Economics: Supply and Demand

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Micro Chapter 18 Practice Problems #3 Key

1. Which is not characteristic of a product with relatively inelastic demand?
A)The good is regarded by consumers as a necessity.
B)There are a large number of good substitutes for the good.
C)Buyers spend a small percentage of their total income on the product.
D)Consumers have had only a short time period to adjust to changes in price. Answer: B

2. The demand for Cheerios cereal is more price-elastic than the demand for cereals as a whole. This is best explained by the fact that:
A)Cheerios are a luxury.
B)cereals are a necessity.
C)there are more substitutes for Cheerios than for cereals as a whole.
D)consumption of cereals as a whole is greater than consumption of Cheerios. Answer: C

3. The price elasticity of demand will increase with the length of the period to which the demand curve pertains because:
A)consumers' incomes will increase.
B)the demand curve will shift outward.
C)all prices will increase over time.
D)consumers will be better able to find substitutes.
Answer: D

4. To economists the main differences between "the short run" and "the long run" are that:
A)the law of diminishing returns applies in the long run, but not in the short run.
B)in the short run all resources are fixed, while in the long run all resources are variable.
C)in the long run all resources are variable, while in the short run at least one resource is fixed.
D)fixed costs are more important to decision making in the long run than they are in the short run. Answer: C

5. A state government wants to increase the taxes on cigarettes to increase tax revenue. This tax would only be effective in raising new tax revenues if the price elasticity of demand is:
A)unity. B) elastic. C) inelastic. D) perfectly elastic. Answer: C

6. You are the newly appointed sales manager of the Rock Record Company and have been charged with the task of increasing revenues. Your economics consultants have informed you that at present price and output levels, price elasticity of demand for your product is less than one. You should:

A)decrease prices.
B)increase prices.
C)hold prices constant and increase supply.
D)cut advertising expenditures to decrease the demand for these records. Answer: B

7. If the demand for a product is elastic, then:
A)a higher tax will generate more tax revenue.
B)a higher tax will generate less tax revenue.
C)total revenue will decrease as price decreases.
D)total revenue will remain constant as price remains constant. Answer: B

8. Sony is considering a 10 percent price reduction on its color television sets. If the demand for sets in this price range is inelastic:
A)revenues from color sets will remain constant.
B)revenues derived from color sets will decrease.
C)revenues derived from color sets will increase.
D)the number of television sets sold will decrease.
Answer: B

9. A remote island nation is discovered, and on this island the cross elasticity of demand for coconut milk and fruit punch is 1.0. This indicates that these two goods are:
A)normal. B) inferior. C) complements. D) substitutes. Answer: D

10. Cross elasticity of demand between complementary products is:
A)positive but less than 1. B) unitary. C) zero. D) negative. Answer: D

11. The cross elasticity of demand between Quaker State motor oil and Texaco motor oil is likely to be:
A)zero.C)a negative number less than –1.
B)a positive number.D)a negative number between zero and –1. Answer: B

12. A 3 percent increase in the price of tea causes a 6 percent increase in the demand for coffee. The cross elasticity of demand for coffee with respect to the price of tea is:
A)-0.5. B) +0.5. C) -2.0. D) +2.0.
Answer: D

13. If a 10 percent increase in the price of one good results in a decrease of 5 percent in the quantity...
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