Managerial Economics - Chap 003

Chapter 03 Quantitative Demand Analysis
Chapter 03
Quantitative Demand Analysis
Multiple Choice Questions

1. Assume that the price elasticity of demand is 2 for a certain firm's product. If the firm
raises price, the firm's managers can expect total revenue to:
A. Decrease
b. Increase
c. Remain constant
d. Either increase or remain constant depending upon the size of the price increase
Difficulty: Easy

2. A price elasticity of zero corresponds to a demand curve that is:
a. Horizontal
b. Downward sloping with a slope always equal to 1
C. Vertical
d. Either vertical or horizontal
Difficulty: Medium

3. As we move down along a linear demand curve, the price elasticity of demand becomes
more
a. Elastic
B. Inelastic
c. Loglinear
d. Variable
Difficulty: Medium

3-1
4. Suppose the demand for a product is QXd = 10 lnPX then product X is
a. Elastic
b. Inelastic
C. Unitary elastic
d. Cannot be determined without more information
Difficulty: Easy

5. The demand for good X has been estimated by QXd =12 3PX + 4PY. Suppose that good X
sells at $2 per unit and good Y sells for $1 per unit. Calculate the own price elasticity.
a. 0.2
B. 0.3
c. 0.5
d. 0.6
Difficulty: Easy

6. The ownprice elasticity of demand for apples is 1.2. If the price of apples falls by 5%,
what will happen to the quantity of apples demanded?
a. It will increase 5%
b. It will fall 4.3%
c. It will increase 4.2%
D. It will increase 6%
Difficulty: Medium

7. If apples have an ownprice elasticity of 1.2 we know the demand is:
a. Unitary
b. Indeterminate
C. Elastic
d. Inelastic
Difficulty: Easy

3-2
8. If quantity demanded for sneakers falls by 10% when price increases 25% we know that the
absolute value of the ownprice elasticity of sneakers is:
a. 2.5
B. 0.4
c. 2.0
d. 0.27
Difficulty: Medium

9. The quantity consumed of a good is relatively unresponsive to changes in price whenever
demand is:
a. Elastic
b. Unitary
c. Falling
D. Inelastic
Difficulty: Easy

10. If the absolute value of the ownprice elasticity of steak is 0.4, a decrease in price will lead
to:
A. A reduction in total revenue
b. An increase in total revenue
c. No change in total revenue
d. None of the statements associated with this question are correct
Difficulty: Easy

11. If a price increase from $5 to $7 causes quantity demanded to fall from 150 to 100, what is
the absolute value of the ownprice elasticity at a price of $7?
a. 0.57
B. 1.75
c. 0.02
d. 1.24
Difficulty: Medium

3-3
12. Demand is perfectly elastic when the absolute value of the own price elasticity of demand
is:
a. Zero
b. One
C. Infinite
d. Unknown
Difficulty: Easy

13. The demand curve for a good is horizontal when it is:
a. A perfectly inelastic good
b. A unitary elastic good
C. A perfectly elastic good
d. An inferior good
Difficulty: Easy

14. Suppose QXd = 10,000 2 PX + 3 PY 4.5M , where PX = $100, PY = $50, and M = $2,000.
What is the ownprice elasticity of demand?
a. 2.34
b. 0.78
C. 0.21
d. 1.21
Difficulty: Medium

Then good X has a demand which is:
a. Elastic
B. Inelastic
c. Unitary
d. Neither elastic, inelastic nor unitary elastic
Difficulty: Easy

3-4
How much of good X is consumed?
a. 100 units
b. 500 units
c. 1,100 units
D. 950 units
Difficulty: Easy

17. Which of the following factors would not affect the ownprice elasticity of a good?
a. Time
B. Price of an input
c. Available substitutes
d. Expenditure share
Difficulty: Medium

18. Lemonade, a good with many close substitutes, should have an ownprice elasticity that
is:
a. Unitary
B. Relatively elastic
c. Relatively inelastic
d. Perfectly inelastic
Difficulty: Medium

19. We would expect the demand for jeans to be:
A. More elastic than the demand for clothing
b. Less elastic than the demand for clothing
c. The same as the demand for clothing
d. Neither more elastic, less elastic nor the same elasticity of demand for clothing
Difficulty: Medium

3-5
20. Demand is more inelastic in the shortterm because consumers:
a. Are impatient
B. Have no time to find available substitutes
c. Are presentoriented
d. Are neither impatient, have no time to find available substitutes nor are presentoriented
Difficulty: Medium

21. We would expect the own price elasticity of demand for food to be:
A. Less elastic than the demand for cereal
b. More elastic than the demand for cereal
c. Have the same elasticity as soap
Difficulty: Medium

22. The elasticity which shows the responsiveness of the demand for a good due to changes in
the price of a related good is the:
a. Ownprice elasticity
b. Income elasticity
c. Loglinear elasticity
D. Crossprice elasticity
Difficulty: Easy

23. If the crossprice elasticity between good A & B is negative, we know the goods are:
a. Inferior goods
B. Complements
c. Inelastic
d. Substitutes
Difficulty: Medium

3-6
24. If the crossprice elasticity between ketchup and hamburgers is 1.2, a 4% increase in the
price of ketchup will lead to a 4.8%:
a. Drop in quantity demanded of ketchup
B. Drop in quantity demanded of hamburgers
c. Increase in quantity demanded of ketchup
d. Increase in quantity demanded of hamburgers
Difficulty: Medium

