UNIVERSITY OF TORONTO DEPARTMENT OF ECONOMICS ECON 100: INTRODUCTORY ECONOMICS ROBERT GAZZALE, PHD PRACTICE PROBLEMS: ELASTICITY

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1 PRACTICE PROBLEMS ELASTICITY 1. Suppose the price of barley increases by 16.53%. If breweries buy 3.28% less barley after the price increase, the total revenue for barley producers will because the effect is greater than the effect. A) decrease; quantity; price B) increase; price; quantity C) not change; quantity; price D) increase; quantity; price 2. Suppose the cross-price elasticity between demand for Burger King burgers and the price of McDonald's burgers is 0.8. If McDonald's increases the price of its burgers by 10%, then: A) Burger King will sell 10% more burgers. B) Burger King will sell 8% more burgers. C) Burger King will sell 8% fewer burgers. D) We cannot tell what will happen to Burger King, but McDonald's will sell 8% fewer burgers. 3. We predict the long-run price elasticity of demand of gasoline would be the short-run price elasticity of demand of gasoline. A) less than B) larger than C) equal to D) not comparable to 4. If the price of chocolate-covered peanuts decreases from $1.10 to $0.90 and the quantity demanded increases from 190 bags to 210 bags, then the price elasticity of demand (using the midpoint method) is: A) 0. B) 0.5. C) 1. D) An attorney supplies 40 hours of work per week when her fee is $100 per hour but supplies 60 hours of work per week when her fee rises to $120 per hour. Using the midpoint formula, her elasticity of supply is equal to: A) 1. B) 0.8. C) 2.2. D) It is very difficult for Julia to find inexpensive and available inputs for her business. Because of this, we predict that Julia's price elasticity of supply is: A) elastic. B) inelastic. C) unit-elastic. D) perfectly elastic

2 7. The only producer of chocolate bunnies in the world, Choco's Bunny Company, recently expanded its production capacity from 1,000 to 2,000 bunnies per day. If the price elasticity of demand for bunnies is 3.33, by how much will the company need to reduce its price to sell the additional 1,000 bunnies (using the midpoint method)? A) 2.5% B) 25% C) 125% D) 20% 8. A hotel has a capacity of 100 rooms. Which of the following statements best describes the elasticity of supply for rooms at this hotel? A) The supply is elastic at quantities above 100 rooms but inelastic at quantities below 100 rooms. B) The elasticity of supply is equal to 1 in the short run but infinitely elastic in the long run. C) The elasticity of supply is zero in the short run because the short-run supply curve is vertical. D) The supply is infinitely elastic in the short run but perfectly inelastic in the long run. 9. If a good is a necessity with few substitutes, then demand will tend to: A) be more price-elastic. B) be less price-elastic. C) have price elasticity equal to 1. D) be the same as that of a luxury good. 10. Sometimes airlines raise ticket prices as the flight departure date approaches in the hope of increasing revenue. The airlines raise their prices on the assumption that: A) consumer demand becomes more price-elastic as departure time approaches. B) consumer demand becomes less price-elastic as departure time approaches. C) consumers are not aware of airline prices. D) consumer demand is unrelated to prices. 11. Egg producers know that the elasticity of demand for eggs is 0.1. If they want to increase sales by 5%, they will have to lower price by: A) 0.1%. B) 1%. C) 5%. D) 50%. 12. The demand for strawberry ice cream tends to be relatively price-elastic because: A) for most people there are many close substitutes for strawberry ice cream. B) it is a necessity for most people. C) it has to be consumed very quickly. D) it costs so little

3 13. Paolo owns a pizza shop. The price of pizza recently increased from $3 to $5 a slice. Paolo responded by increasing the quantity of slices he supplied from 100 to 150 slices per day. Using the midpoint method, calculate Paolo's price elasticity of supply. A) 5/4 B) 4/5 C) 3/4 D) 5/2 Use the following to answer questions Figure: The Demand for Shirts 14. (Figure: The Demand for Shirts) Look at the figure. If the price is below, demand is inelastic. A) $10 B) $20 C) $30 D) $ (Figure: The Demand for Shirts) Look at the figure. Total revenue is maximized if the price is A) $30 B) $40 C) $50 D) $ Each month Jacquelyn spends exactly $50 on ice cream regardless of the price of each container. Jacquelyn's price elasticity of demand for ice cream is: A) 0. B) 1. C) greater than 1. D) less than 1 but greater than If demand is elastic, then: A) the price effect dominates the quantity effect, and a fall in the price will cause total revenue to rise. B) the price effect dominates the quantity effect, and an increase in the price causes total revenue to rise. C) the quantity effect dominates the price effect, and an increase in the price causes total revenue to rise. D) the quantity effect dominates the price effect, and a decrease in the price causes total revenue to rise

