Download Chapter 3: Demand and Supply Applications

CHAPTER 3
DEMAND AND SUPPLY APPLICATIONS
TRUE-FALSE QUESTIONS
T
F
1. Price elasticity can be computed for demand but not for supply.
ANS: F
T
F
2. If a 1 percent change in price leads to 5 percent change in quantity demanded, then the price
elasticity of demand is 5.
ANS: T
T
F
3. Demand is relatively elastic when the percentage change in price exceeds the percentage change
in quantity demanded.
ANS: F
T
F
4. Demand is relatively inelastic when the percentage change in quantity demanded is less than the
percentage change in price.
ANS: T
T
F
5. If two demand curves intersect, the flatter demand curve will be more inelastic and the steeper
demand curve will be more elastic.
ANS: F
T
F
6. If motorists decrease their gasoline consumption by 2 percent when the price increases by 10
percent, the demand for gasoline is relatively inelastic.
ANS: T
T
F
7. If there is a rightward shift in the supply of wheat, total revenue will increase only if the demand
is inelastic.
ANS: F
T
F
8. A freeze would result in less total revenue for Florida orange producers if the demand for
oranges is inelastic.
ANS: F
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T
F
9. The demand for a product is more elastic if the product has many close substitutes in
consumption.
ANS: T
T
F
10. The demand for a product tends to be less elastic if buyers consider the product to be a luxury
rather than a necessity.
ANS: F
T
F
11. When the price of gasoline rises, the decrease in quantity demanded will be greater in the short
run than the long run.
ANS: F
T
F
12. When the price of corn increases, the increase in quantity supplied will be greater in the long
run than the short run.
ANS: T
T
F
13. Over time, supply becomes more elastic and demand becomes less elastic.
ANS: F
T
F
14. A usury law is a law that stipulates the maximum interest rate on loans.
ANS: T
T
F
15. For a price floor to be effective, the price must be set above the market equilibrium price.
ANS: T
T
F
16. If the government imposes a ceiling on the rent of residential housing at a below-market
equilibrium level, the quantity of housing supplied will exceed the quantity demanded.
ANS: F
T
F
17. For a given supply curve of airline tickets, the more elastic the demand, the larger the fraction
of an excise tax that is borne by consumers.
ANS: F
T
F
18. For a given supply curve of gasoline, the less elastic the demand, the smaller the fraction of an
excise tax that is borne by consumers.
ANS: F
T
F
19. When there is an upward-sloping supply curve of gasoline and a downward-sloping demand
curve, an excise tax on gas would be borne by both sellers and buyers.
ANS: T
T
F
20. Placing an excise tax on gasoline would better promote conservation if the demand for gasoline
is relatively elastic, rather than relatively inelastic.
ANS: T
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TEST BANK FOR CONTEMPORARY ECONOMICS
T
F
21. If the government imposes a price floor on wheat, and the price is above the market equilibrium
level, there will be a surplus of wheat.
ANS: T
T
F
22. Suppose the government imposes a ceiling on rent charged for residential apartments. If the
ceiling is below the market equilibrium rent, some people would likely have a difficult time
finding residential apartments to rent.
ANS: T
T
F
23. Examples of price ceilings include usury laws and minimum-wage laws for workers.
ANS: F
T
F
24. The greater amount of time that producers have to adjust to price changes, the more elastic is
the supply curve of apples.
ANS: T
T
F
25. If the U.S. Postal Service increases the price of first-class mail to generate additional revenues,
it estimates that the demand for mail is relatively elastic.
