Econ Review Part 3
Review for my exam
Questions and Answers
- 1.
If the price of a hotel room increases from $70 to $85 and the number of rooms booked decreases from 200 to 150, what would the price elasticity of demand equal? (absolute value)
- A.
0.68
- B.
0.91
- C.
1.10
- D.
1.48
- E.
None of the above
Correct Answer
D. 1.48Explanation
The price elasticity of demand measures the responsiveness of the quantity demanded to a change in price. In this case, the price of the hotel room increased by ($85 - $70) = $15, which is a 21.43% increase from the original price. The number of rooms booked decreased by (200 - 150) = 50 rooms, which is a 25% decrease from the original number of rooms booked. To calculate the price elasticity of demand, we divide the percentage change in quantity demanded (-25%) by the percentage change in price (21.43%). The absolute value of this ratio is 1.48, which is the price elasticity of demand.Rate this question:
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- 2.
If QuikTrip decreases the price of 32 ounce soft drinks in the summer from $0.79 to $0.39 and the number purchased increases from 230 to 770, what would the price elasticity of demand equal? (absolute value)
- A.
0.64
- B.
0.77
- C.
0.93
- D.
1.59
- E.
None of the above
Correct Answer
D. 1.59Explanation
(Q1-Q2)/(Q1+Q2) / (P1-P2)/ (P1+P2)Rate this question:
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- 3.
For which of the following goods would demand be most inelastic with respect to price?
- A.
Soft drink at a gas station
- B.
Soft drink at a movie theater
- C.
Soft drink at a mall
- D.
Soft drink on a college campus
- E.
Soft drink at a grocery store
Correct Answer
B. Soft drink at a movie theaterExplanation
The demand for a soft drink at a grocery store is likely to be the most inelastic with respect to price because there are limited if any substitutes available. Movie-goers have no other choice but to purchase a soft drink at the concession stand if they want a beverage. The high prices at the concession stand are evidence of the inelasticity. If demand is inelastic and a seller raises his price, total revenue increases. For that reason, movie theatres generally charge relatively high prices for soft drinks.Rate this question:
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- 4.
For which of the following goods would demand be most inelastic with respect to price?
- A.
A chair from Rooms to Go
- B.
An antique Queen Anne chair
- C.
A UGA lawn chair
- D.
Lazy chair recliner
Correct Answer
B. An antique Queen Anne chairExplanation
The demand for a Queen Anne chair is likely to be the most inelastic with respect to price because the unique nature of this item means that there are no substitutes. Therefore, someone who is willing to buy such a chair would likely be willing to purchase the item at a relatively high price.Rate this question:
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- 5.
For which of the following goods would demand be most elastic with respect to price?
- A.
A hot dog and soft drink at an NFL stadium
- B.
Heart surgery
- C.
A gallon of gasoline
- D.
Eddie Bauer jeans
- E.
None of the Above
Correct Answer
D. Eddie Bauer jeansExplanation
The demand for jeans from an Eddie Bauer store, catalog, or web site is likely to be the elastic with respect to price because there are many substitutes for this good - jeans from Land's End, the Gap, Abercrombie, J. Crew, etc., etc.Rate this question:
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- 6.
Price elasticity of demand with an absolute value of 2.5 would indicate
- A.
Perfectly inelastic demand
- B.
Relatively inelastic demand
- C.
Demand of unitary elasticity
- D.
Relatively elastic demand
- E.
Perfectly elastic demand
Correct Answer
D. Relatively elastic demandExplanation
A price elasticity of demand with an absolute value of 2.5 indicates relatively elastic demand. This means that a small change in price will result in a relatively larger change in quantity demanded. In other words, consumers are highly responsive to changes in price, and a price increase will lead to a significant decrease in demand, while a price decrease will lead to a significant increase in demand.Rate this question:
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- 7.
Price elasticity of demand with an absolute value of zero would indicate
- A.
Perfectly inelastic demand
- B.
Relatively inelastic demand
- C.
Demand of unitary elasticity
- D.
Relatively elastic demand
Correct Answer
A. Perfectly inelastic demandExplanation
Zero indicates no response by consumers to a change in price; that is as inelastic as possible Also see the table below.Rate this question:
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- 8.
If the demand for a good is inelastic and a producer raises his/her price, the result will be an increase in total revenue.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
If demand is inelastic, that means that the number of consumers will not change very much when the price changes. In effect, consumers are "stuck" with the good. As a result, if the price increases some customers no longer buy the good but most customers continue to buy the good and at a much higher price. The result is an increase in total revenue. (TR = P Q)Rate this question:
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- 9.