4 18. If the estimated price elasticity of demand for foreign travel is 4, then: A) a 20% decrease in the price of foreign travel will increase the quantity demanded by 80%. B) the demand for foreign travel is inelastic. C) a 10% increase in the price of foreign travel will increase the quantity demanded by 40% D) a 20% increase in the price of foreign travel will increase the quantity demanded by 80%. 19. If your purchases of shoes decrease from 11 pairs per year to 9 pairs per year when your income increases from $19,000 to $21,000 a year, other things equal, then, for you, shoes are considered: A) a normal good. B) an inferior good. C) a complementary good. D) a substitute good. 20. On a linear demand curve: A) demand is elastic at high prices. B) demand is inelastic at high prices. C) elasticity is the same at all points on the demand curve. D) demand is elastic at low prices. 21. A rancher in Oklahoma decides to raise the price of her beef by 19% over the prevailing market price. If the demand for beef is perfectly elastic, this rancher's quantity demanded will: A) fall to 0. B) not change. C) fall slightly. D) increase slightly. 22. The income elasticity of demand for eggs has been estimated to be If income grows by 5% in a period, how will that affect demand for eggs in that period, all other things unchanged? A) Demand will increase by more than 5.7%. B) Demand will increase by about 2.9%. C) Demand will decrease by more than 5.7%. D) Demand will decrease. 23. Kayla and Jada are roommates in New York City. Both Kayla and Jada recently received raises. Kayla now buys more CDs than before, but Jada buys fewer. Kayla behaves as if CDs are goods, and Jada's income elasticity of demand for CDs is. A) normal; positive B) normal; negative C) inferior; positive D) inferior; negative

5 Use the following to answer questions Figure: Estimating Price Elasticity 24. (Figure: Estimating Price Elasticity) Look at the figure Estimating Price Elasticity. Between the two prices, P 1 and P 2, which demand curve has the lowest price elasticity? A) D 1 B) D 2 C) D 3 D) D (Figure: Estimating Price Elasticity) Look again at the figure Estimating Price Elasticity. Between the two prices, P 1 and P 2, which demand curve has the highest price elasticity? A) D 1 B) D 2 C) D 3 D) D The university president believes that increasing student tuition by 5% will increase revenues. If the president is correct that revenues will increase, then the tuition increase will: A) reduce the number of students enrolling by less than 5%. B) reduce the number of students enrolling by more than 5%. C) reduce the number of students enrolling by exactly 5%. D) increase the number of students enrolling by 5%. 27. If the demand for golf is price-inelastic and your local public golf course increases the greens fees for using the course, you would expect: A) a decrease in total revenue received by the course. B) an increase in total revenue received by the course. C) an increase in the amount of golf played on the course. D) no change in the amount of golf played on the course. 28. Suppose you manage a convenience mart and are in charge of ordering products but do not set the price. The home office provides the prices. In your area, the income elasticity of demand for peanut butter is 0.5. Due to local factory closings, you expect local incomes to decrease by 20% on average in the next month. As a result, you should stock:

6 A) 20% more peanut butter on the shelves. B) 5% more peanut butter on the shelves. C) 10% more peanut butter on the shelves. D) 10% less peanut butter on the shelves. Use the following to answer question 29. Figure: The Demand for Notebook Computers 29. (Figure: Demand for Notebook Computers) Look at the figure The Demand for Notebook Computers. The change in total revenue resulting from a change in price from P to T suggests that demand is: A) inelastic. B) price-elastic. C) price-inelastic. D) price unit-elastic. 30. When the price of chocolate-covered peanuts increases from $1.55 to $2.00, the quantity demanded decreases from 220 to 160. In this price range, the demand for chocolate covered peanuts is and total revenue will when the price increases. A) elastic; increase B) elastic; decrease C) inelastic; increase D) inelastic; decrease 31. The cross-price elasticity of electricity with respect to the price of natural gas has been estimated as being equal to 0.2. This implies that: A) natural gas and electricity are both normal goods. B) electricity and natural gas are complements. C) electricity and natural gas are substitutes. D) one of the two goods is inferior and the other is normal, but we need additional information to determine which of them is normal

7 32. When the price of chocolate-covered peanuts decreases from $1.10 to $0.95, the quantity demanded increases from 190 bags to 215 bags. In this price range, the demand for chocolate covered peanuts is and total revenue will when price decreases. A) elastic; increase B) elastic; decrease C) inelastic; increase D) inelastic; decrease 33. A group of dairy farmers is trying to raise milk prices by 10%. If the price elasticity of demand for milk is 0.75 and the price elasticity of supply for milk is 0, then by how much should farmers reduce their milk production to obtain the 10% increase? A) 10% B) 7.5% C) 15% D) 13% 34. The price elasticity of demand along a demand curve with a constant slope: A) is equal to the slope. B) is greater than the slope. C) is less than the slope. D) decreases in absolute value as quantity demanded rises. 35. The Cozy Chair Company believes it can sell 200 chairs at $200 per chair or 300 chairs at $150 per chair. Using the midpoint formula, what do they think is the price elasticity of demand? A) 2.5. B) 1.4. C) 0.7. D) The price elasticity of demand for gasoline in the short run has been estimated to be 0.4. If a war in the Middle East causes the price of oil (from which gasoline is made) to increase, how will that affect total revenue from gasoline in the short run, all other things unchanged? A) Quantity demanded will stay the same; total revenue will fall. B) Quantity demanded will decrease; total revenue will rise. C) Total revenue will remain unchanged. D) Demand will not change; total revenue will rise. 37. The price of gasoline rises 5% and the quantity of gasoline purchased falls 1%. The price elasticity of demand is equal to and demand is described as. A) 0.2; inelastic B) 5; inelastic C) 0.2; elastic D) 5; elastic

8 Answers 1. B 2. B 3. B 4. B 5. C 6. B 7. D 8. C 9. B 10. B 11. D 12. A 13. B 14. C 15. A 16. B 17. D 18. A 19. B 20. A 21. A 22. B 23. B 24. D 25. C 26. A 27. B 28. C 29. B 30. B 31. C 32. D 33. B 34. D 35. B 36. B 37. A