ANS: F
MULTIPLE-CHOICE QUESTIONS
1. The consumer responsiveness to price changes is known as the
a.
consumer sensitivity index
b.
producer responsiveness index
c.
demand coefficient
d.
price elasticity of demand
ANS: d
2. The producer responsiveness to price changes is known as the
a.
price elasticity of supply
b.
producer responsiveness index
c.
producer sensitivity index
d.
supply coefficient
ANS: a
3. The price elasticity of demand is a measure of the
a.
relative increase in the demand curve in response to a decrease in price
b.
relative decrease in the demand curve in response to an increase in price
c.
responsiveness of the quantity demanded to an increase or a decrease in price
d.
responsiveness of consumers to advertising expenditures of firms
ANS: c
CHAPTER 3
DEMAND AND SUPPLY APPLICATIONS
4. The price elasticity of supply is a measure of the
a.
relative increase in the supply curve in response to an increase in price
b.
responsiveness of quantity supplied to a change in price
c.
relative decrease in the supply curve in response to a change in price
d.
responsiveness of quantity supplied to a change in production cost
ANS: b
5. Demand is considered to be elastic when the coefficient of the price elasticity of demand is
a.
less than 1
b.
equal to 1
c.
greater than 1
d.
less than zero
ANS: c
6. Demand is considered to be inelastic when the coefficient of the price elasticity of demand is
a.
less than 1
b.
less than zero
c.
greater than zero
d.
greater than 1
ANS: a
7. If the percentage change in quantity demanded is less than the percentage change in price, demand in that
price range is
a.
perfectly inelastic
b.
perfectly elastic
c.
elastic
d.
inelastic
ANS: d
8. If the percentage change in quantity demanded is greater than the percentage change in price, demand in
that price range is
a.
perfectly inelastic
b.
perfectly elastic
c.
elastic
d.
inelastic
ANS: c
9. Supply is considered to be elastic when the coefficient of the price elasticity of supply is
a.
less than 1
b.
equal to 1
c.
greater than 1
d.
less than zero
ANS: c
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TEST BANK FOR CONTEMPORARY ECONOMICS
10. Supply is considered to be inelastic when the coefficient of the price elasticity of supply is
a.
less than 1
b.
less than zero
c.
greater than zero
d.
greater than 1
ANS: a
11. If the percentage change in quantity supplied is less than the percentage change in price, supply in that price
range is
a.
perfectly inelastic
b.
perfectly elastic
c.
elastic
d.
inelastic
ANS: d
12. If the percentage change in quantity supplied is greater than the percentage change in price, supply in that
price range is
a.
perfectly inelastic
b.
perfectly elastic
c.
elastic
d.
inelastic
ANS: c
13. Suppose that an excise tax of $1 is levied on the sale of a bottle of wine. Usually this tax will be paid
a.
entirely by the seller if the consumer demand for wine is perfectly elastic
b.
entirely by the consumer if the supply of wine is perfectly inelastic
c.
by both the seller and the consumer, with the greater portion of the tax being paid by the consumer if
the demand for wine is relatively inelastic
d.
neither by the seller nor by the consumer
ANS: c
14. Most likely, a tax on a luxury good such as yachts will result in
a.
more yachts being bought
b.
less revenue than expected
c.
high unemployment for yacht workers
d.
an increase in the quantity demanded of yachts
ANS: b
15. Suppose that an excise tax of $1 is levied on the sale of a gallon of gas. Most of this tax will be borne by
the buyer rather than the seller if the price elasticity of demand for gas equals
a.
0.4
b.
1.2
c.
1.4
d.
2.0
ANS: a
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DEMAND AND SUPPLY APPLICATIONS
85
Suppose that an excise tax of $1 is levied on the sale of a bottle of fruit juice. Most of this tax will be borne
by the seller rather than the buyer if the price elasticity of demand for fruit juice equals
a.
0.1
b.
0.3
c.
0.6
d.
1.9
ANS: d
17. If the U.S. Postal Service increases the price of first-class mail delivery and its total revenue increases, the
demand curve for first-class mail delivery must be
a.
relatively elastic
b.
relatively inelastic
c.
perfectly elastic
d.
perfectly inelastic
ANS: b
18. If an airline increases the price of a ticket to New York and its total revenue decreases, the demand curve
for airline tickets to New York must be
a.
relatively elastic
b.
relatively inelastic
c.
perfectly elastic
d.
perfectly inelastic
ANS: a
19. If Stanford University increases its tuition and then its tuition revenue increases, the demand curve for
attending Stanford University must be
a.
