Chapter 03 Quantitative Demand Analysis

Chapter 03 - Quantitative Demand Analysis

Chapter 03Quantitative 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.Decreaseb.Increasec.Remain constantd.Either increase or remain constant depending upon the size of the price increase

Difficulty: Easy2.A price elasticity of zero corresponds to a demand curve that is:a.Horizontalb.Downward sloping with a slope always equal to 1C.Verticald.Either vertical or horizontal

Difficulty: Medium3.As we move down along a linear demand curve, the price elasticity of demand becomes morea.ElasticB.Inelasticc.Log-lineard.Variable

Difficulty: Medium4.Suppose the demand for a product is QXd = 10 - lnPX then product X isa.Elasticb.InelasticC.Unitary elasticd.Cannot be determined without more information

Difficulty: Easy5.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.-0.2B.-0.3c.-0.5d.-0.6

Difficulty: Easy6.The own-price 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: Medium7.If apples have an own-price elasticity of -1.2 we know the demand is:a.Unitaryb.IndeterminateC.Elasticd.Inelastic

Difficulty: Easy8.If quantity demanded for sneakers falls by 10% when price increases 25% we know that the absolute value of the own-price elasticity of sneakers is:a.2.5B.0.4c.2.0d.0.27

Difficulty: Medium9.The quantity consumed of a good is relatively unresponsive to changes in price whenever demand is:a.Elasticb.Unitaryc.FallingD.Inelastic

Difficulty: Easy10.If the absolute value of the own-price elasticity of steak is 0.4, a decrease in price will lead to:A.A reduction in total revenueb.An increase in total revenuec.No change in total revenued.None of the statements associated with this question are correct

Difficulty: Easy11.If a price increase from $5 to $7 causes quantity demanded to fall from 150 to 100, what is the absolute value of the own-price elasticity at a price of $7?a.0.57B.1.75c.0.02d.1.24

Difficulty: Medium12.Demand is perfectly elastic when the absolute value of the own price elasticity of demand is:a.Zerob.OneC.Infinited.Unknown

Difficulty: Easy13.The demand curve for a good is horizontal when it is:a.A perfectly inelastic goodb.A unitary elastic goodC.A perfectly elastic goodd.An inferior good

Difficulty: Easy14.Suppose QXd = 10,000 - 2 PX + 3 PY - 4.5M , where PX = $100, PY = $50, and M = $2,000. What is the own-price elasticity of demand?a.-2.34b.-0.78C.-0.21d.-1.21

Difficulty: Medium15.Suppose QXd = 10,000 - 2 PX + 3 PY - 4.5M , where PX = $100, PY = $50, and M = $2,000. Then good X has a demand which is:a.ElasticB.Inelasticc.Unitaryd.Neither elastic, inelastic nor unitary elastic

Difficulty: Easy16.Suppose QXd = 10,000 - 2 PX + 3 PY - 4.5M , where PX = $100, PY = $50, and M = $2,000. How much of good X is consumed?a.100 unitsb.500 unitsc.1,100 unitsD.950 units

Difficulty: Easy17.Which of the following factors would not affect the own-price elasticity of a good?a.TimeB.Price of an inputc.Available substitutesd.Expenditure share

Difficulty: Medium18.Lemonade, a good with many close substitutes, should have an own-price elasticity that is:a.UnitaryB.Relatively elasticc.Relatively inelasticd.Perfectly inelastic

Difficulty: Medium19.We would expect the demand for jeans to be:A.More elastic than the demand for clothingb.Less elastic than the demand for clothingc.The same as the demand for clothingd.Neither more elastic, less elastic nor the same elasticity of demand for clothing

Difficulty: Medium20.Demand is more inelastic in the short-term because consumers:a.Are impatientB.Have no time to find available substitutesc.Are present-orientedd.Are neither impatient, have no time to find available substitutes nor are present-oriented

