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Chapter 5 /Elasticity and Its Application ? 333

Figure 5-9

Price2120191817161514131211109876543211234567891011Demand12Quantity170. Refer to Figure 5-9. Suppose this demand curve is a straight, downward-sloping line all the way from the

horizontal intercept to the vertical intercept. We choose two prices, P1 and P2, and the corresponding

quantities demanded, Q1 and Q2, for the purpose of calculating the price elasticity of demand. Also suppose P2 > P1. In which of the following cases could we possibly find that (i) demand is elastic and (ii) an increase in price from P1 to P2 causes an increase in total revenue? a. 0 < P1 < P2 < $10. b. $10 < P1 < P2 < $15. c. P1 > $15.

d. None of the above is correct.

ANS: D

NAT: Analytic MSC: Analytical

DIF: 3

LOC: Elasticity

REF: 5-1

TOP: Total revenue | Price elasticity of demand

171. Refer to Figure 5-9. If price increases from $10 to $15, total revenue will

a. increase by $20, so demand must be inelastic in this price range. b. increase by $5, so demand must be inelastic in this price range. c. decrease by $20, so demand must be elastic in this price range. d. decrease by $10, so demand must be elastic in this price range.

ANS: A

NAT: Analytic MSC: Applicative

DIF: 2

LOC: Elasticity

REF: 5-1

TOP: Total revenue | Price elasticity of demand

172. Refer to Figure 5-9. A decrease in price from $15 to $10 leads to

a. a decrease in total revenue of $10, so the price elasticity of demand is greater than 1 in this price

range.

b. a decrease in total revenue of $10, so the price elasticity of demand is less than 1 in this price range. c. a decrease in total revenue of $20, so the price elasticity of demand is less than 1 in this price range. d. a decrease in total revenue of $20, so demand is elastic in this price range.

ANS: C

NAT: Analytic MSC: Applicative

DIF: 2

LOC: Elasticity

REF: 5-1

TOP: Total revenue | Price elasticity of demand

334 ? Chapter 5 /Elasticity and Its Application

Figure 5-10

PriceP2AP1CBDDemandQ2Q1Quantity173. Refer to Figure 5-10. If rectangle D is larger than rectangle A, then

a. demand is elastic between prices P1 and P2.

b. a decrease in price from P2 to P1 will cause an increase in total revenue.

c. the magnitude of the percent change in price between P1 and P2 is smaller than the magnitude of the

corresponding percent change in quantity demanded. d. All of the above are correct.

ANS: D

NAT: Analytic MSC: Analytical

DIF: 3

LOC: Elasticity

REF: 5-1

TOP: Total revenue | Price elasticity of demand

174. Refer to Figure 5-10. Total revenue when the price is P1 is represented by the area(s)

a. B + D. b. A + B. c. C + D. d. D.

ANS: A

NAT: Analytic MSC: Applicative

DIF: 2

LOC: Elasticity

REF: 5-1

TOP: Total revenue | Price elasticity of demand

175. Refer to Figure 5-10. Total revenue when the price is P2 is represented by the area(s)

a. B + D. b. A + B. c. C + D. d. D.

ANS: B

NAT: Analytic MSC: Applicative

DIF: 2

LOC: Elasticity

REF: 5-1

TOP: Total revenue | Price elasticity of demand

176. If the price elasticity of demand for tuna is 0.7, then a 1.5% increase in the price of tuna will decrease the

quantity demanded of tuna by

a. 1.05%, and tuna sellers' total revenue will increase as a result. b. 1.05%, and tuna sellers' total revenue will decrease as a result. c. 2.14%, and tuna sellers' total revenue will increase as a result. d. 2.14%, and tuna sellers' total revenue will decrease as a result.

ANS: A

NAT: Analytic MSC: Analytical

DIF: 3

LOC: Elasticity

REF: 5-1

TOP: Total revenue | Price elasticity of demand

Chapter 5 /Elasticity and Its Application ? 335

177. If the price elasticity of demand for aluminum foil is 1.45, then a 2.4% decrease in the price of aluminum foil

will increase the quantity demanded of aluminum foil by

a. 1.66%, and aluminum foil sellers' total revenue will increase as a result. b. 1.66%, and aluminum foil sellers' total revenue will decrease as a result. c. 3.48%, and aluminum foil sellers' total revenue will increase as a result. d. 3.48%, and aluminum foil sellers' total revenue will decrease as a result.

ANS: C

NAT: Analytic MSC: Analytical

DIF: 3

LOC: Elasticity

REF: 5-1

TOP: Total revenue | Price elasticity of demand

178. If a change in the price of a good results in no change in total revenue, then

a. the demand for the good must be elastic. b. the demand for the good must be inelastic. c. the demand for the good must be unit elastic.

d. buyers must not respond very much to a change in price.

ANS: C

NAT: Analytic MSC: Interpretive

DIF: 2

LOC: Elasticity

REF: 5-1

TOP: Total revenue | Price elasticity of demand

179. When demand is unit elastic, price elasticity of demand

a. equals 1, and total revenue and price move in the same direction. b. equals 1, and total revenue and price move in opposite directions. c. equals 1, and total revenue does not change when price changes. d. equals 0, and total revenue does not change when price changes.

