normal good.
c. a luxury good.
d. a necessity.
238. If the demand for a product increases as the result of an increase in income, it can be concluded that
the
a. product is an inferior good.
b. demand for the product is inelastic.
c. price elasticity of demand for the product equals unity.
*
d. product is a normal good.
239. Which one of the following goods would likely have the most inelastic demand?
a. Kellogg’s corn flakes
*
b. salt
c. a new Toyota automobile
d. fresh green beans
240. A perfectly inelastic demand curve indicates that
a. a producer can sell as many units as desired at the market price but no units above the market
price.
b. for a given percent change in price, the quantity demanded rises by the same percentage.
*
c. price has no effect on the quantity demanded.
d. the percent change in price is less than the percent change in quantity demanded.
241. If people spend 30 percent less on movie tickets when movie prices decline 15 percent, the price
elasticity of demand for movie tickets at these prices must be
a. –3.0.
*
b. elastic
c. –0.5.
d. inelastic.
242. When the price of a product increases, the passage of time usually causes the price elasticity of
demand for the product to become
a. less elastic.
*
b. more elastic.
c. smaller and smaller in an absolute value.
d. approximately equal to zero in the long run because of scarcity.
Chapter 7/Consumer Choice and Elasticity
321
CRITICAL THINKING QUESTIONS
243. Mark complains: “I can’t believe they raised the price of comic books, and because of this, I’m
going to reduce my demand for comic books.” Is Mark stating the concept of demand correctly?
Answer
Mark has confused the concept of demand with a change in quantity demanded. In response to the
price increase, he will reduce his quantity demanded. Factors other than price will affect Mark’s
demand, such as his income, his tastes, etc. If these change, his demand will change.
244. Sally is on her college golf team and only uses Titleist golf balls. She states: “I don’t care what the
price is, I will only buy Titleists.” Is this a believable assertion?
Answer
Probably not. While another golf ball might sell for $2, Sally is willing to pay $3 for what she
considers a superior ball. But would she pay $10, $50, $100? It is doubtful that her demand for
Titleist balls is perfectly inelastic. We must assume that college students face income constraints.
245. John is a well-known consultant who makes $150 an hour and has all the work he can handle. He
has a big job in Washington D.C., ten hours away. He can drive at a cost of $80 round trip or take a
one-hour flight for $300. Which is he likely to do? Are there circumstances that may lead him to
choose otherwise?
Answer
From an opportunity cost perspective, we would expect John to fly. The monetary costs of driving
would be the $3,000 foregone –$150 20 hours) plus $80. The cost to fly would be $150 – 2 hours
plus $300. (Time is doubled to account for the round trip.) From a purely monetary perspective, it
would appear rational for John to fly. However, we know there are other considerations besides
money. It may be that John hates to fly, and this aversion may lead him to drive. Preferences are
sometimes more important than money. Another factor may be the marginal tax rate John faces. A
high rate would greatly reduce the pecuniary incentives for driving.
246. Fred, a poor college student, states: “I eat tuna sandwiches five times a week. When I graduate and
get a real job, I will never purchase tuna again.” Is Fred planning on breaking the law of demand?
Answer
For normal goods, we expect consumers to increase their expenditures as their incomes rise. Fred
views tuna as an inferior good. He buys tuna because his income is low; as his income rises, he
plans on purchasing less.
247. In the mythical nation of Oz, gasoline used to sell for $1 a gallon, and the natives purchased
100,000 gallons a week. Four years ago, the price rose to $3 a gallon, and the natives reduced their
quantity demanded to 90,000 gallons a week. Calculate the price elasticity for this change. Today,
gas again sells for $1 a gallon in Oz, but the natives are only buying 70,000 gallons a week. What
gives?
Answer
Four years ago, the initial price increase to $3 demonstrated that the short-run demand for gasoline
was highly inelastic (your calculation should demonstrate this). Over time, we would expect the
demand to become more elastic. As consumers purchased more fuel-efficient cars and found
alternatives for using gas, they could reduce their consumption of gasoline. Their current quantity
demanded reflects these factors. The inelastic short-run demand shifted left, perhaps reflecting
technological improvements in mileage, spurred by the previous $3 price.
322
Chapter 7/Consumer Choice and Elasticity
248. Jack, a music major, is perusing Jill’s notes for her economics class, where she has written that
“total revenues will rise with price rises only if demand is elastic.” Jack tells Jill this is nonsense
because firms can always increase their revenues by raising price. How should Jill respond?
Answer
Jill should point out that her statement is correct. If a firm raises price when demand is elastic, the
percentage fall in quantity demanded will be greater than the percentage rise in price. As a result,
total revenues (price times quantity) will fall. On the other hand, if the firm raises price when
demand is inelastic, the percentage fall in quantity demanded will be less than the percentage rise
in price. The result will be an increase in revenue.
249. A question on an economics exam asks: What happens in the market for margarine when income
rises? Allison, an excellent student, shows the demand for margarine decreasing. Is she necessarily
wrong? Why or why not?
Answer
If we consider Allison’s answer wrong, we are implicitly assuming that margarine is a normal good
and that the demand for margarine should decrease. But suppose Allison believes that margarine is
an inferior good. In this case, her answer is correct. Good exam writers need to make explicit what
they want students to assume.
250. A local restaurant offers an “all you can eat” ribs special. If a person pays $11.95, she can eat as
many servings as she desires at no additional cost. Can you infer anything about her marginal utility
from observing her eating behavior?
Answer
Since the marginal cost of consuming an additional helping is zero, a customer will stop eating
when the marginal utility (or value) derived from eating another serving is zero. Thus, we can infer
the marginal utility of eating is zero when the person stops eating.