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338 ? Chapter 5 /Elasticity and Its Application

191. If the demand for donuts is elastic, then a decrease in the price of donuts will

a. increase total revenue of donut sellers. b. decrease total revenue of donut sellers. c. not change total revenue of donut sellers.

d. There is not enough information to answer this question.

ANS: A

NAT: Analytic MSC: Applicative

DIF: 2

LOC: Elasticity

REF: 5-1

TOP: Total revenue | Price elasticity of demand

192. If the demand for donuts is elastic, then an increase in the price of donuts will

a. increase total revenue of donut sellers. b. decrease total revenue of donut sellers. c. not change total revenue of donut sellers.

d. There is not enough information to answer this question.

ANS: B

NAT: Analytic MSC: Applicative

DIF: 2

LOC: Elasticity

REF: 5-1

TOP: Total revenue | Price elasticity of demand

193. If the demand for textbooks is inelastic, then a decrease in the price of textbooks will

a. increase total revenue of textbook sellers. b. decrease total revenue of textbook sellers. c. not change total revenue of textbook sellers.

d. There is not enough information to answer this question.

ANS: B

NAT: Analytic MSC: Applicative

DIF: 2

LOC: Elasticity

REF: 5-1

TOP: Total revenue | Price elasticity of demand

194. If the demand for textbooks is inelastic, then an increase in the price of textbooks will

a. increase total revenue of textbook sellers. b. decrease total revenue of textbook sellers. c. not change total revenue of textbook sellers.

d. There is not enough information to answer this question.

ANS: A

NAT: Analytic MSC: Applicative

DIF: 2

LOC: Elasticity

REF: 5-1

TOP: Total revenue | Price elasticity of demand

195. Eric produces jewelry boxes. If the demand for jewelry boxes is elastic and Eric wants to increase his total

revenue, he should

a. increase the price of his jewelry boxes. b. decrease the price of his jewelry boxes. c. not change the price of his jewelry boxes. d. None of the above answers is correct.

ANS: B

NAT: Analytic MSC: Interpretive

DIF: 2

LOC: Elasticity

REF: 5-1

TOP: Total revenue | Price elasticity of demand

196. Holding all other forces constant, if increasing the price of a good leads to an increase in total revenue, then

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

d. None of the above is correct, since a price increase always leads to an increase in total revenue.

ANS: B

NAT: Analytic MSC: Applicative

DIF: 2

LOC: Elasticity

REF: 5-1

TOP: Total revenue | Price elasticity of demand

Chapter 5 /Elasticity and Its Application ? 339

197. Holding all other forces constant, if increasing the price of a good leads to a decrease in total revenue, then the

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

d. None of the above is correct, since a price increase always leads to an increase in total revenue.

ANS: C

NAT: Analytic MSC: Applicative

DIF: 2

LOC: Elasticity

REF: 5-1

TOP: Total revenue | Price elasticity of demand

198. Holding all other forces constant, if decreasing the price of a good leads to an increase in total revenue, then

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

d. None of the above is correct, since a price increase always leads to an increase in total revenue.

ANS: C

NAT: Analytic MSC: Applicative

DIF: 2

LOC: Elasticity

REF: 5-1

TOP: Total revenue | Price elasticity of demand

199. Holding all other forces constant, if decreasing the price of a good leads to a decrease in total revenue, then the

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

d. None of the above is correct, since a price increase always leads to an increase in total revenue.

ANS: B

NAT: Analytic MSC: Applicative

DIF: 2

LOC: Elasticity

REF: 5-1

TOP: Total revenue | Price elasticity of demand

200. Suppose you are in charge of setting prices at a local sandwich shop. The business needs to increase its total

revenue and your job is on the line. If the demand for sandwiches is elastic, you a. should increase the price of sandwiches. b. should decrease the price of sandwiches. c. should not change the price of sandwiches.

d. could not determine what to do with price until you determine whether supply is elastic or inelastic.