25. If the price of pork chops falls from $8 to $6, and this leads to an increase in demand for
apple sauce from 100 to 140 jars, what is the cross priceelasticity of apple sauce and pork
chops at a pork chop price of $6?
a. 0.1.17
b. 2.71
c. 0.42
D. 0.86
Difficulty: Medium

26. Suppose the demand function is QXd = 100 8PX + 6PY M. If PX = $4, PY = $2, and M =
$10, what is the crossprice elasticity of good x with respect to the price of good y?
A. 0.17
b. 0.38
c. 0.21
d. 0.04
Difficulty: Medium

3-7
27. The elasticity that measures the responsiveness of consumer demand to changes in income
is the:
A. Income elasticity
b. Ownprice elasticity
c. Crossprice elasticity
d. Neither the income elasticity, ownprice elasticity nor the crossprice elasticity
Difficulty: Easy

3-8
28. An income elasticity less than zero tells us that the good is:
a. A normal good
b. A Giffen good
C. An inferior good
d. An inelastic good
Difficulty: Easy

29. If the income elasticity for lobster is 0.4, a 40% increase in income will lead to a:
a. 10% drop in demand for lobster
B. 16% increase in demand for lobster
c. 20% increase in demand for lobster
d. 4% increase in demand for lobster
Difficulty: Medium

30. You are the manager of a supermarket, and know that the income elasticity of peanut
butter is exactly 0.7. Due to the recession, you expect incomes to drop by 15% next year.
How should you adjust your purchase of peanut butter?
A. Buy 10.5% more peanut butter
b. Buy 2.14% more peanut butter
c. Buy 6.2% less peanut butter
d. Buy 9.8% less peanut butter
Difficulty: Medium

31. Suppose demand is given by QXd = 50 4PX + 6PY + AX, where PX = $4, PY = $2, and AX =
$50. What is the advertising elasticity of demand for good X?
a. 1.12
b. 0.38
c. 1.92
D. 0.52
Difficulty: Medium

3-9
32. Suppose demand is given by QXd = 50 4PX + 6PY + AX , where PX = $4, PY = $2, and AX
= $50. What is the quantity demanded of good X?
A. 96
b. 50
c. 46
d. 72
Difficulty: Easy

33. You are the manager of a popular shoe company. You know that the advertising elasticity
of demand for your product is 0.15. How much will you have to increase advertising in order
to increase demand by 10%?
a. 0.02%
b. 38.6%
C. 66.7%
d. 4.3%
Difficulty: Medium

34. Suppose the demand for good X is lnQXd = 21 0.8 lnPX 1.6 lnPY + 6.2 lnM + 0.4 lnAX.
Then we know goods x and y are:
a. Substitutes
B. Complements
c. Normal goods
d. Inferior goods
Difficulty: Easy

3-10
Then we know good x is:
a. An inferior good
b. An elastic good
C. A normal good
d. A Giffen good
Difficulty: Easy

3-11
Then we know that the ownprice elasticity for good X is:
a. Unitary
b. Elastic
C. Inelastic cannot be calculated from the existing information
Difficulty: Easy

37. Suppose the demand function is given by QXd = 8PX0.5 PY0.25 M0.12 H. Then the crossprice
elasticity between goods X and Y is:
a. 4.00
B. 0.25
c. 0.50
d. 8.33
Difficulty: Hard

38. Suppose the demand function is given by QXd = 8PX0.5 PY0.25 M0.12 H. Then good X is:
A. A normal good
b. An inferior good
c. A complement for good y
Difficulty: Hard

39. Suppose the demand function is given by QXd = 8PX0.5 PY0.25 M0.12 H. Then the demand for
good X is:
A. Inelastic
b. Unitary
c. Elastic
d. Perfectly elastic
Difficulty: Hard

3-12
40. The statistical analysis of economic phenomenon is defined as:
A. Econometrics
b. Variance
c. Confidence intervals
d. Standard deviation
Difficulty: Easy

41. The demand for video recorders has been estimated to be QV = 134 1.07PF + 46PM 2.1PV
5I, where QV is the quantity of video recorders, PF denotes the price of video recorder film,
PM is the price of attending a movie, PV is the price of video recorders, and I is income. Based
on the estimated demand equation we can conclude:
A. Video recorders are inferior goods
b. Video recorder film is a substitute for video recorders
c. The demand for video recorders is inelastic
d. The demand for video recorders are neither inferior nor inelastic and video recorder film is
not a substitute for video recorders
Difficulty: Medium

42. Which of the following is used to determine the statistical significance of a regression
coefficient?
A. Tstatistic
b. Fstatistic
c. Rsquare
d. Adjusted Rsquare
Difficulty: Easy

3-13
43. Which of the following provides a measure of the overall fit of a regression?
a. Tstatistic
b. Fstatistic
c. Rsquare
D. The Fstatistic and Rsquare
Difficulty: Easy

3-14
44. Which of the following can be used to quantify the overall statistical significance of a
regression?
a. Tstatistic
B. Fstatistic
c. Rsquare
d. The Fstatistic and Rsquare
Difficulty: Medium

45. Which of the following measures of fit penalizes a researcher for estimating many
coefficients with relatively little data?
a. Tstatistic
b. Rsquare
C. Adjusted Rsquare
d. Neither the tstatistic, Rsquare nor the adjusted Rsquare
Difficulty: Easy

46. As a ruleofthumb, a parameter estimate is statistically different from zero when the
absolute value of the tstatistic is:
a. Zero
b. Less than one
c. Greater than or equal to one
D. Greater than or equal to two
Difficulty: Easy

