Download Elasticities

Elasticities
True or false :
1) Quantity supplied, but not the supply, of good X will increase when the prices of
resources used to produce X decrease.
2) When the price of cameras increases, the demand for film is predicted to decrease.
3) A simultaneous increase in supply and demand must lead to an increase in
equilibrium price and quantity.
4) If the percentage change in price is less than the percentage change in quantity
demanded, the price elasticity coefficient is greater than 1.
5) If the quantity demanded for good A increases from 40 to 60 when price
decreases from k.d 9 to k.d 7, price elasticity of demand in this price range is 1.6 .
6) When demand is price-elastic, an increase in price will lead to increased total
consumer spending for the product.
7) Price elasticity of demand is lower for goods with few close substitutes.
8) A positive cross-elasticity of demand for two products indicates that they are
substitutes.
9) For complementary goods, the coefficient of the cross price elasticity of demand
is negative.
10) If the absolute value of price elasticity of demand is higher than unity, then a
price fall will reduce consumer’s expenditure .
11) The concept of “ income elasticity of demand “ is defined as the change in
quantity demanded over the change in income .
Multiple choice:
1) Total revenue of a firm producing a certain good will decrease as the price
increases, if the price elasticity of demand of the good in question is :
A) Larger than  1
B) Equal to  1
C)
Between  1 and zero
D) Equal to zero
2) If the absolute value of the price elasticity of demand of a certain good is equal to
1, then a reduction in the price will cause the total revenue of a firm to:
A) Decrease by 1%
B) Increase by 1%
C) Remain unchanged
D) Increase by 10%
3) Which is inconsistent with an elastic demand curve ?
A)
The elasticity coefficient is fractional .
B)
Total revenues fall when prices rise .
C)
Buyers are relatively sensitive to price changes .
D)
The relative change in quantity exceeds the relative change in price.
4) If the price elasticity of demand for a good is .75, the demand for the good can be
described as :
A)
normal
B) elastic
C)
inferior
D) inelastic
5) When the price of a product is increased 10 percent, the quantity demanded
decreases 15 percent. In this range of prices, demand for this product is :
A)
elastic
B) inelastic
C)
cross-elastic
D) unitary elastic
6) If the price elasticity of demand for a product is equal to 0.5, then a 10 percent
decrease in price will :
A)
increase quantity demanded by 5 percent .
B)
increase quantity demanded by 0.5 percent .
C)
decrease quantity demanded by 5 percent .
D)
decrease quantity demanded by 0.5 percent.
7) Ahmed sells 500 bottles of perfume a month when the price is k.d 7. A huge
increase in resource costs causes price to rise to k.d 9 and Ahmed only manages to
sell 460 bottles of perfume. The price elasticity of demand (mid-point) is :
A)
.33 and elastic
B) 3.0 and elastic
C)
.33 and inelastic
D) 3.0 and inelastic
8) Suppose you are given the following data on demand for a product. The price
elasticity of demand (point) when price decreases from k.d 9 to k.d 7 is:
Price
10 9 8 7 6
Quantity demanded 30 40 50 60 70
A)
C)
.63
1.60
B)
D)
1.16
2.27
9) If price declines from k.d 450 to k.d 350 and, as a result, quantity demanded
increases from 1200 to 1500, price elasticity of demand (mid-point) is :
A)
1.78
B)
.88
C)
1.12
D) 3.42
10) If, when the price of a product rises from k.d 2 to k.d 3, the quantity demanded
of the product decreases from 600 to 400, the price elasticity of demand coefficient,
using the midpoint formula, is:
A)
0.40
B) 1.00
C)
1.60
D) 2.10
11) If a 5 percent fall in the price of a product causes the quantity demanded of the
product to increase by 10 percent, the demand is:
A)
inelastic.
B) elastic .
C)
unit elastic.
D) perfectly elastic .
12) A 4 percent reduction in the price of a product causes consumer expenditure to
remain unaffected. The price elasticity of demand is :
A)
zero .
