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288 ? Chapter 5 /Elasticity and Its Application
Chapter 5
Elasticity and Its Application
TRUE/FALSE
1. Elasticity measures how responsive quantity is to changes in price. ANS: T DIF: 1 REF: 5-0
LOC: Elasticity TOP: Price elasticity of demand ANS: T DIF: 1 REF: 5-0
LOC: Elasticity TOP: Price elasticity of demand
NAT: Analytic MSC: Definitional NAT: Analytic MSC: Definitional
2. Measures of elasticity enhance our ability to study the magnitudes of changes.
3. The demand for bread is likely to be more elastic than the demand for solid-gold bread
plates. ANS: F DIF: 2 REF: 5-1
LOC: Elasticity TOP: Price elasticity of demand ANS: F DIF: 1 REF: 5-1
LOC: Elasticity TOP: Price elasticity of demand ANS: T DIF: 1 REF: 5-1
LOC: Elasticity TOP: Price elasticity of demand ANS: T DIF: 2 REF: 5-1
LOC: Elasticity TOP: Price elasticity of demand
NAT: Analytic MSC: Interpretive NAT: Analytic MSC: Interpretive NAT: Analytic MSC: Interpretive NAT: Analytic MSC: Interpretive
4. In general, demand curves for necessities tend to be price elastic.
5. In general, demand curves for luxuries tend to be price elastic.
6. Necessities tend to have inelastic demands, whereas luxuries have elastic demands.
7. Goods with close substitutes tend to have more elastic demands than do goods without close
substitutes. ANS: T DIF: 2 REF: 5-1
LOC: Elasticity TOP: Price elasticity of demand ANS: T DIF: 2 REF: 5-1
LOC: Elasticity TOP: Price elasticity of demand ANS: F DIF: 2 REF: 5-1
LOC: Elasticity TOP: Price elasticity of demand
NAT: Analytic MSC: Interpretive NAT: Analytic MSC: Interpretive NAT: Analytic MSC: Interpretive
8. The demand for Rice Krispies is more elastic than the demand for cereal in general.
9. The demand for soap is more elastic than the demand for Dove soap.
10. The demand for gasoline will respond more to a change in price over a period of five weeks
than over a period of five years. ANS: F DIF: 2 REF: 5-1
LOC: Elasticity TOP: Price elasticity of demand
NAT: Analytic MSC: Interpretive
11. Even the demand for a necessity such as gasoline will respond to a change in price,
especially over a longer time horizon. ANS: T DIF: 2 REF: 5-1
LOC: Elasticity TOP: Price elasticity of demand
NAT: Analytic MSC: Interpretive
288
Chapter 5 /Elasticity and Its Application ? 289
12. The price elasticity of demand is defined as the percentage change in quantity demanded
divided by the percentage change in price. ANS: T DIF: 1 REF: 5-1
LOC: Elasticity TOP: Price elasticity of demand
NAT: Analytic MSC: Definitional
13. The price elasticity of demand is defined as the percentage change in price divided by
the percentage change in quantity demanded. ANS: F DIF: 1 REF: 5-1
LOC: Elasticity TOP: Price elasticity of demand
NAT: Analytic MSC: Definitional
14. Suppose that when the price rises by 20% for a particular good, the quantity demanded
of that good falls by 10%. The price elasticity of demand for this good is equal to 2.0. ANS: F DIF: 2 REF: 5-1
LOC: Elasticity TOP: Price elasticity of demand
NAT: Analytic MSC: Analytical
15. Suppose that when the price rises by 10% for a particular good, the quantity demanded
of that good falls by 20%. The price elasticity of demand for this good is equal to 2.0. ANS: T DIF: 2 REF: 5-1
LOC: Elasticity TOP: Price elasticity of demand
NAT: Analytic MSC: Analytical
16. If the price of calculators increases by 15 percent and the quantity demanded per week
falls by 45 percent as a result, then the price elasticity of demand is 3. ANS: T DIF: 2 REF: 5-1
LOC: Elasticity TOP: Price elasticity of demand ANS: F DIF: 1 REF: 5-1 LOC: Elasticity TOP: Inelastic demand ANS: F DIF: 2 REF: 5-1
LOC: Elasticity TOP: Price elasticity of demand
NAT: Analytic MSC: Applicative NAT: Analytic MSC: Definitional NAT: Analytic MSC: Interpretive