3-15
47. A study has estimated the effect of changes in interest rates and consumer confidence on
the demand for money to be: lnM = 14.666 +.021 lnC 0.036 lnr, where M denotes real
money balances, C is an index of consumer confidence, and r is the interest rate paid on bank
deposits. Based on this study we know that the interest elasticity is:
a. Unitary
b. Zero
c. Very elastic
D. Very inelastic
Difficulty: Hard

3-16
48. A study has estimated the effect of changes in interest rates and consumer confidence on
the demand for money to be: lnM = 14.666 +.021 lnC 0.036 lnr, where M denotes real
money balances, C is an index of consumer confidence, and r is the interest rate paid on bank
deposits. Based on this study, a 5% increase in interest rates will cause the demand for money
to:
a. Drop by 1.8%
b. Increase by 1.8%
C. Drop by.18%
d. Increase by.18%
Difficulty: Medium

49. The elasticity of variable G with respect to variable S is defined as
A. The percentage change in variable G that results from a given percentage change in
variable S
b. The percentage change in variable G that results from a given change in variable S
c. The change in variable G that results from a given percentage change in variable S
d. The change in variable G that results from a given change in variable S
Difficulty: Easy

50. If the absolute value of the own price elasticity of demand is greater than one, then
demand is said to be
A. Elastic
b. Inelastic
c. Unitary elastic
Difficulty: Easy

3-17
51. Suppose the ownprice elasticity of demand for good X is 0.5, and that the price of good
X increases by 10%. We would expect the quantity demanded of good X to
a. Increase by 5%
b. Increase by 20%
C. Decrease by 5%
d. Decrease by 20%
Difficulty: Medium

52. Suppose the ownprice elasticity of demand for good X is 0.5, and that the price of good
X increases by 10%. What would you expect to happen to the total expenditures on good X?
A. Increase
b. Decrease
c. Unchanged
d. Neither increase, decrease nor remain unchanged
Difficulty: Medium

53. If the own price elasticity of demand is infinite in absolute value, then
a. Demand is perfectly inelastic
B. The demand curve is horizontal
c. Consumers do not respond at all to changes in price
d. Demand is neither perfectly inelastic nor is the demand curve horizontal
Difficulty: Medium

54. If demand is perfectly inelastic, then
a. The own price elasticity of demand is infinite in absolute value
b. A small increase in price will lead to a situation where none of the good is purchased
C. The demand curve is vertical
d. Neither will the demand curve be vertical, the ownprice elasticity of demand be infinite in
absolute value nor a small price increase lead to none of the good being purchased
Difficulty: Medium

3-18
55. The demand for good X is estimated to be QXd = 10,000 4PX + 5PY + 2M + AX
where PX is the price of X, PY is the price of good Y, M is income and AX is the amount of
advertising on X. Suppose the present price of good X is $50, PY = $100, M = $25,000, and
AX = 1,000 units. What is the demand curve for good X?
a. 61,500
b. 61,300
c. 61,300 4PX
D. 61,500 4PX
Difficulty: Medium

56. The demand for good X is estimated to be QXd = 10,000 4PX + 5PY + 2M + AX
where PX is the price of X, PY is the price of good Y, M is income and AX is the amount of
advertising on X. Suppose the present price of good X is $50, PY = $100, M = $25,000, and
AX = 1,000 units. What is the quantity demanded of good X?
a. 61,500
B. 61,300
c. 61,300 4PX
d. 61,500 4PX
Difficulty: Easy

57. The demand for good X is estimated to be QXd = 10,000 4PX + 5PY + 2M + AX, where PX
is the price of X, PY is the price of good Y, M is income and AX is the amount of advertising
on X. Suppose the present price of good X is $50, PY = $100, M = $25,000, and AX = 1,000
units. What is the ownprice elasticity of demand for good X?
A. 0.003
b. 0.03
c. 0.3
d. 3
Difficulty: Medium

3-19
58. The demand for good X is estimated to be QXd = 10, 000 4PX + 5PY + 2M + AX, where PX
units. Based on this information, we know that the demand for good X is
a. Elastic
B. Inelastic
c. Unitary elastic
Difficulty: Medium

units. Based on this information, the cross price elasticity between goods X and Y is
A. 0.008
b. 0.08
c. 0.8
d. 8
Difficulty: Medium

units. Based on this information, goods X and Y are
A. Substitutes
b. Complements
c. Normal goods
d. Inferior goods
Difficulty: Medium

3-20
units. Based on this information, the income elasticity of good X is
a. 0.008
b. 0.082
C. 0.82
d. 8.2
Difficulty: Medium

units. Based on this information, good X is
a. An inferior good
B. A normal good
c. A Giffen good
d. A regular good
Difficulty: Easy

63. When a demand curve is linear,
a. The elasticity is the same as the slope of the demand curve
B. Demand is elastic at high prices
c. Demand is unitary elastic at low prices
d. The elasticity is constant at all prices
Difficulty: Medium

3-21
64. Which of the following is not the important factor that affects the magnitude of the own
price elasticity of a good?
a. Available substitutes
B. Supply of the good
c. Time
d. Expenditure share
Difficulty: Medium

65. If there are few close substitutes for a good, demand tends to be relatively
a. Elastic
B. Inelastic
c. Unitary elastic
Difficulty: Medium

66. The demand for food (a broad group) is more
a. Elastic than the demand for beef (specific commodity)
B. Inelastic than the demand for beef (specific commodity)
c. Sensitive to price changes than the demand for beef
d. Responsive to price change than the demand for beef
Difficulty: Medium

