Eco 102 H Review (Chapter 5: Elasticity And Its Application)

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Questions and Answers
  • 1. 

    Elasticity measured the magnitude of how much buyers and sellers respond to changes in market conditions.

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    Elasticity refers to the responsiveness of buyers and sellers to changes in market conditions. It measures the magnitude of this response, indicating how much buyers and sellers adjust their behavior in response to changes in factors such as price, income, or demand. Therefore, the statement that elasticity measures the magnitude of how much buyers and sellers respond to changes in market conditions is true.

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  • 2. 

    The price elasticity of demand measures how willing consumers are to buy less of the good as its price decreases. 

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    The price elasticity of demand measures the responsiveness of quantity demanded to a change in price. It indicates how much consumers are willing to change their quantity demanded in response to a change in price. A higher price elasticity of demand suggests that consumers are more willing to buy less of the good as its price increases, not decreases. Therefore, the statement is false.

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  • 3. 

    Goods with close substitutes tend to have more elastic demand. 

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    True, because it is easier to for consumers to switch from that good to others.

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  • 4. 

    Neccesities tend to have elastic demands, whereas luxuries have inelastic demands. 

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    Necessities: inelastic demand; Luxuries: elastic demand

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  • 5. 

    Whether a good is a necessity depends not on the intrinsic properties of the good. 

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    True, but on the preference of the buyer.

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  • 6. 

    Narrowly defined markets tend to have more elastic demand than broadly defined markets. 

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    True, because it is easier to find close substitutes for narrowly defined goods.

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  • 7. 

    Goods tend to have a more inelastic demand over longer time horizon. 

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    ...more elastic.

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  • 8. 

    In Mankiw's book, a larger price elasticity implies a lesser responsiveness of quantity demanded to price. 

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    ...greater responsiveness

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  • 9. 

    Using the midpoint method, what is the demand elasticity of a product if its price rose from $4 to $6 and its quantity decreased from 120 to 80? 

    • A.

      0.25

    • B.

      2.5

    • C.

      -1

    • D.

      1

    Correct Answer
    D. 1
    Explanation
    The demand elasticity of a product measures the responsiveness of the quantity demanded to a change in price. In this case, the price of the product increased from $4 to $6, causing the quantity to decrease from 120 to 80. The midpoint method calculates the percentage change in quantity demanded and the percentage change in price. By using the formula (change in quantity/average quantity) divided by (change in price/average price), we can determine the demand elasticity. In this case, the percentage change in quantity is -33.33% and the percentage change in price is 50%. Dividing these two values, we get a demand elasticity of 1, indicating that the product is unit elastic.

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  • 10. 

    In Mankiw's book, what elasticity represents is more important than how it is calculated. 

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    The statement suggests that the importance of understanding what elasticity represents outweighs the significance of knowing the specific calculations used to determine it. This implies that comprehending the concept and its implications is more crucial than being able to perform the calculations accurately.

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  • 11. 

    Demand is considered elastic when the elasticity is less than 1, and inelastic if the elasticity is greater than 1.

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    elastic: greater than 1; inelastic: less than 1

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  • 12. 

    If the elasticity is exactly 1, the quantity moves the same amount proportionately as the price, and demand is said to have unit elasticity. 

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    If the elasticity is exactly 1, it means that a change in price will result in an equal percentage change in quantity demanded. This indicates that demand is responsive to price changes, as the quantity moves the same amount proportionately as the price. Therefore, demand is said to have unit elasticity.

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  • 13. 

    The price elasticity is closely related to the demand slope. 

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    True, because the price elasticity of demand measures how much quantity demand responds to changes in price.

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  • 14. 

    The flatter the demand curve that passes through a given point, the greater the price elasticity of the demand and vice versa. 

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    The statement is true because the flatter the demand curve, the more responsive consumers are to changes in price. This means that even a small change in price will result in a larger change in quantity demanded. On the other hand, a steeper demand curve indicates that consumers are less responsive to price changes, resulting in a smaller change in quantity demanded for a given change in price. Therefore, a flatter demand curve indicates a greater price elasticity of demand, and vice versa.

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  • 15. 

    Profit is the amount paid by buyers and received by sellers of the good. 

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    Total revenue

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  • 16. 

    How total revenue changes as one moves along the demand curve does not depend on the price elasticity of demand.

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    it does depend on the price elasticity of the demand.

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  • 17. 

    An increase in price in a good with an elastic demand decreases total revenue, while it increase if the good has an inelastic demand. 