17. Demand is inelastic if the price elasticity of demand is greater than 1.
18. A linear, downward-sloping demand curve has a constant elasticity but a changing slope.
19. Price elasticity of demand along a linear, downward-sloping demand curve increases as
price falls. ANS: F DIF: 3 REF: 5-1
LOC: Elasticity TOP: Price elasticity of demand ANS: F DIF: 1 REF: 5-1
LOC: Elasticity TOP: Price elasticity of demand ANS: T DIF: 1 REF: 5-1
LOC: Elasticity TOP: Price elasticity of demand
NAT: Analytic MSC: Interpretive NAT: Analytic MSC: Definitional NAT: Analytic MSC: Definitional
20. If the price elasticity of demand is equal to 0, then demand is unit elastic.
21. If the price elasticity of demand is equal to 1, then demand is unit elastic.
22. Demand for a good is said to be inelastic if the quantity demanded increases substantially
when the price falls by a small amount. ANS: F DIF: 1 REF: 5-1 LOC: Elasticity TOP: Inelastic demand
NAT: Analytic MSC: Definitional
289
290 ? Chapter 5 /Elasticity and Its Application
23. The midpoint method is used to calculate elasticity between two points because it gives
the same answer regardless of the direction of the change. ANS: T DIF: 2 REF: 5-1 LOC: Elasticity TOP: Midpoint method
NAT: Analytic MSC: Interpretive
24. The flatter the demand curve that passes through a given point, the more inelastic the
demand. ANS: F DIF: 2 REF: 5-1
LOC: Elasticity TOP: Price elasticity of demand ANS: T DIF: 2 REF: 5-1
LOC: Elasticity TOP: Price elasticity of demand
NAT: Analytic MSC: Interpretive NAT: Analytic MSC: Interpretive
25. The flatter the demand curve that passes through a given point, the more elastic the demand.
26. If demand is perfectly inelastic, the demand curve is vertical, and the price elasticity
of demand equals 0. ANS: T DIF: 2 REF: 5-1
LOC: Elasticity TOP: Perfectly inelastic demand
NAT: Analytic MSC: Interpretive
27. If demand is perfectly elastic, the demand curve is horizontal, and the price elasticity
of demand equals 1. ANS: F DIF: 2 REF: 5-1 LOC: Elasticity TOP: Perfectly elastic demand
NAT: Analytic MSC: Interpretive
28. Along the elastic portion of a linear demand curve, total revenue rises as price rises. ANS: F DIF: 3 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand MSC: Interpretive
29. If a firm is facing elastic demand, then the firm should decrease price to increase revenue. ANS: T DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand MSC: Applicative
30. If a firm is facing inelastic demand, then the firm should decrease price to increase
revenue. ANS: F DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Total revenue | Price elasticity of demand MSC: Applicative
31. When demand is inelastic, a decrease in price increases total revenue. ANS: F DIF: 2 REF: 5-1 NAT: Analytic LOC: Elasticity TOP: Inelastic demand | Total revenue MSC: Interpretive
32. The income elasticity of demand is defined as the percentage change in quantity demanded
divided by the percentage change in income. ANS: T DIF: 1 REF: 5-1
LOC: Elasticity TOP: Income elasticity of demand
NAT: Analytic MSC: Definitional
33. The income elasticity of demand is defined as the percentage change in quantity demanded
divided by the percentage change in price. ANS: F DIF: 1 REF: 5-1
LOC: Elasticity TOP: Income elasticity of demand
NAT: Analytic MSC: Definitional
290