ANS: B

NAT: Analytic MSC: Applicative

DIF: 2

LOC: Elasticity

REF: 5-1

TOP: Total revenue | Price elasticity of demand

201. Suppose a producer is able to separate customers into two groups, one having an inelastic demand and the

other having an elastic demand. If the producer's objective is to increase total revenue, she should a. increase the price charged to customers with the elastic demand and decrease the price charged to

customers with the inelastic demand.

b. decrease the price charged to customers with the elastic demand and increase the price charged to

customers with the inelastic demand.

c. decrease the price to both groups of customers. d. increase the price for both groups of customers.

ANS: B

NAT: Analytic MSC: Analytical

DIF: 3

LOC: Elasticity

REF: 5-1

TOP: Total revenue | Price elasticity of demand

340 ? Chapter 5 /Elasticity and Its Application

202. Your younger sister needs $50 to buy a new bike. She has opened a lemonade stand to make the money she

needs. Your mother is paying for all of the ingredients. She currently is charging 25 cents per cup, but she wants to adjust her price to earn the $50 faster. If you know that the demand for lemonade is elastic, what is your advice to her?

a. Leave the price at 25 cents and be patient. b. Raise the price to increase total revenue. c. Lower the price to increase total revenue.

d. There isn't enough information given to answer this question.

ANS: C

NAT: Analytic MSC: Applicative

DIF: 2

LOC: Elasticity

REF: 5-1

TOP: Total revenue | Price elasticity of demand

203. An increase in price causes an increase in total revenue when

a. demand is elastic. b. demand is inelastic. c. demand is unit elastic.

d. All of the above are possible.

ANS: B

NAT: Analytic MSC: Applicative

DIF: 2

LOC: Elasticity

REF: 5-1

TOP: Total revenue

204. The local pizza restaurant makes such great bread sticks that consumers do not respond much at all to a change

in the price. If the owner is only interested in increasing revenue, he should a. lower the price of the bread sticks.

b. leave the price of the bread sticks alone. c. raise the price of the bread sticks. d. reduce costs.

ANS: C

NAT: Analytic MSC: Interpretive

DIF: 2

LOC: Elasticity

REF: 5-1

TOP: Total revenue

205. When demand is inelastic within a certain price range, then within that price range,

a. an increase in price would increase total revenue because the decrease in quantity demanded is

proportionately less than the increase in price.

b. an increase in price would decrease total revenue because the decrease in quantity demanded is

proportionately greater than the increase in price.

c. a decrease in price would increase total revenue because the increase in quantity demanded is

proportionately smaller than the decrease in price. d. a decrease in price would not affect total revenue.

ANS: A

NAT: Analytic MSC: Applicative

DIF: 3

LOC: Elasticity

REF: 5-1

TOP: Total revenue

206. When demand is inelastic the price elasticity of demand is

a. less than 1, and price and total revenue will move in the same direction. b. less than 1, and price and total revenue will move in opposite directions. c. greater than 1, and price and total revenue will move in the same direction. d. greater than 1, and price and total revenue will move in opposite directions.

ANS: A

NAT: Analytic MSC: Applicative

DIF: 2

LOC: Elasticity

REF: 5-1

TOP: Total revenue

Chapter 5 /Elasticity and Its Application ? 341

207. How does total revenue change as one moves downward and to the right along a linear demand curve?

a. It always increases. b. It always decreases.

c. It first increases, then decreases.

d. It is unaffected by a movement along the demand curve.

ANS: C

NAT: Analytic MSC: Analytical

DIF: 3

LOC: Elasticity

REF: 5-1

TOP: Total revenue

208. On a downward-sloping linear demand curve, total revenue reaches its maximum value at the

a. midpoint of the demand curve. b. lower end of the demand curve. c. upper end of the demand curve.

d. It is impossible to tell without knowing prices and quantities demanded.

ANS: A

NAT: Analytic MSC: Analytical

DIF: 3

LOC: Elasticity

REF: 5-1

TOP: Total revenue

209. Suppose the point (Q = 2,000, P = $60) is the midpoint on a certain downward-sloping, linear demand curve.

Then

a. an increase in price from $40 to $42 will increase total revenue.

b. a decrease in price from $61 to $59 will leave total revenue unchanged. c. the maximum value of total revenue is $120,000. 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

210. Moving downward and to the right along a linear demand curve, we know that total revenue

a. first increases, then decreases. b. first decreases, then increases. c. always increases. d. always decreases.