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    When a good has an elastic demand, it means that the quantity demanded is highly responsive to changes in price. Therefore, if the price of the good increases, the quantity demanded will decrease significantly, resulting in a decrease in total revenue. On the other hand, when a good has an inelastic demand, it means that the quantity demanded is not very responsive to changes in price. In this case, if the price of the good increases, the quantity demanded will decrease only slightly, leading to an increase in total revenue. Therefore, the statement is true.

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  • 18. 

    Which is not part of the general rules for demand elasticity? 

    • A.

      When demand is inelastic, price and total revenue moves in the same direction.

    • B.

      When demand is elastic, price and total revenue moves in opposite directions.

    • C.

      If demand is unit elastic, total revenue remains constant when the price changes.

    • D.

      If demand is unit elastic, total revenue changes from one point to another in the demand curve.

    Correct Answer
    D. If demand is unit elastic, total revenue changes from one point to another in the demand curve.
    Explanation
    The given statement is not part of the general rules for demand elasticity because when demand is unit elastic, total revenue remains constant when the price changes.

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  • 19. 

    Even though the slope of a linear demand curve is constant, the elasticity is not. 

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    This is true because the slope is the ratio of changes in two variables, whereas the elasticity is the ratio of percentage changes in the two variables.

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  • 20. 

    In a linear demand curve, the demand curve is elastic at points with low price and high quantity; and the demand curve is inelastic at points with a high price and low quantity.

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    elastic: points with high price and low quantity
    inelastic: points with low price and high quantity

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  • 21. 

    Normal goods have positive income elasticities, while inferior goods have negative income elasticties. 

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    Normal goods are those for which demand increases as income increases. Therefore, they have positive income elasticities. On the other hand, inferior goods are those for which demand decreases as income increases. Hence, they have negative income elasticities.

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  • 22. 

    Necessities tend to have small income elasticities. 

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    True, because consumers choose to buy some of these goods even when their income are low.

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  • 23. 

    Luxuries tend to have small income elasticities. 

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    Large income elasticities because consumers feel that they can do without these goods altogether if their income are too low.

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  • 24. 

    The cross-price elasticity of substitutes is negative while the cross-price elasticity of complements is positive. 

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    substitutes: positive
    complements: negative

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  • 25. 

    The law of supply states that higher prices decrease the quantity supplied. 

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    ...increase the quantity supplied

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  • 26. 

    Supply is usually more elastic in the long run than in the short run. 

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    It's hard to change the supply of a beach resort even if the demand rapidly changes, but in the long run it becomes more elastic.

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  • 27. 

    The midpoint method is also used to compute for the Price Elasticity of Supply. 

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    The statement is true because the midpoint method is a commonly used formula to calculate the price elasticity of supply. This method takes into account the percentage change in quantity supplied and the percentage change in price, which allows for a more accurate measurement of elasticity. By using the midpoint method, economists can determine how responsive the quantity supplied is to changes in price, helping to understand the elasticity of supply in a given market.

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  • 28. 

    The supply curves gets flatter as the elasticity rises. 

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    As the elasticity of supply increases, the responsiveness of quantity supplied to changes in price also increases. This means that a small change in price will result in a relatively larger change in quantity supplied. In other words, the supply curve becomes flatter as elasticity rises because suppliers are more willing and able to adjust their quantity supplied in response to price changes. Therefore, the given statement is true.

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  • 29. 

    Drug interdiction increase drug-related crime. 

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    It increases because addicts will tend to succumb to crimes such as stealing to keep up with the prices of the drugs. Education, on the other hand, decreases drug-related crime.

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  • 30. 

    What is good for farmers is not necessarily good for the society as a whole. 

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    This statement suggests that what may benefit farmers individually may not always benefit society as a whole. While certain agricultural practices or policies may be advantageous for farmers in terms of their profits or yields, they may have negative impacts on the environment, public health, or other aspects of society. Therefore, it is possible for something to be beneficial for farmers but not for society as a whole.

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  • 31. 

    In the short-run, both the supply and demand for oil are relatively elastic. 

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    inelastic.

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  • 32. 

    Raising prices is easier in the short run than in the long run.

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    In the short run, a company can easily increase prices as it requires minimal adjustments to its existing operations. It can simply raise prices to increase revenue without making significant changes to its production or supply chain. However, in the long run, increasing prices may require more complex adjustments such as renegotiating contracts, investing in new technology, or finding alternative suppliers. Therefore, it is generally easier for a company to raise prices in the short run compared to the long run.

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  • 33. 

    Financial stimulus is the incentive catalyzed by spending so that it will stimulate economy.

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    Fiscal Stimulus (Sir's lesson)

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  • 34. 

    We assume the total dollar value of drug-related crime equals the total expenditure on drugs, hence we know the total value of drug related crime. 

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    Sir's lesson

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