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Chapter 5 - Practice Problems

Terms in this set (49)

A decrease in supply will have a greater effect on price in a market with an _________ demand than the same decrease in supply with an ___________ demand.
inelastic; elastic
A firm knows that some of its customers have inelastic demand. If it wishes to raise revenues made from those customers it might __________ its prices.
raise
Kevin's goal as a business manager is to increase total sales in dollar terms for his business. Should he raise or lower his prices?
lower the prices if demand is elastic; raise the prices if demand is inelastic
An increase in an effective price floor will cause ___________.
an increase in the surplus
One market has an elastic demand for the good. In a second market, the demand is inelastic. Everything else is the same in the two markets. An increase in supply, will ___________ the equilibrium quantity the most in the ___________ market.
increase; first
A firm wishes to increase sales. It knows that demand is inelastic. Therefore, it should ___________ its prices.
raise
If the goal is to increase revenue, a firm facing an inelastic demand should ___________ its prices.
raise
If demand is elastic, should a producer raise or lower price if the producer wants to increase total revenues?
The producer should lower prices.
Consider a market with an effective price floor. What will happen to the quantity exchanged in the market if demand for the product increases? The quantity exchanged will ___________.
increase
A change in demand will cause the equilibrium price to change by ___________ and the equilibrium quantity to change by ___________ with an inelastic supply than if supply were elastic.
more; less
One market has an elastic demand for a good. In a second market, the demand is inelastic. Everything else is the same in the two markets. An increase in supply will ___________ the equilibrium quantity the most in the ___________ market.
increase; first
if supply increase, what will happen to the total amount spent on a product with an inelastic demand?
decrease
An increase in a price ceiling will change the amount of a good sold in a market:
if the price ceiling is effective.
A change in supply will cause the equilibrium price to change by ___________ and the equilibrium quantity to change by ___________ with an inelastic demand than if demand were elastic.
more; less
A decrease in an effective price floor will cause the ___________ (surplus or shortage) to ___________ (increase or decrease).
surplus; decrease
The current equilibrium price of a specific type of automobiles is $23,000. An increase of a price ceiling on automobiles from $20,000 to $25,000 will do what to the amount sold in the market and to the price of automobiles?
The price of automobiles will increase and more will be sold.
An increase in prices of inputs will cause a (relatively large/relatively small) change in prices with an elastic demand as opposed to an inelastic demand. The change in input prices will cause a (relatively large/relatively small) change in quantity if demand is elastic as opposed to an inelastic demand.
relatively small increase; relatively large decrease
An increase in the costs of producing a service will cause a(n) ___________ in the price of a service with an elastic demand than it would in the case of an inelastic demand.
smaller increase
A change in supply will cause the equilibrium price to change by ___________ and the equilibrium quantity to change by ___________ with an elastic demand than if demand were inelastic.
less; more
Assume an inelastic supply. Which of the following will be most likely to be true if demand increases?
The equilibrium price will increase by more and the equilibrium quantity by less than if the supply were elastic.
A new owner of the Nashville Predators wants to increase revenue, so she lowers the price of tickets. If the owner made a good decision and the quantity demanded went up by 15%, then the price decrease must be less than ____%.
15
A manufacturing company has a fixed amount of capital that cannot be increase rapidly. Suppose there is a sudden increase in the price of their product. Their supply curve is ___________.
inelastic and not very responsive to changes in prices
The price of rice increases from $1 to $2. The quantity demanded falls from 100 to 95. Calculate the price elasticity of demand.
-0.05
An individual's income increases by 50% and their demand for fast food falls by 10%. Calculate their income elasticity of demand for fast food.
-0.2
Tim makes twice as much money as his brother Andrew, but they equally like to go to baseball games. Suppose the ticket price of MLB games rises from $50 to $100, and Tim decreases the number of games he attends by 20%. Andrew is more responsive to the price change of tickets because they take up a larger portion of his income. Andrew's price elasticity of demand for MLB games must be less than _____.
