Handout 3

Question 1

Elasticity measures how responsive quantity is to changes in price.

Answer 1

ANS: T

Question 2

The price elasticity of demand is defined as the percentage change in price divided by the percentage change in quantity demanded.

Answer 2

ANS: F

Question 3

In general, demand curves for necessities tend to be price elastic.

Answer 3

ANS: F

Question 4

Goods with close substitutes tend to have more elastic demands than do goods without close substitutes.

Answer 4

ANS: T

Question 5

The demand for desserts tends to be more inelastic than the demand for red velvet cake.

Answer 5

ANS: T

Question 6

The demand for gasoline will respond more to a change in price over a period of five weeks than over a period of five years.

Answer 6

ANS: F

Question 7

Suppose that when the price rises by 10% for a particular good, the quantity demanded of that good falls by 20%. The price elasticity of demand for this good is equal to 2.0.

Answer 7

ANS: T

Question 8

The flatter the demand curve that passes through a given point, the more elastic the demand.

Answer 8

ANS: T

Question 9

An advantage of using the midpoint method to calculate the price elasticity of demand is that it uses the metric system.

Answer 9

ANS: F

Question 10

If we observe that when the price of chocolate increases by 10%, total revenue increases by 10%, then the demand for chocolate is unit price elastic.

Answer 10

ANS: F

Question 11

If a firm is facing inelastic demand, then the firm should decrease price to increase revenue.

Answer 11

ANS: F

Question 12

The income elasticity of demand is defined as the percentage change in quantity demanded divided by the percentage change in income.

Answer 12

ANS: T

Question 13

If we observe that when the price of ice cream rises by 10%, ice cream manufacturers increase the quantity supplied of ice cream by 20%, then the price elasticity of supply is 2.

Answer 13

ANS: T

Question 14

If the income elasticity of demand for a good is negative, then the good must be an inferior good.

Answer 14

ANS: T

Question 15

Cross-price elasticity of demand measures how the quantity demanded of one good changes as the price of another good changes.

Answer 15

ANS: T

Question 16

The cross-price elasticity of demand for bacon and eggs likely would be negative because bacon and eggs are complements for many people.

Answer 16

ANS: T

Question 17

If a supply curve is horizontal, then supply is said to be perfectly elastic, and the price elasticity of supply approaches infinity.

Answer 17

ANS: T

Question 18

OPEC failed to maintain a high price of oil in the long run, partly because both the supply of oil and the demand for oil are more elastic in the long run than in the short run.

Answer 18

ANS: T

Question 19

Drug interdiction, which reduces the supply of drugs, may decrease drug-related crime because the demand for drugs is inelastic.

Answer 19

ANS: F

Question 20

A “Just Say No” drug education policy that successfully educates consumers to reduce their demand for drugs will lower drug prices and reduce the quantity of drugs demanded.

Answer 20

ANS: T