relatively inelastic
b.
relatively elastic
c.
perfectly inelastic
d.
perfectly elastic
ANS: a
20. If the University of Wisconsin increases its tuition and its tuition revenue decreases, the demand curve for
attending the University of Wisconsin must be
a.
relatively elastic
b.
relatively inelastic
c.
perfectly elastic
d.
perfectly inelastic
ANS: a
21. The price elasticity of demand is determined by all of the following except the
a.
time period under consideration
b.
availability of substitute goods
c.
amount of spending on the good compared to the consumer’s income
d.
costs of producing the good
ANS: d
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TEST BANK FOR CONTEMPORARY ECONOMICS
22. Suppose that the short-run price elasticity of demand for gasoline is 0.6. In the long run, which one of the
following is most likely to represent the price elasticity of demand?
a.
0.2
b.
0.4
c.
0.6
d.
1.8
ANS: d
23. The demand for a product is relatively elastic if
a.
there is only a smaller number of close-substitute products available
b.
spending on the product constitutes a small portion of consumer income
c.
the product is considered to be a necessity
d.
the consumer has considerable time to adjust to price changes
ANS: d
24. The demand for a product is relatively inelastic if
a.
there is only a small number of close-substitute products available
b.
spending on the product constitutes a large portion of consumer income
c.
the product is considered to be a luxury
d.
the consumer has considerable time to adjust to price changes
ANS: a
25. You are given an upward-sloping supply curve and downward-sloping demand curve for gasoline. If the
government levies a tax of $1 on each gallon of gasoline that is sold
a.
all of the tax will be borne by the seller
b.
all of the tax will be borne by the buyer
c.
the tax will be borne by both the seller and the buyer
d.
the tax will be borne by neither the seller nor the buyer
ANS: c
26. The government is thinking about increasing the gasoline tax to raise additional revenue, rather than to
promote conservation. The tax will result in the greatest amount of tax revenue if the price elasticity of
demand for gasoline equals
a.
1.8
b.
1.4
c.
1.0
d.
0.5
ANS: d
27. The government is thinking about increasing the gasoline tax to promote conservation. The tax will
discourage the consumption of gasoline by the greatest extent when the price elasticity of demand equals
a.
0.1
b.
0.7
c.
1.3
d.
2.0
ANS: d
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28. Which of the following products is likely to have the lowest price elasticity of demand?
a.
foreign travel
b.
Mobil motor oil
c.
Green Giant peas
d.
medical care
ANS: d
29. The government will obtain the most revenue from a tax imposed on the sale of liquor when the demand for
liquor is
a.
highly inelastic
b.
highly elastic
c.
somewhat elastic
d.
somewhat inelastic
ANS: a
30. The government wants to raise additional tax revenues with the least disruption to prevailing demand
patterns. For which product should an excise tax be levied?
a.
Coca Cola
b.
liquor
c.
Cheerios
d.
hot tubs
ANS: b
31. If government sets a ceiling on rent that is below the market equilibrium rent, the result will be
a.
greater profits for landlords
b.
an increase in the quantity supplied of apartments
c.
a surplus of apartments
d.
a shortage of apartments
ANS: d
32. Assume that the government sets a ceiling on the interest rate that banks charge on loans. If the ceiling is
set below the market equilibrium interest rate, the result will be
a.
a surplus of credit
b.
a shortage of credit
c.
greater profits for banks issuing credit
d.
an increase in the quantity supplied of credit
ANS: b
33. If the government sets a floor on the price of wheat that is above the market equilibrium price, the result
will be
a.
a surplus of wheat
b.
a shortage of wheat
c.
small profits for wheat farmers
d.
a decrease in the quantity supplied of wheat
ANS: a
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TEST BANK FOR CONTEMPORARY ECONOMICS
34. If the government imposes a price floor on sugar that is above the market equilibrium price, it may also
have to
a.
establish programs to expand supply in the private sector
b.
establish programs to reduce demand in the private sector
c.
produce some sugar itself
d.
