Economics Module 4

Question 1

Is the demand for a container of salt likely to be inelastic or elastic? Why? Select all that apply.

Answer 1

Inelastic because salt is a necessary dietary component

Inelastic because for most people salt is a very small part of their budget

Question 2

A business should ___________ (increase/decrease) the price of a good with an inelastic demand if it wants to increase revenues.

Answer 2

increase

Question 3

A business should ___________ (increase/decrease) the price of a good with an elastic demand if it wants to increase revenues.

Answer 3

decrease

Question 4

If you were selling a product with an elasticity of 1.6 and you wanted to increase your revenue, what should you do to the price?

Answer 4

lower price

Question 5

Suppose you know that the price elasticity of demand for your product is 0.5, and you are thinking about raising your price by 8%. How much can you expect quantity to decrease?

Answer 5

4%

Question 6

A major city was thinking about increasing its bus fares and commissioned a study to estimate the price elasticity of demand. The study estimated that elasticity was 0.4. What action should the city have taken to increase revenue from bus fares?

Answer 6

increase fares

Question 7

In the question above, if the city examined the elasticity of bus fares over this longer time period, what would they likely find?

Answer 7

Elasticity is now greater than 1

Question 8

Prices should be ___________ (increased/decreased/not changed) in the winter and ___________ (increased/decreased/not changed) in the summer. ​[Image description: The two tables below show the demand (prices and quantities) for movie tickets in the winter and summer.]

Answer 8

increased; decreased

Question 9

Is Figure 5.7 in violation of the law of demand? (graph of perfectly inelastic graph)

Answer 9

yes

Question 10

Sometimes consumers purchase goods because of “conspicuous consumption”; i.e., they want others to know that they can afford to buy the goods. There are many examples of these goods, such as Rolex watches, Coach purses, and flying first class. What would you expect the income elasticity of demand to be for these goods?

Answer 10

These are luxury goods, so income elasticity would be greater than 1.

Question 11

If the government imposes an effective price ceiling in a market, what will be the result?

Answer 11

A shortage

Question 12

This table shows the supply and demand for socks. If the government imposes a price floor of $10, how many pairs of socks will be exchanged on this market?

Answer 12

2

quantity demand is 2 at $10

Question 13

Using the table above, if the government imposes a price floor of $10, what will the effect be?

Answer 13

A surplus of 6 units

quantity supply is 8 at $10

Question 14

Situation A: When a $10 per unit tax is imposed on the producer of Bippies (a candy), the equilibrium price increases by $4.
Situation B: When a $10 per unit tax is imposed on the producer of Bippies, the equilibrium price increases by $2.
Based on the two situations above, Bippies in Situation A has a _________ elastic supply OR faces a _________ elastic demand than exists in Situation B.

Answer 14

more; less

Question 15

If the government taxes car producers, that will happen in the market for cars?

Answer 15

The supply curve will shift to the left.

Question 16

Suppose that there is currently a $2.00 per bottle tax on vodka that is levied on consumers. Legislators have decided to give consumers some relief by eliminating the tax. In order to keep tax revenues at their previous level, they decide to impose a $2.00 tax on producers. What is the net impact of these two actions?

Answer 16

There is no change in either consumers’ or producers’ well-being.

Question 17

When the federal government subsidizes higher education in the form of Pell grants to students, it results in

Answer 17

An increase in the demand for higher education

Question 18

When the federal government subsidizes higher education in the form of direct subsidies to universities, it results in:

Answer 18

An increase in the supply of higher education

Question 19

If population increases in a city with effective rent controls (and nothing else changes), which of the following describes what will happen in the market for rental housing?

Answer 19

An increase in demand, but no change in quantity supplied.

Question 20

Which of the following statements about the effects of a government setting maximum prices is true?

Answer 20

A maximum price will cause a shortage of a good to be produced only if the maximum price is below the equilibrium price.

Question 21

If a man spends approximately 45% of his income on air travel and his sister only spends about 2% of her income on air travel (and that is the only difference), would the man’s demand for air travel be less or more elastic than his sister’s?