B) greater than zero.
C)
greater than zero but less than 1
D) equal to 1 .
13) Refer to the data below. What is the elasticity of demand between the prices of
k.d 4 and k.d 3 using the mid-point formula?
Price
4
3
2
1
Quantity demanded 300 400 500 600
A)
C)
0.2
1.00
B)
D)
0.5
2.00
14) Total revenue falls as the price of a good increases if price elasticity of demand
is :
A)
elastic .
B) inelastic .
C)
unitary elastic .
D) perfectly elastic.
15) Demand can be said to be inelastic when :
A)
an increase in price results in a reduction in total revenue .
B)
a reduction in price results in an increase in total revenue .
C)
a reduction in price results in a decrease in total revenue .
D)
the elasticity coefficient exceeds one.
16) Assuming pizza and hamburgers are substitutes, when the price of pizza
increases, what must always happen ?
A)
Total revenue received by pizza sellers increases .
B)
Total revenue received by pizza sellers decreases .
C)
Total revenue received by hamburger sellers increases .
D)
Total revenue received by hamburger sellers decreases .
17) If a business decreased the price of its product from k.d 10 to k.d 9 when the
price elasticity of demand was inelastic, then total revenues would:
A)
decrease.
B)
increase.
C)
remain unchanged.
D)
be perfectly inelastic.
18) To economists the main differences between "the short run" and "the long run"
are that :
A)
the law of diminishing returns applies in the long run, but not in the
short run .
B)
in the short run all resources are fixed, while in the long run all
resources are variable .
C)
in the long run all resources are variable, while in the short run at least
one resource is fixed .
D)
fixed costs are more important to decision making in the long run than
they are in the short run.
19) Elasticity of supply will increase when :
A)
the number of producers selling a product decreases .
B)
producers are given less time to respond to price changes .
C)
the number of consumers wanting to purchase a product increases .
D)
it becomes easier to substitute one factor of production for another in a
manufacturing process .
20) A "black market" could arise as a result of :
A)
an increase in demand .
B)
a decrease in supply .
C)
the imposition of a legal price floor above the equilibrium price
D)
the imposition of a legal price ceiling below the equilibrium price.
Problem Sets :
1) Assume that the supply and demand functions for housing units might be
specified as such :
Quantity supplied
80
100
120
140
160
170
180
190
200
220
240
Price Quantity demanded
100
300
110
280
120
260
130
240
140
220
150
200
160
180
170
160
180
140
190
120
200
100
Answer the following :
a) What is the equilibrium price and quantity ? Show your answer graphically .
b) Now assume that the government sets a price equal to k.d 190, what will
happen to the market ?
c) Measure the arc price elasticity of demand for the interval between
prices 100 and 150. What can you say about this good ?
2) Assume the following relationships between income and demand for a certain
good :
Quantity demanded Consumer income
(unit)
(k.d)
8
1000
9
1100
Calculate the income elasticity of demand .
3) Assume the following information on the price of good (Y) and quantities bought
of good (X) .
Price of Y Quantity demanded of X
(Fils)
(Unit)
100
150
80
200
a) Calculate the cross elasticity of demand between goods Y and X .
b) Comment on the type of relationship between Y and X .
4) If the price of a particular good decreased from k.d 50 to k.d 40 and the quantity
supplied remained unchanged at 150 units :
a) Calculate the price elasticity of supply.
b) Draw the supply curve of that good .
5) Suppose that :
Q S  16  7 P
and
Q D  50  4 P
a) What is the equilibrium price and quantity ?
b) What is the effect of a price ceiling set at k.d 3 ? Is there a shortage or surplus
in the market? How much ?
c) What is the effect of a price floor set at k.d 8 ? Explain .
d) Illustrate your answer in a and b on a simple graph .
6) Suppose that :
and
Q D  106
Q S  14  3P
a) What is the equilibrium price and quantity ?
b) What is the effect of a price floor (minimum price) set at k.d 42 ?
c) Illustrate your answer in a and b on a simple graph .