Difficulty: Medium21.We would expect the own price elasticity of demand for food to be:A.Less elastic than the demand for cerealb.More elastic than the demand for cerealc.Have the same elasticity as soapd.Perfectly inelastic

Difficulty: Medium22.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.Own-price elasticityb.Income elasticityc.Log-linear elasticityD.Cross-price elasticity

Difficulty: Easy23.If the cross-price elasticity between good A & B is negative, we know the goods are:a.Inferior goodsB.Complementsc.Inelasticd.Substitutes

Difficulty: Medium24.If the cross-price 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 ketchupB.Drop in quantity demanded of hamburgersc.Increase in quantity demanded of ketchupd.Increase in quantity demanded of hamburgers

Difficulty: Medium25.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 price-elasticity of apple sauce and pork chops at a pork chop price of $6?a.-0.1.17b.2.71c.0.42D.-0.86

Difficulty: Medium26.Suppose the demand function is QXd = 100 - 8PX + 6PY - M. If PX = $4, PY = $2, and M = $10, what is the cross-price elasticity of good x with respect to the price of good y?A.0.17b.0.38c.0.21d.0.04

Difficulty: Medium27.The elasticity that measures the responsiveness of consumer demand to changes in income is the:A.Income elasticityb.Own-price elasticityc.Cross-price elasticityd.Neither the income elasticity, own-price elasticity nor the cross-price elasticity

Difficulty: Easy28.An income elasticity less than zero tells us that the good is:a.A normal goodb.A Giffen goodC.An inferior goodd.An inelastic good

Difficulty: Easy29.If the income elasticity for lobster is 0.4, a 40% increase in income will lead to a:a.10% drop in demand for lobsterB.16% increase in demand for lobsterc.20% increase in demand for lobsterd.4% increase in demand for lobster

Difficulty: Medium30.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 butterb.Buy 2.14% more peanut butterc.Buy 6.2% less peanut butterd.Buy 9.8% less peanut butter

Difficulty: Medium31.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.1.12b.0.38c.1.92D.0.52

Difficulty: Medium32.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.96b.50c.46d.72

Difficulty: Easy33.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: Medium34.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.SubstitutesB.Complementsc.Normal goodsd.Inferior goods

Difficulty: Easy35.Suppose the demand for good X is lnQXd = 21 - 0.8 lnPX - 1.6 lnPY + 6.2 lnM + 0.4 lnAX. Then we know good x is:a.An inferior goodb.An elastic goodC.A normal goodd.A Giffen good

Difficulty: Easy36.Suppose the demand for good X is lnQXd = 21 - 0.8 lnPX - 1.6 lnPY + 6.2 lnM + 0.4 lnAX. Then we know that the own-price elasticity for good X is:a.Unitaryb.ElasticC.Inelastic cannot be calculated from the existing information

Difficulty: Easy37.Suppose the demand function is given by QXd = 8PX0.5 PY0.25 M0.12 H. Then the cross-price elasticity between goods X and Y is:a.4.00B.0.25c.0.50d.8.33

Difficulty: Hard38.Suppose the demand function is given by QXd = 8PX0.5 PY0.25 M0.12 H. Then good X is:A.A normal goodb.An inferior goodc.A complement for good yd.Perfectly inelastic

Difficulty: Hard39.Suppose the demand function is given by QXd = 8PX0.5 PY0.25 M0.12 H. Then the demand for good X is:A.Inelasticb.Unitaryc.Elasticd.Perfectly elastic

Difficulty: Hard40.The statistical analysis of economic phenomenon is defined as:A.Econometricsb.Variancec.Confidence intervalsd.Standard deviation

Difficulty: Easy41.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 goodsb.Video recorder film is a substitute for video recordersc.The demand for video recorders is inelasticd.The demand for video recorders are neither inferior nor inelastic and video recorder film is not a substitute for video recorders

Difficulty: Medium42.Which of the following is used to determine the statistical significance of a regression coefficient?A.T-statisticb.F-statisticc.R-squared.Adjusted R-square