-0.2
Consider two goods. The first makes up a large part of one's spending; the second, a small part. The first does not have many substitutes, while the second has quite a few. What is likely true about the elasticity of demand for the first good compared to that of the second>
One cannot tell as the larger portion of spending makes demand elastic and the lower number of substitutes makes demand inelastic.
An individual's income increases by 50% and their demand for fast food falls by 10%. Calculate their income elasticity of demand for fast food. Provide your answer to two decimal places and include a "-" if it is a negative number.
0.2
An individual living in NYC gets a pay raise and then switches from taking the subway to work to catching an Uber. The subway is a(n) ___________ good.
inferior
The government is trying to increase the consumption of good through a subsidy. They will have better luck if the demand and supply curves are
elastic.
The CEO of a Fortune 500 company goes to a convenience store and finds many options for chewing gum. His demand for gum is likely:
inelastic because it is a small portion of his income.
A local government imposes a minimum wage on all workers. The employers in the community have been contemplating switching employees' labor to machines. One negative consequence of the minimum wage law could be a ___________(shortage/surplus) of workers.
surplus
The market for baking flour has changed over time such that there are more substitutes on the market. If the price of baking flour goes up, the decrease in quantity demanded will be ___________ as compared to before.
greater
Suppose you know that the elasticity of demand for a product is 1.7%. By how much would quantity decrease if price were increased by 5%?
8.5%
Milk producers know that the elasticity of demand for milk is 0.1. If they want to increase the quantity sold by 5%, by how much will they need to lower price?
50%
Each week, Bill buys exactly 10 cups of coffee, regardless of the price. Bill's price elasticity of demand for coffee is what?
0
Assume that the price elasticity of demand of gas in the short run is 0.3. If a war in the Mideast causes the price of oil to increase, what will happen in the market for gas?
quantity demanded will decrease and total revenue will rise
How could a drought be good news for farmers?
if demand for their crop is inelastic
The total amount spent on a service with an elastic demand will ___________ if supply decreases.
decrease
A change in demand will cause the equilibrium price to change by ___________ and the equilibrium quantity to change by ___________ with an inelastic supply than if supply were elastic.
more; less
A city passes a law that automobile prices may not increase. The auto market is currently in equilibrium. What will happen in that market if costs of producing autos increase?
Less than then allocatively efficient amount will be produced.
Consider a market with an effective price floor. What will happen to the quantity exchanged in the market if demand for the product increase?
It will increase.
An increase in supply will cause the smallest change in prices if demand is:
elastic
Suppose that the supply of new apartments is elastic, while the supply of new homes is inelastic. Compare the results of a decrease in demand in both markets.
The number of new apartments will change by less than the price of new houses. The quantity of new apartments will change by more than the number of new houses.
A tax placed on a good will ___________ the quantity sold if demand is inelastic. A subsidy of production of a good will ___________ the quantity sold if demand is inelastic.
decrease; increase
For many, Spam is an inferior good. Therefore, is the income elasticity for Spam is less than 1, 0, or -1?
0
A tax on cigarettes increases the price of cigarettes from $4 to $5. Suppose the price elasticity of demand for cigarettes is -2. Calculate the percentage change in quantity demanded.
-50
A new owner of the Nashville Predators wants to increase revenue, so she lowers the price of tickets. If the owner made a good decision and the quantity demanded went up by 15%, then the price decrease must be less than _____%.
15
Facing a rising demanded for hand sanitizers, a perfume company switches to producing exclusively sanitizers. Suppose the switch is relatively easy for the company. If the price for hand sanitizers went up by 40% and the company were able to increase quantity supplied by 50%, calculate their price elasticity of supply.
1.25
An increase in a price floor causes quantity demanded to fall by 15 and quantity supplied to increase by 45. Calculate the change in the surplus.
60
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