The price elasticity of supply
Unit 3 Chapter 5 Homework
The price elasticity of supply measures how much
a. the quantity supplied responds to changes in the price of the good.
b. the price of the good responds to changes in supply.
c. the quantity supplied responds to changes in input prices.
d. sellers respond to changes in technology.
Which of the following statements is not correct?
a. The quantity of illegal drugs demanded is very responsive to changes in price.
b. Advocates for drug-interdiction policies that reduce the supply of illegal drugs argue that the demand for illegal drugs may be more responsive in the long run than in the short run.
c. The demand for illegal drugs is price inelastic.
d. Drug interdiction efforts that reduce the supply of illegal drugs may increase drug-related crimes.
The price elasticity of demand is defined as
a. the percentage change in price of a good divided by the percentage change in the quantity demanded of that good.
b. the percentage change in income divided by the percentage change in the quantity demanded.
c. the percentage change in the quantity demanded of a good divided by the percentage change in the price of that good.
d. the percentage change in the quantity demanded divided by the percentage change in income.
e. none of the above.
Suppose that at a price of $30 per month, there are 30,000 subscribers to cable television in Small Town. If Small Town Cablevision raises its price to $40 per month, the number of subscribers will fall to 20,000.
At which of the following prices does Small Town Cablevision earn the greatest total revenue?
a. $0 per month
b. either $30 or $40 per month because the price elasticity of demand is 1.0
c. $40 per month
d. $30 per month
Which of the following would cause a demand curve for a good to be price inelastic?
a. The good is inferior.
b. The good is a luxury.
c. There are a great number of substitutes for the good.
d. The good is a necessity.
If supply is price inelastic, the value of the price elasticity of supply must be
a. zero.
b. less than 1.
c. greater than 1.
d. infinite.
e. none of the above.
If the price elasticity of supply is 1.5, and a price increase led to a 1.8 percent increase in quantity supplied, then the price increase is about
a. 2.70 percent.
b. 0.83 percent.
c. 0.67 percent.
d. 1.20 percent.
If a small percentage increase in the price of a good greatly reduces the quantity demanded for that good, the demand for that good is
a. income inelastic.
b. price inelastic.
c. income elastic.
d. price elastic.
e. unit price elastic.
Figure 5-3
Refer to Figure 5-3
At a price of $70 per unit, sellers’ total revenue equals
a. $1,250.
b. $700.
c. $1,400.
d. $1,050.
For which of the following goods is the income elasticity of demand likely highest?
a. Housing
b. Water
c. Hamburgers
d. Diamonds
Scenario 5-2
The supply of aged cheddar cheese is inelastic, and the supply of bread is elastic. Both goods are considered to be normal goods by a majority of consumers. Suppose that a large income tax increase decreases the demand for both goods by 10 percent.
Refer to Scenario 5-2. The change in equilibrium quantity will be
a. greater in the aged cheddar cheese market than in the bread market.
b. greater in the bread market than in the aged cheddar cheese market.
c. the same in the aged cheddar cheese and bread markets.
d. unknown without more information.
If there is excess capacity in a production facility, it is likely that the firm’s supply curve is
a. price inelastic.
b. price elastic.
c. unit price elastic.
d. none of the above.
Suppose that at a price of $30 per month, there are 30,000 subscribers to cable television in Small Town. If Small Town Cablevision raises its price to $40 per month, the number of subscribers will fall to 20,000.
Using the midpoint method for calculating the elasticity, what is the price elastic¬ity of demand for cable television in Small Town?
a. 0.75
b. 2.0
c. 1.0
d. 0.66
e. 1.4
A decrease in supply (shift to the left) will increase total revenue in that market if
a. demand is price elastic.
b. demand is price inelastic.
c. supply is price elastic.
d. supply is price inelastic.
If a 25 percent change in price results in a 40 percent change in quantity supplied, then the price elasticity of supply is about
a. 1.60, and supply is inelastic.
b. 0.63, and supply is elastic.
c. 0.63, and supply is inelastic.
d. 1.60, and supply is elastic.
Figure 5-5
Refer to Figure 5-5 . Using the midpoint method, the price elasticity of demand between point X and point Y is
a. 1.
b. 2.5.
c. 2.
d. 0.4.
Demand is said to be inelastic if
a. the quantity demanded changes only slightly when the price of the good changes.
b. buyers respond substantially to changes in the price of the good.
c. the price of the good responds only slightly to changes in demand.
d. demand shifts only slightly when the price of the good changes.
If the price of walnuts rises, many people would switch from consuming walnuts to consuming pecans. But if the price of salt rises, people would have difficulty purchasing something to use in its place. These examples illustrate the importance of
a. the time horizon in determining the price elasticity of demand.
b. the availability of close substitutes in determining the price elasticity of demand.
c. the definition of a market in determining the price elasticity of demand.
d. a necessity versus a luxury in determining the price elasticity of demand.
Scenario 5-2
The supply of aged cheddar cheese is inelastic, and the supply of bread is elastic. Both goods are considered to be normal goods by a majority of consumers. Suppose that a large income tax increase decreases the demand for both goods by 10 percent.
Refer to Scenario 5-2. The change in equilibrium price will be
a. unknown without more information.
b. greater in the bread market than in the aged cheddar cheese market.
c. greater in the aged cheddar cheese market than in the bread market.
d. the same in the aged cheddar cheese and bread markets.
Demand is said to be price elastic if
a. buyers respond substantially to changes in the price of the good.
b. buyers do not respond much to changes in the price of the good.
c. the price of the good responds substantially to changes in demand.
d. demand shifts substantially when income or the expected future price of the good changes.