Answer 21

More

Question 22

The price elasticity of demand will be _________________ if demand is elastic.

Answer 22

more than one

Question 23

A firm has a choice of raising or lowering its price. If the firm wishes to increase its revenues (the price times the quantity sold), what should it do?

Answer 23

Raise price when demand is inelastic, because the revenues gained from the price increase will be larger than the revenues lost from the smaller quantity sold.

Question 24

A change in supply will have a (greater, lesser, the same) effect on quantity for a relatively more elastic demand curve than a relatively less elastic one.

Answer 24

A greater

Question 25

A change in supply will have a (greater, lesser, the same) effect on price for a relatively more inelastic demand curve than a relatively more elastic one.

Answer 25

A greater

Question 26

You are running a small business and are thinking about ways to increase your profits. Assume you are facing an elastic demand. Would you raise or lower your prices?

Answer 26

I do not know because I cannot tell how much costs would change in relationship to revenues.

Question 27

An example of price controls given in your text concerns minimum wage increases. On a supply and demand diagram (with wages on the vertical axis and number of workers on the horizontal), would minimum wage be considered a price ceiling or a price floor?

Answer 27

Price floor

Question 28

When will a minimum wage be an effective price control? When it is a _________.

Answer 28

minimum “price” that is above equilibrium price

Question 29

Many major U.S. cities have adopted rent controls for some housing. An effective rent control is what kind of price control?

Answer 29

A price ceiling with a maximum price below equilibrium price

Question 30

Which of the following statements about the effects of rent control is true?

Answer 30

A maximum price will cause a shortage of a good to be produced only if the maximum price is below the equilibrium price.

Question 31

An increase in an effective minimum legal price will do what to prices and quantities actually sold in a market? Prices will __________ and the quantities actually sold will ___________.

Answer 31

increase; decrease

Question 32

An increase in an effective maximum legal price will do what to prices and quantities actually sold in a market? Prices will __________ and the quantities actually sold will ___________.

Answer 32

increase; increase

Question 33

If the country enters a period of prosperity, resulting in consumer incomes increasing by 4% and the income elasticity of a good is 0.8, what will happen to the demand for that good as a result?

Answer 33

Demand will increase by 3.2%

Question 34

If the income elasticity of a good is 0.8, what do we know about the good?

Answer 34

It is a normal good.

Question 35

If the government is trying to raise as much revenue as possible, then the suppliers of ____________are more likely to have a tax imposed on their production.

Answer 35

gasoline

Question 36

If the government is trying to raise as much revenue as possible, which of the following goods would be the most likely to be subject to a government-imposed tax?

Answer 36

Bottles of alcohol, such as whiskey and gin

Question 37

Who is likely to be in favor of a price ceiling on a good?

Answer 37

The consumers of the good who can still purchase it after the ceiling is imposed

Question 38

Which of the following is likely to have the largest elasticity of supply?

Answer 38

A producer of vanilla ice cream

Question 39

A government may impose a price ceiling if which of the following is true?

Answer 39

Consumers can persuade legislators that lower prices are needed

Question 40

Assume that as your income increases, your consumption of burgers decreases. We can assume that your income elasticity of demand for burgers is what?

Answer 40

Negative

Question 41

When price decreases, quantity increases. Price elasticity of demand measures how much ___________.

Answer 41

the quantity increases when price decreases

Question 42

An effective price floor goes from $4 to $5 (an increase in price of 25%). Assume that the elasticity of supply is 2 and the elasticity of demand is -3.

Which party is more elastic? The producers or the consumers?

Answer 42

Consumers

Question 43

If the elasticity of supply were 1.5 instead of 2, the surplus in the market created by the price floor would be ______ before?

Answer 43

less than

Question 44

In the graph below, what happens to the surplus when the price floor increases?

Answer 44

Increases

Question 45

Currently in the market for widgets there is no tax. The quantity exchanged is 1 million units per year. The market price is $10. If tax of $1 per widget is levied on producers, the amount of tax revenue raised will be:

Answer 45

Less than $1 million