purchase the surplus sugar
ANS: d
35. The supply of corn will be more inelastic the
a.
shorter the time that producers have to adjust to price changes
b.
longer the time that producers have to adjust to price changes
c.
greater the number the buyers in the corn market
d.
easier it is to substitute capital for labor in corn production
ANS: a
Price (dollars)
Figure 3.1 The Market for Wheat
S0
7
5
3
D0
0
4
8
12
Quantity of Wheat (millions of bushels)
36. Refer to Figure 3.1. At the government-established support price of $7, there is a
a.
shortage of 8 million bushels
b.
shortage of 4 million bushels
c.
surplus of 4 million bushels
d.
surplus of 8 million bushels
ANS: d
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37. Refer to Figure 3.1. At the government-established support price of $7, wheat farmers will receive revenues
from consumers totaling
a.
$28 million
b.
$32 million
c.
$56 million
d.
$84 million
ANS: a
38. Refer to Figure 3.1. To defend its support price of $7, the government must
a.
purchase 8 million bushels of wheat at a cost of $56 million
b.
purchase 12 million bushels of wheat at a cost of $84 million
c.
sell 8 million bushels of wheat and receive revenues totaling $40 million
d.
sell 12 million bushels of wheat and receive revenues totaling $84 million
ANS: a
Table 3.1 The Wheat Market
Price per
Bushel
$2
3
4
5
6
Quantity of Bushels
Demanded per Month
800
700
600
500
400
Quantity of Bushels
Supplied per Month
400
500
600
700
800
39. Refer to Table 3.1. At the support price of $5, there is a surplus of
a.
100 bushels of wheat
b.
150 bushels of wheat
c.
200 bushels of wheat
d.
250 bushels of wheat
ANS: c
40. Refer to Table 3.1. To maintain a $5 support price, government must
a.
sell 200 bushels of wheat at revenues totaling $800
b.
sell 700 bushels of wheat are revenues totaling $3,500
c.
purchase 200 bushels of wheat at a total cost of $1,000
d.
purchase 500 bushels of wheat at a total cost of $2,500
ANS: c
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TEST BANK FOR CONTEMPORARY ECONOMICS
41. Suppose that an economist estimates that the price elasticity of demand for TVs is exactly 1. This means
demand is
a.
elastic
b.
inelastic
c.
unit elastic
d.
stable
ANS: c
42. Renters usually spend a large proportion of their incomes on rent. Therefore, the price elasticity of demand
for rental apartments is most likely to be which of the following numbers?
a.
2.2
b.
1.0
c.
0.5
d.
0
ANS: a
43. In the long run, the coefficient for price elasticity of demand is likely to be ______ than the short-run
elasticity coefficient.
a.
lower than
b.
higher than
c.
the same as
d.
more inelastic than
ANS: b
44. A poor harvest for farmers may be desirable because
a.
inelastic demand results in lower total revenue as the price rises
b.
elastic demand results in higher total revenue as the price falls
c.
inelastic demand results in higher total revenue as price rises
d.
elastic demand results in lower total revenue as price falls
ANS: c
45. A tax on diamonds will raise only a small amount of revenue for the government when the demand for
diamonds is
a.
equal to the supply of diamonds
b.
elastic
c.
inelastic
d.
very high
ANS: b
46. If the price elasticity of supply for lettuce is 0.1, then this means that
a.
the demand for lettuce is quite high
b.
the supply of lettuce responds only slightly to changes in price
c.
there is a surplus of lettuce
d.
there is not very much lettuce being produced
ANS: b
CHAPTER 3
DEMAND AND SUPPLY APPLICATIONS
47. An interest-rate ceiling is called a(n)
a.
usury law
b.
elasticity coefficient
c.
price floor
d.
government subsidy
ANS: a
48. A price ceiling on gasoline, such as those imposed in the 1970s in the U.S., will
a.
generate surpluses of gasoline
b.
cause gas stations to offer more free services
c.
create a new favorable equilibrium price of gasoline
d.
cause shortages of gasoline
ANS: d
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