Chapter 6 Homework
Most labor economists believe that the supply of labor is
a. less elastic than the demand, and, therefore, firms bear most of the burden of the payroll tax.
b. less elastic than the demand, and, therefore, workers bear most of the burden of the payroll tax.
c. more elastic than the demand, and, therefore, firms bear most of the burden of the payroll tax.
d. more elastic than the demand, and, therefore, workers bear most of the burden of the payroll tax.
Figure 6-10
The vertical distance between points A and B represents the tax in the market.
Refer to Figure 6-10 . The price that buyers pay after the tax is imposed is
a. $24.
b. $8.
c. $16.
d. $10.
Suppose the government wants to encourage Americans to exercise more, so it imposes a binding price ceiling on the market for in-home treadmills. As a result,
a. a shortage of treadmills will develop.
b. the demand for treadmills will increase.
c. the supply of treadmills will decrease.
d. a surplus of treadmills will develop.
Rent-control laws dictate
a. the exact rent that landlords must charge tenants.
b. only a minimum rent that landlords may charge tenants.
c. only a maximum rent that landlords may charge tenants.
d. both a minimum rent and a maximum rent that landlords may charge tenants.
The federal government uses the revenue from the FICA (Federal Insurance Contribution Act) tax to pay for
a. unemployment compensation.
b. Social Security and Medicare.
c. housing subsidies for low-income people.
d. the salaries of members of Congress.
Which of the following statements is true if the government places a price ceiling on gasoline at $4.00 per gallon and the equilibrium price is $3.00 per gallon?
a. A significant increase in the supply of gasoline could cause the price ceiling to become a binding constraint.
b. A significant increase in the demand for gasoline could cause the price ceiling to become a binding constraint.
c. There will be a shortage of gasoline.
d. There will be a surplus of gasoline.
A tax on the buyers of cameras encourages
a. sellers to supply a smaller quantity at every price.
b. buyers to demand a smaller quantity at every price.
c. buyers to demand a larger quantity at every price.
d. sellers to supply a larger quantity at every price.
Under rent control, bribery is a potential mechanism to
a. allocate housing to the poorest individuals in the market.
b. force the total price of an apartment (including the bribe) to be less than the market price.
c. allocate housing to the most deserving tenants.
d. bring the total price of an apartment (including the bribe) closer to the equilibrium price
Suppose that in a particular market, the supply curve is highly elastic and the demand curve is highly inelastic. If a tax is imposed in this market, then the
a. buyers and sellers are likely to share the burden of the tax equally.
b. sellers will bear a greater burden of the tax than the buyers.
c. buyers and sellers will not share the burden equally, but it is impossible to determine who will bear the greater burden of the tax without more information.
d. buyers will bear a greater burden of the tax than the sellers.
If the government removes a tax on a good, then the price paid by buyers will
a. decrease, and the price received by sellers will increase.
b. increase, and the price received by sellers will increase.
c. increase, and the price received by sellers will decrease.
d. decrease, and the price received by sellers will decrease.
Which of the following observations would be consistent with the imposition of a binding price ceiling on a market? After the price ceiling is established,
a. a larger quantity of the good is supplied.
b. a smaller quantity of the good is bought and sold.
c. a smaller quantity of the good is demanded.
d. the price rises above the previous equilibrium.
When OPEC raised the price of crude oil in the 1970s, it caused the United States’
a. binding price floor on gasoline to become nonbinding.
b. nonbinding price ceiling on gasoline to become binding.
c. binding price ceiling on gasoline to become nonbinding.
d. nonbinding price floor on gasoline to become binding.
The minimum wage was instituted to ensure workers
a. employment.
b. a middle-class standard of living.
c. unemployment compensation.
d. a minimally adequate standard of living.
Which of the following causes the price paid by buyers to be different than the price received by sellers?
a. Nonbinding price control
b. Binding price floor
c. Tax on the good
d. Binding price ceiling
Figure 6-13
Refer to Figure 6-13. Acme, Inc. is a seller of the good. Acme sells a unit of the good to a buyer and then pays the tax on that unit to the government. After paying the tax, Acme receives how much?
a. $9.00
b. $8.00
c. $12.00
d. $10.50
If the government wants to reduce the burning of fossil fuels, it should impose a tax on
a. either buyers or sellers of gasoline.
b. only the buyers of gasoline.
c. whichever side of the market is less elastic.
d. only the sellers of gasoline.
Figure 6-4
Graph (a) Graph (b)
Refer to Figure 6-4 . In graph (b), there will be
a. equilibrium in the market.
b. lines of people waiting to buy the good.
c. a surplus.
d. a shortage.
A price ceiling is
a. imposed to make sure everyone can earn a fair wage.
b. often imposed on markets in which “cutthroat competition” would prevail without a price ceiling.
c. a legal maximum on the price at which a good can be sold.
d. often imposed when sellers of a good are successful in their attempts to convince the government that the market outcome is unfair without a price ceiling.
Figure 6-7
Refer to Figure 6-7. If the government imposes a price ceiling at $6, it would be
a. nonbinding if market demand is Demand A or Demand B.
b. nonbinding if market demand is Demand A and binding if market demand is Demand B.
c. binding if market demand is Demand A and nonbinding if market demand is Demand B.
d. binding if market demand is Demand A or Demand B.
Figure 6-1
Graph (a) Graph (b)
Refer to Figure 6-1. A binding price ceiling is shown in
a. graph (a) only.
b. both graph (a) and graph (b).
c. neither graph (a) nor graph (b).
d. graph (b) only.
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