67. The demand for women's clothing is, in general,
A. More elastic than the demand for clothing
b. Less elastic than the demand for clothing
c. Equally elastic to the demand for clothing
d. Neither more elastic, less elastic nor equally elastic to the demand for clothing
Difficulty: Medium

3-22
68. Demand tends to be
a. More elastic in the shortterm than in the longterm
B. More inelastic in the shortterm than in the longterm
c. Equally elastic in the shortterm and in the longterm
d. Neither more elastic, more inelastic nor equally elastic than in the shortterm and in the
longterm
Difficulty: Medium

69. If the shortterm own price elasticity for transportation is estimated to be 0.6, then long
term own price elasticity is expected to be
a. 0.6
b. Greater than 0.6
C. Less than 0.6
d. Neither greater than, less than nor equal to 0.6
Difficulty: Hard

70. Since most consumers spend very little on salt, a small increase in the price of salt will
a. Reduce quantity demanded by a large amount
B. Not reduce quantity demanded by very much
c. Not change quantity demanded
d. Increase quantity demanded by a small amount
Difficulty: Medium

71. Suppose the income elasticity for transportation is 1.8. Which of the following is an
incorrect statement?
a. Transportation is a normal good
b. Expenditures on transportation grow more rapidly than income grows
C. Expenditures on transportation will fall less rapidly than income falls
d. Whenever the income increases by 1%, the expenditure on transportation increases by 1.8%
Difficulty: Medium

3-23
72. Nonfed ground beef is an inferior good. In economic booms, grocery managers should
a. Increase their orders of nonfed ground beef
B. Reduce their orders of nonfed ground beef
c. Not change their orders of nonfed ground beef
d. Neither increase, reduce or not change their orders for nonfed ground beef
Difficulty: Easy

73. The demand for good X has been estimated to be lnQXd = 100 2.5 lnPX + 4 lnPY + lnM.
The own price elasticity of good X is
A. 2.5
b. 4.0
c. 2.5%
d. 4.0%
Difficulty: Medium

The cross price elasticity of demand between goods X and Y is
a. 2.5
B. 4.0
c. 2.5%
d. 4.0%
Difficulty: Medium

The income elasticity of good X is
a. 4.0
B. 1.0
c. 2.0
d. 2.5
Difficulty: Medium

3-24
76. The demand for good X has been estimated to be lnQXd = 0 2.5 lnPX + 4 lnPY + lnM. The
advertising elasticity of good X is
a. 4.0
b. 1.0
C. 0.0
d. 2.5
Difficulty: Hard

77. The greater the standard error of an estimated coefficient:
a. The greater the tvalue of the estimated coefficient
B. The lower the tvalue of the estimated coefficient
c. The greater the Rsquare
d. The greater the adjusted Rsquare
Difficulty: Easy

78. For a given set of data and regression equation, the greater the Rsquare
a. The greater the tvalue
b. The lower the tvalue
C. The greater adjusted Rsquare
d. The greater the Fstatistic
Difficulty: Hard

79. The lower the standard error,
a. The less confident the manager can be that the parameter estimates reflect the true values
B. The more confident the manager can be that the parameter estimates reflect the true values
c. The more precisely the parameter estimates the true values
d. The less precisely the parameter estimates the true values
Difficulty: Medium

3-25
80. The manager can be 95% confident that the true value of the underlying parameters in a
regression is not zero if the absolute value of tstatistic is
a. Less than 1
b. Less than 2
c. Greater than 1
D. Greater than 2
Difficulty: Medium

81. When the own price elasticity of good X is 3.5 then total revenue can be increased by
a. Increasing the price
b. Decreasing the quantity supplied
C. Decreasing the price
d. Neither increase price, decrease price nor decrease quantity supplied
Difficulty: Medium

82. When the price of sugar was "low", consumers in the U.S. spent a total of $3 billion
annually on sugar consumption. When the price doubled, consumer expenditures increased to
$5 billion annually. This data indicates that:
A. The demand for sugar is inelastic
b. The demand curve for sugar is upward sloping
c. The quantity demanded of sugar increased
d. The demand curve for sugar is upward sloping and the quantity demanded of sugar
increased
Difficulty: Medium

3-26
83. Which of the following statements is incorrect?
a. If a firm decreases the price of its product, its total revenue will decrease
b. The own price elasticity of demand is constant at all points along a linear demand curve
c. As the price of X falls and we move down an individual's demand curve for X, the money
income of the individual also changes
D. None of the statements associated with this question are correct
Difficulty: Easy

3-27
84. The demand for which of the following commodities is likely to be more inelastic?
a. Soft drinks
B. Beverages
c. Cola drinks
d. Pepsi Cola
Difficulty: Medium

85. Each week Bill buys exactly 7 bottles of cola regardless of its price. Bill's own price
elasticity of demand for cola in absolute value is:
a. Greater than one
b. Less than one
c. One
D. Zero
Difficulty: Hard

86. The price elasticity of demand is 2.0 for a certain firm's product. If the firm raises price,
the firm manager can expect total revenue to
A. Decrease
b. Increase
c. Remain constant
d. Either increase or remain constant, depending upon the size of the price increase
Difficulty: Medium

3-28
87. The management of Local Cinema has estimated the monthly demand for tickets to be lnQ
= 22,328 0.41 lnP + 0.5 lnM 0.33 lnA + 100 lnPvcr, where Q = quantity of tickets
demanded, P = price per ticket, M = income, A = advertising outlay, and Pvcr = price of a VCR
tape rental. It is known that P = $5.50, M = $9,000, A = $900, and Pvcr = $3.00. Determine the
ownprice elasticity of demand for movie tickets.
a. 0.29
b. 0.32
c. 0.39
D. 0.41
Difficulty: Medium