ANS: C

NAT: Analytic MSC: Interpretive

DIF: 2

LOC: Elasticity

REF: 5-1

TOP: Total revenue | Price elasticity of demand

180. If the demand curve is linear and downward sloping, which of the following statements is not correct?

a. Demand is more elastic on the lower part of the demand curve than on the upper part.

b. Different pairs of points on the demand curve can result in different values of the price elasticity of

demand.

c. Different pairs of points on the demand curve result in identical values of the slope of the demand

curve.

d. Starting from a point on the upper part of the demand curve, an increase in price leads to a decrease

in total revenue.

ANS: A

NAT: Analytic MSC: Analytical

DIF: 3

LOC: Elasticity

REF: 5-1

TOP: Total revenue | Price elasticity of demand

181. Total revenue

a. always increases as price increases.

b. increases as price increases, as long as demand is elastic. c. decreases as price increases, as long as demand is inelastic.

d. remains unchanged as price increases when demand is unit elastic.

ANS: D

NAT: Analytic MSC: Applicative

DIF: 2

LOC: Elasticity

REF: 5-1

TOP: Total revenue | Price elasticity of demand

182. In which of the following situations will total revenue increase?

a. Price elasticity of demand is 1.2, and the price of the good decreases. b. Price elasticity of demand is 0.5, and the price of the good increases. c. Price elasticity of demand is 3.0, and the price of the good decreases. d. All of the above are correct.

ANS: D

NAT: Analytic MSC: Analytical

DIF: 2

LOC: Elasticity

REF: 5-1

TOP: Total revenue | Price elasticity of demand

336 ? Chapter 5 /Elasticity and Its Application

183. You have just been hired as a business consultant to determine what pricing policy would be appropriate in

order to increase the total revenue of a major shoe store. The first step you would take would be to a. increase the price of every shoe in the store.

b. look for ways to cut costs and increase profit for the store.

c. determine the price elasticity of demand for the store's products. d. determine the price elasticity of supply for the store’s products.

ANS: C

NAT: Analytic MSC: Interpretive

DIF: 2

LOC: Elasticity

REF: 5-1

TOP: Total revenue | Price elasticity of demand

184. You are in charge of the local city-owned golf course. You need to increase the revenue generated by the golf

course in order to meet expenses. The mayor advises you to increase the price of a round of golf. The city manager recommends reducing the price of a round of golf. You realize that

a. the mayor thinks demand is elastic, and the city manager thinks demand is inelastic. b. both the mayor and the city manager think that demand is elastic. c. both the mayor and the city manager think that demand is inelastic.

d. the mayor thinks demand is inelastic, and the city manager thinks demand is elastic.

ANS: D

NAT: Analytic MSC: Applicative

DIF: 2

LOC: Elasticity

REF: 5-1

TOP: Total revenue | Price elasticity of demand

185. You are in charge of the local city-owned golf course. You need to increase the revenue generated by the golf

course in order to meet expenses. The mayor advises you to decrease the price of a round of golf. The city manager recommends increasing the price of a round of golf. You realize that

a. the mayor thinks demand is elastic, and the city manager thinks demand is inelastic. b. both the mayor and the city manager think that demand is elastic. c. both the mayor and the city manager think that demand is inelastic.

d. the mayor thinks demand is inelastic, and the city manager thinks demand is elastic.

ANS: A

NAT: Analytic MSC: Applicative

DIF: 2

LOC: Elasticity

REF: 5-1

TOP: Total revenue | Price elasticity of demand

186. Get Smart University is contemplating an increase in tuition to enhance revenue. If GSU feels that raising

tuition would enhance revenue, it is a. ignoring the law of demand.

b. assuming that the demand for university education is elastic. c. assuming that the demand for university education is inelastic. d. assuming that the supply of university education is elastic.

ANS: C

NAT: Analytic MSC: Applicative

DIF: 2

LOC: Elasticity

REF: 5-1

TOP: Total revenue | Price elasticity of demand

Chapter 5 /Elasticity and Its Application ? 337

Figure 5-11

Price55504540353025201510550100150200250300350400450500550DemandQuantity187. Refer to Figure 5-11. When the price is $30, total revenue is

a. $3,000. b. $5,000. c. $7,000. d. $9,000.

ANS: D

NAT: Analytic MSC: Interpretive

DIF: 1

LOC: Elasticity

REF: 5-1

TOP: Total revenue | Price elasticity of demand

188. Refer to Figure 5-11. When price falls from $50 to $40, it can be inferred that demand between those two

prices is

a. inelastic, since total revenue decreases from $8,000 to $5,000. b. inelastic, since total revenue increases from $5,000 to $8,000. c. elastic, since total revenue increases from $5,000 to $8,000. d. unit elastic, since total revenue does not change.

ANS: C

NAT: Analytic MSC: Applicative

DIF: 2

LOC: Elasticity

REF: 5-1

TOP: Total revenue | Price elasticity of demand

189. Refer to Figure 5-11. An increase in price from $20 to $30 would

a. increase total revenue by $2,000. b. decrease total revenue by $2,000. c. increase total revenue by $1,000. d. decrease total revenue by $1,000.

ANS: C

NAT: Analytic MSC: Applicative

DIF: 2

LOC: Elasticity

REF: 5-1

TOP: Total revenue | Price elasticity of demand

190. Refer to Figure 5-11. An increase in price from $30 to $35 would

a. increase total revenue by $250 b. decrease total revenue by $250. c. increase total revenue by $500. d. decrease total revenue by $500.

ANS: B

NAT: Analytic MSC: Applicative

DIF: 2

LOC: Elasticity

REF: 5-1

TOP: Total revenue | Price elasticity of demand