Difficulty: Easy43.Which of the following provides a measure of the overall fit of a regression?a.T-statisticb.F-statisticc.R-squareD.The F-statistic and R-square

Difficulty: Easy44.Which of the following can be used to quantify the overall statistical significance of a regression?a.T-statisticB.F-statisticc.R-squared.The F-statistic and R-square

Difficulty: Medium45.Which of the following measures of fit penalizes a researcher for estimating many coefficients with relatively little data?a.T-statisticb.R-squareC.Adjusted R-squared.Neither the t-statistic, R-square nor the adjusted R-square

Difficulty: Easy46.As a rule-of-thumb, a parameter estimate is statistically different from zero when the absolute value of the t-statistic is:a.Zerob.Less than onec.Greater than or equal to oneD.Greater than or equal to two

Difficulty: Easy47.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.Unitaryb.Zeroc.Very elasticD.Very inelastic

Difficulty: Hard48.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: Medium49.The elasticity of variable G with respect to variable S is defined asA.The percentage change in variable G that results from a given percentage change in variable Sb.The percentage change in variable G that results from a given change in variable Sc.The change in variable G that results from a given percentage change in variable Sd.The change in variable G that results from a given change in variable S

Difficulty: Easy50.If the absolute value of the own price elasticity of demand is greater than one, then demand is said to beA.Elasticb.Inelasticc.Unitary elasticd.Neither elastic, inelastic nor unitary elastic

Difficulty: Easy51.Suppose the own-price 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 toa.Increase by 5%b.Increase by 20%C.Decrease by 5%d.Decrease by 20%

Difficulty: Medium52.Suppose the own-price 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.Increaseb.Decreasec.Unchangedd.Neither increase, decrease nor remain unchanged

Difficulty: Medium53.If the own price elasticity of demand is infinite in absolute value, thena.Demand is perfectly inelasticB.The demand curve is horizontalc.Consumers do not respond at all to changes in priced.Demand is neither perfectly inelastic nor is the demand curve horizontal

Difficulty: Medium54.If demand is perfectly inelastic, thena.The own price elasticity of demand is infinite in absolute valueb.A small increase in price will lead to a situation where none of the good is purchasedC.The demand curve is verticald.Neither will the demand curve be vertical, the own-price elasticity of demand be infinite in absolute value nor a small price increase lead to none of the good being purchased

Difficulty: Medium55.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.61,500b.61,300c.61,300 - 4PXD.61,500 - 4PX

Difficulty: Medium56.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.61,500B.61,300c.61,300 - 4PXd.61,500 - 4PX

Difficulty: Easy57.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 own-price elasticity of demand for good X?A.-0.003b.-0.03c.-0.3d.-3

Difficulty: Medium58.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. Based on this information, we know that the demand for good X isa.ElasticB.Inelasticc.Unitary elasticd.Neither elastic, inelastic nor unitary elastic

Difficulty: Medium59.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. Based on this information, the cross price elasticity between goods X and Y isA.0.008b.-0.08c.-0.8d.-8

Difficulty: Medium60.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. Based on this information, goods X and Y areA.Substitutesb.Complementsc.Normal goodsd.Inferior goods

Difficulty: Medium61.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. Based on this information, the income elasticity of good X isa.0.008b.0.082C.0.82d.8.2

Difficulty: Medium62.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. Based on this information, good X isa.An inferior goodB.A normal goodc.A Giffen goodd.A regular good

Difficulty: Easy63.When a demand curve is linear,a.The elasticity is the same as the slope of the demand curveB.Demand is elastic at high pricesc.Demand is unitary elastic at low pricesd.The elasticity is constant at all prices

Difficulty: Medium64.Which of the following is not the important factor that affects the magnitude of the own price elasticity of a good?a.Available substitutesB.Supply of the goodc.Timed.Expenditure share

