1 Chapter 5 Practice Quiz Tutorial Price Elasticity of Demand ©2004 South-Western

2 1. If an increase in bus fares in Charlotte, North Carolina, reduces total revenue of the public transit system, this is evidence that demand is a. price elastic. b. price inelastic c. unitary elastic d. perfectly elastic. A. When price increases and the total revenue decreases, by definition, this represents an elastic demand curve. The revenue lost from selling fewer units is not offset by the revenue gained by charging a higher price.

3 2. Which of the following results in an increase in total revenue? a. Price increases when demand is elastic. b. Price decreases when demand is elastic. c. Price increases when demand is unitary elastic. d. Price decreases when demand is inelastic. B. When price decreases and the total revenue increases, the revenue gained by the increase in sales more than offsets the revenue lost from the lower price. By definition, this represents an elastic demand curve.

4 3. You are on a committee that is considering ways to raise money for your city’s symphony program. You would recommend increasing the price of symphony tickets only if you thought the demand curve for these tickets was a. inelastic. b. elastic. c. unitary elastic. d. perfectly elastic. A. When the demand curve is inelastic, the revenue gained from the higher price more than offsets the revenue lost from the decline in sales.

5 4. The price elasticity of demand for a horizontal demand curve is a. perfectly elastic. b. perfectly inelastic. c. unitary elastic. d. inelastic. e. elastic. A. A perfectly elastic demand curve exists when any increase in price leads to zero sales. The only curve that would illustrate this would be a horizontal line at the beginning price.

6 5. Suppose the quantity of steak purchased by the Jones family is 110 pounds per year when the price is $2.10 per pound and 90 pounds per year when the price is $3.90 per pound. The price elasticity of demand coefficient for this family is a b c d A.(110 – 90)/( ) = 20/200 = 1/10 divided by (2.10 – 3.90)/( ) = 1.80/6.00 Elasticity coefficient = 1/10 x 6.00/1.80 = 0.33

7 6. If a 5 percent reduction in the price of a good produces a 3 percent increase in the quantity demanded, the price elasticity of demand over this range of the demand curve is a. elastic. b. perfectly elastic. c. unitary elastic. d. inelastic. e. perfectly inelastic. D. Since the percentage change in quantity demanded is less than the percentage change in price, this range is defined inelastic

8 7. A manufacturer of Beanie Babies hires an economist to study the price elasticity of demand for this product. The economist estimates that the price elasticity of demand coefficient for a range of prices close to the selling price is greater than 1. The relationship between changes in price and quantity demanded for this segment of the demand curve is a. elastic. b. inelastic. c. perfectly elastic. d. perfectly inelastic. e. unitary elastic. A. Elasticity > 1 = elastic demand

9 8. A downward-sloping demand curve will have a a. higher price elasticity of demand coefficient along the top of the demand curve. b. lower price elasticity coefficient along the top of the demand curve. c. constant price elasticity of demand coefficient throughout the length of the demand curve. d. positive slope. A. The quantity demanded by consumers is more sensitive to a price change at higher prices than at lower prices.

10 9. The price elasticity of demand coefficient for a good will be less a. if there are few or no substitutes available. b. if a small portion of the budget will be spent on it. c. in the short run than in the long run. d. if all of the above cases. D. A low elasticity of demand means that there is a low sensitivity to a change in price. When the good has few substitutes, or the purchase represents a small portion of one’s budget, or they do not have much time to adjust to the price change, price elasticity of demand is inelastic.

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