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Homework 2
Multiple Choice
1. Suppose we estimate that the demand elasticity for fine leather jackets is 0.7 at their current prices. Then we know that:
a. a 1% increase in price reduces quantity sold by 0.7%.
b. no one wants to buy leather jackets.
c. demand for leather jackets is elastic.
d. a cut in the prices will increase total revenue.
e. leather jackets are luxury items.
2. A linear demand for lake front cabins on a nearby lake is estimated to be: QD = 900,000 - 2P. What is the point price
elasticity for lake front cabins at a price of P = $300,000? [HINT: Ep = (∂Q/∂P)(P/Q)]
a. EP = 3.0
b. EP = 2.0
c. EP = 1.0
d. EP = 0.5
e. EP = 0
3. Demand is given by QD = 620 - 10·P and supply is given by QS = 100 + 3·P. What is the price and quantity when the
market is in equilibrium?
a. The price will be $30 and the quantity will be 132 units.
b. The price will be $11 and the quantity will be 122 units.
c. The price will be $40 and the quantity will be 220 units.
d. The price will be $35 and the quantity will be 137 units
e. The price will be $10 and the quantity will be 420 units.
4. Which of the following would tend to make demand INELASTIC?
a. the amount of time analyzed is quite long
b. there are lots of substitutes available
c. the product is highly durable
d. the proportion of the budget spent on the item is very small
e. no one really wants the product at all
5. An increase in the quantity demanded could be caused by:
a. an increase in the price of substitute goods
b. a decrease in the price of complementary goods
c. an increase in consumer income levels
d. all of the above
e. none of the above
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Homework 2
6. Goods having a negative calculated income elasticity are...
a. superior goods
b. producers' goods
c. nondurable goods
d. inferior goods
e. none of the above
7. If the cross price elasticity measured between items A and B is positive, the two products are referred to as:
a. complements
b. substitutes
c. inelastic as compared to each other
d. both b and c
e. a, b, and c
8. When demand is ____ a percentage change in ____ is exactly offset by the same percentage change in ____ demanded,
the net result being a constant total consumer expenditure.
a. elastic; price; quantity
b. unit elastic; price; quantity
c. inelastic; quantity; price
d. inelastic; price; quantity
e. none of the above
9. Marginal revenue (MR) is ____ when total revenue is maximized.
a. greater than one
b. equal to one
c. less than zero
d. equal to zero
e. equal to minus one
10. The factor(s) which cause(s) a movement along the demand curve include(s):
a. increase in level of advertising
b. decrease in price of complementary goods
c. increase in consumer disposable income
d. decrease in price of the good demanded
e. all of the above
11. A price elasticity (ED) of 1.50 indicates that for a ____ increase in price, quantity demanded will ____ by ____.
a. one percent; increase; 1.50 units
b. one unit; increase; 1.50 units
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c. one percent; decrease; 1.50 percent
d. one unit; decrease; 1.50 percent
e. ten percent; increase; fifteen percent
13. Those goods having a calculated income elasticity that is negative are called:
a. producers' goods
b. durable goods
c. inferior goods
d. nondurable goods
e. none of the above
14. An income elasticity (Ey) of 2.0 indicates that for a ____ increase in income, ____ will increase by ____.
a. one percent; quantity supplied; two units
b. one unit; quantity supplied; two units
c. one percent; quantity demanded; two percent
d. one unit; quantity demanded; two units
e. ten percent; quantity supplied; two percent
15. When demand elasticity is ____ (or ____), an increase in price will result in a(n) ____ in total revenues.
a. less than 1; elastic; increase
b. more than 1; inelastic; decrease
c. less than 1; elastic; decrease
d. less than 1; inelastic; increase
e. none of the above
16. Factors affecting the price elasticity of demand include all of these EXCEPT:
a. percentage of the consumer's budget
b. the availability and closeness of substitutes
c. positioning as income inferior
d. time period of adjustment
e. all of the above affect the price elasticity of demand
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Homework 2
Open Questions
1. The manager of the Sell-Rite drug store accidentally mismarked a shipment of bags of charcoal at $4.38 instead of the
regular price of $5.18. At the end of a week, the store's inventory of 200 bags of charcoal was completely sold out. The
store originally sells a 150 bags per week.
(a)
(b)
What is the store's arc elasticity of demand for charcoal?(10%)
Give an economic interpretation of the numerical value obtained in part (a) (6%)
2. The British Automobile Company is introducing a brand new model called the "London Special." Using the latest
forecasting techniques, BAC economists have developed the following demand function for the "London Special":
QD = 1,200,000 − 40P
What is the point price elasticity of demand at prices of (a) $8,000 and (b) $10,000?(20%)
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