Difficulty: Medium65.If there are few close substitutes for a good, demand tends to be relativelya.ElasticB.Inelasticc.Unitary elasticd.Neither elastic, inelastic nor unitary elastic

Difficulty: Medium66.The demand for food (a broad group) is morea.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 beefd.Responsive to price change than the demand for beef

Difficulty: Medium67.The demand for women's clothing is, in general,A.More elastic than the demand for clothingb.Less elastic than the demand for clothingc.Equally elastic to the demand for clothingd.Neither more elastic, less elastic nor equally elastic to the demand for clothing

Difficulty: Medium68.Demand tends to bea.More elastic in the short-term than in the long-termB.More inelastic in the short-term than in the long-termc.Equally elastic in the short-term and in the long-termd.Neither more elastic, more inelastic nor equally elastic than in the short-term and in the long-term

Difficulty: Medium69.If the short-term own price elasticity for transportation is estimated to be -0.6, then long-term own price elasticity is expected to bea.-0.6b.Greater than -0.6C.Less than -0.6d.Neither greater than, less than nor equal to -0.6

Difficulty: Hard70.Since most consumers spend very little on salt, a small increase in the price of salt willa.Reduce quantity demanded by a large amountB.Not reduce quantity demanded by very muchc.Not change quantity demandedd.Increase quantity demanded by a small amount

Difficulty: Medium71.Suppose the income elasticity for transportation is 1.8. Which of the following is an incorrect statement?a.Transportation is a normal goodb.Expenditures on transportation grow more rapidly than income growsC.Expenditures on transportation will fall less rapidly than income fallsd.Whenever the income increases by 1%, the expenditure on transportation increases by 1.8%

Difficulty: Medium72.Non-fed ground beef is an inferior good. In economic booms, grocery managers shoulda.Increase their orders of non-fed ground beefB.Reduce their orders of non-fed ground beefc.Not change their orders of non-fed ground beefd.Neither increase, reduce or not change their orders for non-fed ground beef

Difficulty: Easy73.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 isA.-2.5b.4.0c.-2.5%d.4.0%

Difficulty: Medium74.The demand for good X has been estimated to be lnQXd = 100 - 2.5 lnPX + 4 lnPY + lnM. The cross price elasticity of demand between goods X and Y isa.-2.5B.4.0c.-2.5%d.4.0%

Difficulty: Medium75.The demand for good X has been estimated to be lnQXd = 100 - 2.5 lnPX + 4 lnPY + lnM. The income elasticity of good X isa.4.0B.1.0c.2.0d.-2.5

Difficulty: Medium76.The demand for good X has been estimated to be lnQXd = 0 - 2.5 lnPX + 4 lnPY + lnM. The advertising elasticity of good X isa.4.0b.1.0C.0.0d.-2.5

Difficulty: Hard77.The greater the standard error of an estimated coefficient:a.The greater the t-value of the estimated coefficientB.The lower the t-value of the estimated coefficientc.The greater the R-squared.The greater the adjusted R-square

Difficulty: Easy78.For a given set of data and regression equation, the greater the R-squarea.The greater the t-valueb.The lower the t-valueC.The greater adjusted R-squared.The greater the F-statistic

Difficulty: Hard79.The lower the standard error,a.The less confident the manager can be that the parameter estimates reflect the true valuesB.The more confident the manager can be that the parameter estimates reflect the true valuesc.The more precisely the parameter estimates the true valuesd.The less precisely the parameter estimates the true values

Difficulty: Medium80.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 t-statistic isa.Less than 1b.Less than 2c.Greater than 1D.Greater than 2

Difficulty: Medium81.When the own price elasticity of good X is -3.5 then total revenue can be increased bya.Increasing the priceb.Decreasing the quantity suppliedC.Decreasing the priced.Neither increase price, decrease price nor decrease quantity supplied

Difficulty: Medium82.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 inelasticb.The demand curve for sugar is upward slopingc.The quantity demanded of sugar increasedd.The demand curve for sugar is upward sloping and the quantity demanded of sugar increased