ANS: A

NAT: Analytic MSC: Interpretive

DIF: 2

LOC: Elasticity

REF: 5-1

TOP: Total revenue | Price elasticity of demand

211. Total revenue will be at its largest value on a linear demand curve at

a. the top of the curve, where prices are highest. b. the midpoint of the curve.

c. the low end of the curve, where quantity demanded is highest. d. None of the above is correct.

ANS: B

NAT: Analytic MSC: Interpretive

DIF: 2

LOC: Elasticity

REF: 5-1

TOP: Total revenue | Price elasticity of demand

212. Last year, Sheila bought 6 pairs of shoes when her income was $40,000. This year, her income is $50,000 and

she purchased 10 pairs of shoes. Holding other factors constant, it follows that Sheila a. considers shoes to be a necessity. b. considers shoes to be an inferior good. c. considers shoes to be a normal good.

d. has a low price elasticity of demand for shoes.

ANS: C

NAT: Analytic MSC: Interpretive

DIF: 2

LOC: Elasticity

REF: 5-1

TOP: Income elasticity of demand

342 ? Chapter 5 /Elasticity and Its Application

213. Last year, Sheila bought 6 pairs of shoes when her income was $40,000. This year, her income is $52,000 and

she purchased 7 pairs of shoes. Holding other factors constant and using the midpoint method, it follows that Sheila’s income elasticity of demand is about

a. 0.59, and Sheila regards shoes as an inferior good. b. 0.59, and Sheila regards shoes as a normal good. c. 1.7, and Sheila regards shoes as an inferior good. d. 1.7, and Sheila regards shoes as a normal good.

ANS: B

NAT: Analytic MSC: Applicative

DIF: 2

LOC: Elasticity

REF: 5-1

TOP: Income elasticity of demand

214. Necessities such as food and clothing tend to have

a. high price elasticities of demand and high income elasticities of demand. b. high price elasticities of demand and low income elasticities of demand. c. low price elasticities of demand and high income elasticities of demand. d. low price elasticities of demand and low income elasticities of demand.

ANS: D

NAT: Analytic MSC: Interpretive

DIF: 2

LOC: Elasticity

REF: 5-1

TOP: Income elasticity of demand

215. Income elasticity of demand measures how

a. the quantity demanded changes as consumer income changes.

b. consumer purchasing power is affected by a change in the price of a good. c. the price of a good is affected when there is a change in consumer income. d. many units of a good a consumer can buy given a certain income level.

ANS: A

NAT: Analytic MSC: Definitional

DIF: 1

LOC: Elasticity

REF: 5-1

TOP: Income elasticity of demand

216. For Susie, a 7 percent increase in income results in a 12 percent increase in the quantity demanded of pizza.

For Susie, the income elasticity of demand for pizza is a. negative, and pizza is an normal good. b. negative, and pizza is a inferior good. c. positive, and pizza is an inferior good. d. positive, and pizza is a normal good.

ANS: D

NAT: Analytic MSC: Applicative

DIF: 2

LOC: Elasticity

REF: 5-1

TOP: Income elasticity of demand

217. For which of the following goods is the income elasticity of demand likely highest?

a. water b. diamonds c. hamburgers d. housing

ANS: B

NAT: Analytic MSC: Interpretive

DIF: 2

LOC: Elasticity

REF: 5-1

TOP: Income elasticity of demand

218. Last year, Joan bought 50 pounds of hamburger when her household’s income was $40,000. This year, her

household income was only $30,000 and Joan bought 60 pounds of hamburger. All else constant, Joan's income elasticity of demand for hamburger is

a. positive, so Joan considers hamburger to be an inferior good.

b. positive, so Joan considers hamburger to be a normal good and a necessity. c. negative, so Joan considers hamburger to be an inferior good.

d. negative, so Joan considers hamburger to be a normal good but not a necessity.

ANS: C

NAT: Analytic MSC: Interpretive

DIF: 2

LOC: Elasticity

REF: 5-1

TOP: Income elasticity of demand