Chapter 5

Question 1

If the price elasticity of demand for a good is 2, then a 10 percent increase in price results in a

Answer 1

20 percent decrease in the quantity demanded.

Question 2

If a 15% increase in price for a good results in a 20% decrease in quantity demanded, the price elasticity of demand is

Answer 2

1.33

Question 3

Which of the following is most likely to have the most price inelastic demand?

Answer 3

gasoline in the short-run

Question 4

Suppose that studies indicate that the price elasticity of demand for beer is about 0.2. A government policy aimed at reducing beer consumption changed the price of a case of beer from $12 to $20. According to the midpoint method, the government policy should have reduced beer consumpion by

Answer 4

10%

Question 5

When demand is inelastic, a decrease in price will cause

Answer 5

a decrease in total revenue.

Question 6

Toomer’s Drugs makes such great lemonade that consumers do not respond much at all to a change in the price. If the owner is only interested in increasing revenue, she should

Answer 6

raise the price

Question 7

A city wants to raise revenues to build a new municipal swimming pool next year. The mayor suggests that the city raise the price of admission to the current municipal pools this year to raise revenues. The city manager suggests that the city lower the price of admission to raise revenues. Who is correct?

Answer 7

The answer depends on the price elasticity of demand.

Question 8

Danita rescues dogs from her local animal shelter. When Danita’s income rises by 7 percent, her quantity demanded of dog biscuits increases by 12 percent. For Danita, the income elasticity of demand for dog biscuits is

Answer 8

positive, and dog biscuits are a normal good.

Question 9

For which pairs of goods is the cross-price elasticity most likely to be negative?

Answer 9

peanut butter and jelly