If the demand for a good is elastic and a producer lowers his/her price, the result will be an increase in total revenue.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
If demand is elastic, that means that the number of consumers will change by a great degree when the price changes. In effect, consumers have several options with respect to this good. As a result, if the price decreases a large number of customers will begin buying the good; the existing customers will continue to buy the good at a lower price. The substantial number of new customers will lead to an increase in total revenue. (TR = P Q)Rate this question:
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- 10.
If the demand for a good is elastic and a producer lowers his/her price, the result will be an increase in total revenue.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
If demand is elastic, that means that the number of consumers will change by a great degree when the price changes. In effect, consumers have several options with respect to this good. As a result, if the price decreases a large number of customers will begin buying the good; the existing customers will continue to buy the good at a lower price. The substantial number of new customers will lead to an increase in total revenue. (TR = P Q)Rate this question:
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- 11.
If the price elasticity of demand equals -2.5 and a producer raises his/her price, the result will be an increase in total revenue.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
Price elasticity of demand of -2.5 indicates that demand is relatively elastic. If demand is elastic, that means that the number of consumers will change significantly when price changes. Consumers have several options with respect to this good. As a result, if the price increases many customers will no longer buy the good with only a limited number continuing to buy the good at the much higher price. The result is a decrease in total revenue. (TR = P QRate this question:
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- 12.
If a specific movie theatre increases prices by $1.00 and demand for is unitary with respect to price what will happen to total revenue?
- A.
Increase
- B.
Decrease
- C.
no change
Correct Answer
C. no changeExplanation
Unitary elasticity means that the percentage change in quantity demanded will be equal to the percentage change in price. As a result, if the theatre increases the price of its tickets it will lose some of its customers. However, the loss in customers will be exactly offset by an increase in the price paid by the remaining customers. Therefore, total revenue does not increase not does it decrease.Rate this question:
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- 13.
If a decrease in price leads to an increase in total revenue, the demand must be elastic.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
If the price decrease caused an increase in total revenue, the drop in price must have caused a large number of new consumers to purchase the good in question. A large change in the number of customers or quantity demanded describes what is known as elastic demand with respect to price.Rate this question:
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- 14.
The Laffer curve (at least in the short run) depicts an inverse relationship between inflation and unemployment.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
The Laffer curve depicts the relationship between the tax rate and tax revenues. In contrast, the Phillips curve (in the short run) depicts the relationship between inflation and unemployment. It is an inverse relationship; as inflation increases unemployment decreases and vice-versa.Rate this question:
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- 15.
Which of the following is a correct indication of the labels on the axis for the Phillips curve?
- A.
Inflation is on the vertical axis and unemployment is on the horizontal axis.
- B.
Unemployment is on the vertical axis and inflation is on the horizontal axis.
- C.
Price is on the vertical axis and unemployment is on the horizontal axis.
- D.
Price is on the vertical axis and employment is on the horizontal axis.
- E.
Employment is on the vertical axis and price is on the horizontal axis.
Correct Answer
A. Inflation is on the vertical axis and unemployment is on the horizontal axis.Explanation
The Phillips curve is a graphical representation of the relationship between inflation and unemployment. It shows that as unemployment decreases, inflation tends to increase, and vice versa. In this context, it makes sense to have inflation on the vertical axis and unemployment on the horizontal axis. The correct answer indicates this relationship accurately.Rate this question:
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- 16.
Rational expectations create forecasts using all past information as well as the current decisions of other decision makers;
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
Rational expectations theory suggests that individuals make predictions about the future based on all available information, including past data and the current decisions made by others. This means that individuals take into account not only historical information but also the actions and choices of other decision makers in order to form their forecasts. Therefore, the statement that rational expectations create forecasts using all past information as well as the current decisions of other decision makers is true.Rate this question:
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- 17.
Adaptive expectations create forecasts using all past information as well as the current decisions of other decision makers.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
Adaptive expectations do not consider all past information and the current decisions of other decision makers when creating forecasts. Instead, they only rely on past information to make predictions about the future. Therefore, the statement is false.Rate this question:
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- 18.
Which of the following would be included in the U.S. GDP?
- A.
A Volvo built by Ford in Gothenburg, Sweden
- B.
A Hyundai built in Montgomery, Alabama
- C.
A Corvette built in Bowling Green, Kentucky by General Motors
- D.
All of the above
- E.
B and C only
Correct Answer
E. B and C onlyExplanation
The correct answer is B and C only because the U.S. GDP includes the value of goods and services produced within the United States. The Volvo built by Ford in Gothenburg, Sweden would not be included in the U.S. GDP as it was not produced within the country. However, the Hyundai built in Montgomery, Alabama and the Corvette built in Bowling Green, Kentucky by General Motors would both be included in the U.S. GDP as they were produced within the country.Rate this question:
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Current Version
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Mar 21, 2023Quiz Edited by
ProProfs Editorial Team -
Jul 29, 2009Quiz Created by
Laurenmlbc
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