3-29
88. The management of Local Cinema has estimated the monthly demand for tickets to be lnQ
= 22,328 0.41 lnP + 0.5 lnM 0.33 lnA + 100 lnPvcr, where Q = quantity of tickets
demanded, P = price per ticket, M = income, A = advertising outlay, and Pvcr = price of a VCR
tape rental. It is known that P = $5.50, M = $9,000, A = $900, and Pvcr = $3.00. Based on the
information given, which of the following statements is false?
a. Advertising decreases the demand for movie tickets
b. Movies are normal goods
C. Movies are complements for VCR tapes
d. The advertising elasticity of demand for movie tickets is 0.33
Difficulty: Hard

89. When the price of sugar was "low", consumers in the U.S. spent a total of $3 billion
annually on sugar consumption. When the price doubled, consumer expenditures remained at
$3 billion annually. This data indicates that:
a. The demand for sugar is inelastic
c. The quantity demanded of sugar increased
Difficulty: Medium

90. The demand for good X is given by lnQXd = 120 0.9 lnPX + 1.5 lnPY 0.7 lnM. Which of
the following statements is correct?
A. X has constant income elasticity
b. An economic downturn will increase demand for X
c. A 15% increase in income would increase demand for X by 10.5%
d. X has a constant income elasticity and an economic downturn will increase the demand for
X
Difficulty: Medium

3-30
91. The cross price elasticity of demand between goods X and Y is 3.5. If the price of X
decreases by 7%, the quantity demanded of Y will:
a. Decrease by 24.5%
b. Decrease by 2.45%
C. Increase by 24.5%
d. Increase by 2.45%
Difficulty: Medium

92. The short run response of quantity demanded to a change in price is usually:
a. The same as the long run response
B. Less than the long run response
c. Greater than the long run response
Difficulty: Medium

93. The crossprice advertising of demand for books and magazines is 2.0. If the price of
magazines decreases by 10 percent, the quantity demanded of books will
a. Fall by 2.0 percent
b. Rise by 2.0 percent
c. Fall by 20 percent
D. Rise by 20 percent
Difficulty: Medium

94. If the demand function for a particular good is Q = 25 10P, then the price elasticity of
demand (in absolute value) at a price of $1 is
a. 8
b. 2
C. 2/3
d. 1/8
Difficulty: Easy

3-31
95. The demand for video recorders has been estimated to linear and given by the demand
relation QV = 145 3.2PV + 7M 0.95PF 39PM, where QV is the quantity of video recorders,
Pf denotes the price of video recorder film, PM is the price of attending a movie, PV is the price
of video recorders, and M is income. Based on the estimated demand equation we can
conclude:
a. Video recorders are normal goods
b. The demand for video recorders is inelastic
c. Video recorders are normal goods and the demand for video recorders is inelastic
D. Video recorders are normal goods and video recorder film is a complement for video
recorders
Difficulty: Medium

96. The elasticity of demand for gasoline has been estimated to be 2.0, and the standard error
is 1.0. The upper and lower bounds on the 95 percent confidence interval for the elasticity of
demand for gasoline are
a. 3 and 2
b. 2 and 1
c. 3 and 1
Difficulty: Medium

97. The crossprice elasticity of demand for textbooks and copies of old exams is 3.5. If the
price of copies of old exams increase by 10 percent, the quantity demanded of textbooks will
a. Fall by 3.5 percent
b. Rise by 3.5 percent
C. Fall by 35 percent
d. Rise by 35 percent
Difficulty: Medium

3-32
98. When the price of sugar was "low", consumers in the United States spent a total of $3
billion annually on its consumption. When the price doubled, consumer expenditures actually
increased to $4 billion annually. This indicates that
a. The demand for sugar is elastic
c. Sugar is a Giffen good
Difficulty: Hard

99. The demand for which of the following commodities is likely to be more price inelastic?
A. Food
b. Hamburgers
c. Big Mac's
d. Sandwiches
Difficulty: Easy

100. If the demand function for a particular good is Q = 20 8P, then the price elasticity of
demand (in absolute value) at a price of $1 is
a. 8
b. 2
C. 2/3
d. 1/8
Difficulty: Medium

101. Assume that the price elasticity of demand is 0.75 for a certain firm's product. If the
firm lowers price, the firm's managers can expect total revenue to
A. Decrease
b. Increase
c. Remain constant
d. Either increase or remain constant depending upon the size of the price decrease
Difficulty: Medium

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102. Suppose the demand for a product is QXd = 12 3 lnPX then product X is
a. Inelastic
b. Unitary elastic
C. Elastic
d. Cannot be determined without more information
Difficulty: Easy

103. The demand for good X has been estimated by QXd = 6 2PX + 5PY. Suppose that good X
sells at $3 per unit and good Y sells for $2 per unit. Calculate the own price elasticity.
a. 0.3
b. 0.4
c. 0.5
D. 0.6
Difficulty: Medium

104. The ownprice elasticity of demand for apples is 1.5. If the price of apples falls by 6%,
what will happen to the quantity of apples demanded?
a. It will increase 4%
B. It will increase 9%
c. It will fall 4%
d. It will fall 6%
Difficulty: Medium

105. If quantity demanded for sneakers falls by 6% when price increases 20% we know that
the absolute value of the ownprice elasticity of sneakers is
A. 0.3
b. 0.7
c. 2.3
d. 3.3
Difficulty: Easy

