Practice problems

Multiple choice questions.

1.The price elasticity of demand is:
a) the ratio of the percentage change in quantity demanded to the percentage change in price.
b) the responsiveness of revenue to a change in quantity.
c) the nominal change in quantity demanded divided by the nominal change in price.
d) the response of revenue to a change in price.

2. If demand is price elastic, then:
a) a rise in price will raise total revenue.
b) a fall in price will raise total revenue.
c) a fall in price will lower the quantity demanded.
d) a rise in price won't have any effect on total revenues.

3. Complementary goods usually have:
a) the same elasticities of demand.
b) very low price elasticities of demand.
c) negative cross price elasticities of demand with respect to each other.
d) positive income elasticities of demand.

4. The price elasticity of demand generally tends to be:
a) smaller in the long run than in the short run.
b) smaller in the short run than in the long run.
c) larger in the short run than in the long run.
d) unrelated to the length of time.

5. If the price elasticity of supply of doodads is 0.60 and the price increases by 3 percent, then the quantity supplied of doodads will rise by
a) 0.60 percent.
b) 0.20 percent
c) 1.8 percent
d) 18 percent.

6. Suppose we know that the price elasticity of demand of good X is equal to -1.2. Then, if its price will increase by 5%, we can predict with certainty that
a) quantity demanded of that good will increase.
b) the revenue of the firm producing that good will increase by 6%.
c) the revenue of the firm producing that good will decrease by 6%.
d) the quantity demanded of that good will decrease by 6%.
e) None of the above.

7. A 10% increase in the price of movie ticket in Westridge 8 movie theater leads to a 15% decrease in the number of tickets sold. This indicates that the demand for movie tickets in Westridge 8 is:
a) elastic.
b) inelastic.
c) unit elastic.
d) Can not tell from the information given.

8. If the cross-price elasticity between two commodities is 1.5,
a) the two goods are luxury goods.
b) the two goods are complements.
c) the two goods are substitutes.
d) the two goods are normal goods.

For each of the following statements, say whether it is true, false, or uncertain and explain your answer.

1. It is reasonable to expect the cross price elasticity of demand for golf clubs and golf balls to be positive.

2. If the demand is perfectly elastic, then a shift in the supply curve does not affect the equilibrium price.

3. The demand curve for autos is more elastic than the demand curve for Fords.

4. Suppose that you own a "Here Comes the Sun" tanning salon and that the demand curve for your services is downward sloping. Further, suppose that a new tanning salon called "Sunny Delight" opens two blocks away from your salon. Tell whether the following three statements are true, false or uncertain and explain your answer.

a. The demand curve for your services shifts to the right.

b. The demand for your services becomes more elastic.

c. The cross-price elasticity of the demand for your services with respect to the price charged by "Sunny Delight" is negative.

Short Answer Question.

5. Initially Hans Johnson was the only consumer in the market for "Casa de Econ" beer, produced by a small local brewery. As the price of "Casa de Econ" six-pack varies between $10 and $20, the price elasticity of his individual demand is equal to negative 1. Now imagine that Hans has been cloned 4 times, and now we have 5 identical consumers in the market for "Casa de Econ". What will happen to the price elasticity of market demand in the price range given above? Will the demand become more price elastic, less price elastic, or will elasticity stay the same? Explain your answer.


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