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106. If the crossprice elasticity between ketchup and hamburgers is 2.5, a 2% increase in the
price of ketchup will lead to a
a. 5% drop in quantity demanded of ketchup
B. 5% drop in demanded of hamburgers
c. 5% increase in quantity demanded of ketchup
d. 5% increase in demanded of hamburgers
Difficulty: Medium

107. If the income elasticity for lobster is.6, a 25% increase in income will lead to a
a. 6% drop in demand for lobster
b. 2.4% increase in demand for lobster
C. 15% increase in demand for lobster
d. 42% increase in demand for lobster
Difficulty: Medium

108. You are the manager of a popular hat company. You know that the advertising elasticity
of demand for your product is 0.25. How much will you have to increase advertising in order
to increase demand by 5%?
a. 0.05%
B. 20%
c. 25%
d. 1.25%
Difficulty: Medium

109. The statistical analysis of economic phenomenon is defined as:
a. Standard error
b. Confidence intervals
c. The tstatistic
D. Econometrics
Difficulty: Easy

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110. Which of the following provides a measure of the overall fit of a regression?
a. Tstatistic
B. Fstatistic
c. Pvalue
d. The tstatistic and the pvalue
Difficulty: Easy

111. As a general ruleofthumb, a manager can be 95 percent confident that the true value of
the underlying parameter in the regression is not zero, when the absolute value of the t
statistic is
a. Greater than zero
b. Greater than or equal to one
C. Greater than or equal to two
Difficulty: Easy

112. If the own price elasticity of demand is infinite in absolute value, then
A. Demand is perfectly elastic
b. The demand curve is vertical
c. Consumers do not respond at all to changes in price
d. The demand curve is vertical and consumers do not respond at all to changes in price
Difficulty: Easy

113. When a demand curve is linear,
a. Demand is elastic at low prices
B. Demand is inelastic at low prices
c. Demand is unitary elastic at low prices
d. The elasticity is constant at all prices
Difficulty: Hard

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114. The demand for Cinnamon Toast Crunch brand cereal is
a. Equally elastic to the demand for cereal in general
b. Less elastic than the demand for cereal in general
C. More elastic than the demand for cereal in general
Difficulty: Medium

115. Which of the following is a correct statement about the ownprice elasticity of demand?
a. Demand tends to be more inelastic in the shortterm than in the longterm
b. Demand tends to be more elastic as more substitutes are available
c. Demand tends to be more inelastic for goods that comprise a smaller share of a consumer's
budget
D. All of the statements are correct
Difficulty: Easy

116. When marginal revenue is zero, demand will be
a. Elastic
b. Inelastic
C. Unit elastic
d. There is not sufficient information to classify the elasticity of demand
Difficulty: Easy

117. When marginal revenue is zero, total revenue
a. Will increase when price increases
B. Is maximized
c. Will decrease when price decreases
d. Will decrease as quantity decreases
Difficulty: Medium

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118. When marginal revenue is positive, demand is
A. Elastic
b. Inelastic
c. Unit elastic
Difficulty: Easy

119. When marginal revenue is negative, demand is
a. Elastic
B. Inelastic
c. Unit elastic
Difficulty: Easy

120. Suppose the equilibrium price in the market is $10 and the price elasticity of demand for
the linear demand function at the market equilibrium is 1.25. Then we know that
a. Demand is inelastic
B. Marginal revenue is $2
c. Marginal revenue is $50
d. Demand is unit elastic
Difficulty: Medium

121. Suppose that at the equilibrium price and quantity the marginal revenue is $15 and the
price elasticity of demand for a linear demand function is 0.75. Then we know that the
equilibrium price is
a. $5
B. $45
c. $45
d. $5
Difficulty: Medium

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122. Suppose the equilibrium price in the market is $100 and the marginal revenue associated
with the linear (inverse) demand function is $50. Then we know that the own price elasticity
of demand is
A. 1
b. 1
c. 2
d. Cannot be determined from the information contained in the question
Difficulty: Hard

123. Suppose the equilibrium price in the market is $60 and the marginal revenue associated
with the linear (inverse) demand function is $20. Then we know that the own price elasticity
of demand is
a. 2
b. 2
c. 0.50
D. Cannot be determined from the information contained in the question
Difficulty: Hard

124. A firm derives revenue from two sources: goods X and Y. Annual revenues from good X
and Y are $10,000 and $20,000, respectively. If the price elasticity of demand for good X is
4.0 and the crossprice elasticity of demand between Y and X is 2.0 then a 2 percent price
decrease will
A. Increase total revenues from X and Y by $520
b. Decrease total revenues from X and Y by $520
c. Leave total revenues from X and Y unchanged
d. Decrease total revenues for X and Y by $600
Difficulty: Medium

3-39
125. A firm derives revenue from two sources: goods X and Y. Annual revenues from good X
and Y are $10,000 and $20,000, respectively. If the price elasticity of demand for good X is
2.0 and the crossprice elasticity of demand between Y and X is 1.5 then a 4 percent price
increase will
A. Increase total revenues from X and Y by $800
b. Increase total revenues from X and Y by $8,000
c. Decrease total revenues from X and Y by $400
d. Increase total revenues from X and Y by $400
Difficulty: Medium

Essay Questions

126. Several years ago the National Association of Broadcasters imposed restrictions on the
amount of nonprogram material (commercials) that could be aired during children's television
shows, effectively reducing the quantity of advertising allowed during children's viewing
hours by 33 percent. Within four months, the price of a minute of advertising on network
television increased by roughly 14 percent. What impact do you think this had on the
revenues of the networks?
The ownprice elasticity of demand for advertising time is the percentage change in quantity
demanded ( 33 percent) divided by the percentage change in price (+ 14 percent), which is
2.36. Thus, the demand for advertising minutes by those who sell children's products is
elastic. By the total revenue test, we would expect this to decrease network revenues.
127. A study sponsored by the American Medical Association suggests that the absolute value
of the own price elasticity for surgical procedures is smaller than that for the own price
elasticity for office visits. Explain why this would be expected.
The demand for surgical procedures is generally more inelastic than the demand for office
visits, since most surgical procedures do not have close substitutes. In contrast, there are close
substitutes for many types of office visits. For example, a patient can purchase overthe
counter drugs. Another explanation is that surgical procedures are usually needed
immediately, while office visits can often wait.
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128. Suppose the monthly demand for soda by a consumer is given by .
a. If the price of soda is $1 per can, how many sodas will the consumer purchase in a typical
month?
b. What is the elasticity of demand for soda?
a. Sodas purchased by a consumer in a typical month: Q = 10 8(1) = 2 (cans).
b. EQ,P = 8P/Q= 8 (1/2) = 4.
129. The demand function for VCRs has been estimated to be
, where is the quantity of VCRs, is the price of
a videocassette, is the price of a movie, is the price of a VCR, and is income. Based
on this information, answer the following questions
a. Are VCRs normal or inferior goods?
b. Are movies substitutes or complements for VCRs?
c. What additional information is needed to calculate the price elasticity of demand for
VCRs?
a. Since the coefficient associated with income is negative, an increase in income leads to a
reduction in demand for VCRs. Hence, VCRs are inferior goods.
b. Movies are substitutes for VCRs, since the coefficient associated with the price of a movie
is positive.
c. The actual values of prices and income are needed to calculate the price elasticity of
demand for VCRs.
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130. When the price of butter was "low," consumers spent $5 billion annually on its
consumption. When the price doubled consumer expenditures increased to $7 billion.
Recently you read that this means that the demand curve for butter is upward sloping. Do you
agree? Explain.
Disagree. Let P be the initial price and 2P the new price. Then

An increase in price leads to a reduction in quantity demanded. Thus, the demand curve for
butter is negatively sloped. The rise in expenditures is due to inelastic demand.
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131. The crossprice elasticity for textbooks and copies of old exams is 3.5. If the price of
copies of old exams increases by 10 percent, what will happen to the quantity demanded of
textbooks?
By definition,

Substitute EQ,P = 3.5 and %)P = 10 into the equation to get %)Q = 35.
132. Which of the following goods would you expect to have the most inelastic demand?
Why?
a. Swiss cheese
b. Chesse
c. Dairy products
Dairy products are expected to have the most inelastic demand because it is the most broadly
defined group, followed by cheese and then swiss cheese. A more specifically defined
category has more substitutes and, therefore, more elastic demand.
133. The following estimates have been obtained for the market demand for cereal:
, where Q is the quantity of cereal, P is the price
of cereal, A is the level of advertising, and M is income. Based on this information, determine
the effect on the consumption of cereal of
a. A 5 percent reduction in the price of cereal
b. A 4 percent increase in income
c. A 20 percent reduction in cereal advertising
a. Since the own price elasticity is 0.68, we use the elasticity formula to write
Solving for %)Q, we see that there will be a 3.4 percent increase in the quantity demanded of
cereal.
b. There will be a 5.2 percent reduction in the demand for cereal.
c. There will be a 15 percent reduction in the demand for cereal.
3-43
134. Suppose you are the manager of a homebuilding company and the government is
considering eliminating the tax deductibility of mortgage interest payments. A typical
consumer's marginal tax rate is 25 percent, and the elasticity of demand for new homes is
1.5. Your boss wants to know the impact of the proposed government policy on your
business. What do you tell him?
Use the elasticity formula to write Solving, we see that the demand for new
homes will be reduced by 37.5 percent.
135. You work for an unemployment agency that distributes unemployment checks to
unemployed workers in your state. Your boss recently learned that the President proposed a
21 percent increase in the minimum wage, and wants you to provide her with an estimate of
the number of additional workers who will file for unemployment compensation claims next
year if the bill passes. Based on library research at a nearby university, you learn that about
200,000 workers in your state earn at or below the current minimum wage. Further library
research turns up a study that reports the own price elasticity of demand for minimum wage
earners to be 0.30. Based on your findings, how many additional workers do you think will
file unemployment claims in your state?
Since the elasticity of demand for minimum wage earners equals 0.3, the 21 percent increase
in the minimum wage would decrease the quantity demanded of minimum wage earners by
6.3 percent. This would translate into.063 x 200,000 = 12,600 lost jobs, and presumably,
12,600 additional workers who file unemployment claims. Your boss may need to hire some
additional workers to help process claims if the bill passes.
3-44
136. The income elasticity of demand for your firm's product is estimated to be 0.75. A recent
report in The Wall Street Journal says that national income is expected to decline by 3 percent
this year.
a. What should you do with your stock of inventories?
b. What do you expect to happen to your sales?
c. How would you answer parts a and b if you expected a 5 percent increase in income instead
of a decrease?
a. or . The manager should reduce the stock of

inventories by 2.25 percent.
b. Sales are expected to decrease by 2.25 percent.
c. Using the elasticity formula,
The stock of inventories should be increased by 3.75 percent, since sales are expected to rise
by 3.75 percent.
137. A consumer spends all of her income on only one good. What is the income elasticity of
demand for this good? What is the own price elasticity of demand for this good?
Since PQ = M, we can solve for the demand function as Q = M/P. Taking logarithms, we see
that ln Q = ln M ln P. Thus, the income elasticity is one, and the own price elasticity is 1.
3-45
138. As the manager of a local hotel chain, you have hired an econometrician to estimate the
demand for one of your hotels (H). The estimation has resulted in the following demand
function: , where is the price of a
room at your hotel, is the price of concerts in your area, is the price of sporting events
in your area, is the average room price at other hotels in your area, and is the average
income in the United States. What would be the impact on your firm of
a. A $500 increase in income?
b. A $10 reduction in the price charged by other hotels?
c. A $7 increase in the price of tickets to local sporting events?
d. A $5 increase in the price of concert tickets, accompanied by an $8 increase in income?
a. )QH = (.01)M = (.01)(500) = 5. Thus, the demand for your hotel will increase by
five units.
b. )QH = (0.8)()(POH) = 0.8 (10) = 8. Thus, the demand for your hotel will decrease
by 8 units.
c. )QH = (2.25)()(PSE) = 2.25(7) = 15.75. Thus, the demand for your hotel will
decrease by 15.75 units.
d. )QH = (1.5)()(PC) + 0.01()(M) = 1.5(5) + 0.01(8) = 7.42. The demand
for your hotel will decrease by 7.42 units.
139. Your firm's research department has estimated the elasticity of demand for toys to be
0.7. As the manager of a local chain of toy stores, determine the impact of an 8 percent
increase in toy prices on your total revenues.
Since the elasticity of demand for toys is less than one in absolute value, an increase in toy
prices will increase your total revenues.
3-46
140. The demand for Wanderlust Travel Services (X) is estimated to be
, where represents the amount of advertising
spent on X and the other variables have their usual interpretations. Suppose the price of good
X is $450, good Y sells for $40, the company utilizes 3,000 units of advertising, and
consumer income is $20,000.
a. Calculate the own price elasticity of demand at these values of prices, income, and
advertising
b. Is demand elastic, inelastic, or unitary elastic?
c. How will your answers to parts a and b change if the price of Y increases to $50?
a. QX = 22,000 2.5 (450) + 4(40) 1(20,000) + 1.5(3,000) = 5,535.

b. Since the elasticity is less than one in absolute value, demand is inelastic.
c. QX = 22,000 2.5(450) + 4(50) 1(20,000) + 1.5(3,000) = 5,575, so

The elasticity changes from 0.203 to 0.202 as Py changes from $40 to $50.
3-47
141. The demand for company X's product is given by . Suppose good X
sells for $3.00 per unit and good Y sells for $1.50 per unit.
a. Calculate the crossprice elasticity of demand between goods X and Y at the given prices
b. Are goods X and Y substitutes or complements?
c. What is the own price elasticity of demand at these prices?
d. How would your answers to parts a and c change if the price of X dropped to $2.50 per
unit?
a. QX = 12 3(3) + 4(1.5) = 9, so
b. They are substitutes.
c.
d. QX = 12 3(2.5) + 4(1.5) = 10.5, so

142. Your firm's research department has estimated the income elasticity of demand for Art
Deco lawn furniture to be 0.85. You have just learned that due to an upturn in the economy,
consumer incomes are expected to rise by 5 percent next year. How will this event affect your
ordering decision for PVC pipe, which is the main component in your furniture?
Using the formula for the income elasticity, we see that the demand for your lawn furniture
will be reduced by 4.25 percent this year. You may want to order about 4.25 percent less PVC
pipe.
3-48
143. Suppose the demand for sunscreen (X) has been estimated to be
, where denotes the average hours of sunshine per
day and represents the level of advertising for good Y.
a. What would be the impact on demand of a 5 percent increase in the daily amount of
sunshine?
b. What would be the impact of a 10 percent reduction in the amount of advertising toward
good Y?
c. What might be good Y in this example?
a. A five percent increase in the daily amount of sunshine leads to a 15 percent increase in the
demand for sunscreen (X).
b. A 10 percent reduction in the amount of advertising toward good Y results in a 30 percent
increase in demand for X.
c. Beach umbrellas.
144. An econometrician has estimated the inverse demand relation and found
that , , , and . Find the approximate 95 percent
confidence interval for the true values of a and b.
A 95 percent confidence interval for a is . Thus, you can be 95 percent
confident that a is within the range of 384 and 416. A 95 percent confidence interval for b is
. Thus, you can be 95 percent confident that b is within the range of
4.25 and 1.25.
3-49
145. A firm is considering raising its price by 9 percent and has hired an econometrician to
estimate the elasticity of demand for its product. The econometrician estimates the parameters
of a logliner demand function and reports that the parameter estimate for the elasticity of
demand is 1.5 and the standard error of the estimate is 0.3.
a. If the firm raises its price by 9 percent, what is the expected change in quantity demanded?
b. Approximate the upper and lower bounds on the 95 percent confidence interval for the
change in quantity demanded
a. Using the estimated own price elasticity of 1.5, the 9 percent increase in price is expected
to reduce quantity demanded by 13.5 percent.
b. The lower bound for the 95 percent confidence interval for the elasticity is 1.5 2(.3) =
2.1. Based on this lower bound, the 9 percent increase in price would reduce quantity
demanded by 18.9 percent. The upper bound for the 95 percent confidence interval for the
elasticity is 1.5 + 2(.3) = 0.9. Based on this upper bound, the 9 percent increase in price
would reduce quantity demanded by 8.1 percent. In summary the manager can be 95 percent
confident that the 9 percent price increase will reduce quantity demanded somewhere between
8.1 and 18.9 percent.
3-50

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