Difficulty: Medium83.Which of the following statements is incorrect?a.If a firm decreases the price of its product, its total revenue will decreaseb.The own price elasticity of demand is constant at all points along a linear demand curvec.As the price of X falls and we move down an individual's demand curve for X, the money income of the individual also changesD.None of the statements associated with this question are correct

Difficulty: Easy84.The demand for which of the following commodities is likely to be more inelastic?a.Soft drinksB.Beveragesc.Cola drinksd.Pepsi Cola

Difficulty: Medium85.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 oneb.Less than onec.OneD.Zero

Difficulty: Hard86.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 toA.Decreaseb.Increasec.Remain constantd.Either increase or remain constant, depending upon the size of the price increase

Difficulty: Medium87.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 own-price elasticity of demand for movie tickets.a.-0.29b.-0.32c.-0.39D.-0.41

Difficulty: Medium88.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 ticketsb.Movies are normal goodsC.Movies are complements for VCR tapesd.The advertising elasticity of demand for movie tickets is -0.33

Difficulty: Hard89.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 inelasticb.The demand curve for sugar is upward slopingc.The quantity demanded of sugar increasedD.None of the statements associated with this question are correct

Difficulty: Medium90.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 elasticityb.An economic downturn will increase demand for Xc.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: Medium91.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: Medium92.The short run response of quantity demanded to a change in price is usually:a.The same as the long run responseB.Less than the long run responsec.Greater than the long run responsed.None of the statements associated with this question are correct

Difficulty: Medium93.The cross-price advertising of demand for books and magazines is -2.0. If the price of magazines decreases by 10 percent, the quantity demanded of books willa.Fall by 2.0 percentb.Rise by 2.0 percentc.Fall by 20 percentD.Rise by 20 percent

Difficulty: Medium94.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 isa.8b.2C.2/3d.1/8

Difficulty: Easy95.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 goodsb.The demand for video recorders is inelasticc.Video recorders are normal goods and the demand for video recorders is inelasticD.Video recorders are normal goods and video recorder film is a complement for video recorders

Difficulty: Medium96.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 area.3 and 2b.2 and 1c.3 and 1D.None of the statements associated with this question are correct

Difficulty: Medium97.The cross-price 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 willa.Fall by 3.5 percentb.Rise by 3.5 percentC.Fall by 35 percentd.Rise by 35 percent

Difficulty: Medium98.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 thata.The demand for sugar is elasticb.The demand curve for sugar is upward slopingc.Sugar is a Giffen goodD.None of the statements associated with this question are correct

Difficulty: Hard99.The demand for which of the following commodities is likely to be more price inelastic?A.Foodb.Hamburgersc.Big Mac'sd.Sandwiches

Difficulty: Easy100.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 isa.8b.2C.2/3d.1/8

Difficulty: Medium101.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 toA.Decreaseb.Increasec.Remain constantd.Either increase or remain constant depending upon the size of the price decrease

Difficulty: Medium102.Suppose the demand for a product is QXd = 12 - 3 lnPX then product X isa.Inelasticb.Unitary elasticC.Elasticd.Cannot be determined without more information

Difficulty: Easy103.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.-0.3b.-0.4c.-0.5D.-0.6

Difficulty: Medium104.The own-price 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: Medium105.If quantity demanded for sneakers falls by 6% when price increases 20% we know that the absolute value of the own-price elasticity of sneakers isA.0.3b.0.7c.2.3d.3.3

Difficulty: Easy106.If the cross-price elasticity between ketchup and hamburgers is -2.5, a 2% increase in the price of ketchup will lead to aa.5% drop in quantity demanded of ketchupB.5% drop in demanded of hamburgersc.5% increase in quantity demanded of ketchupd.5% increase in demanded of hamburgers

Difficulty: Medium107.If the income elasticity for lobster is.6, a 25% increase in income will lead to aa.6% drop in demand for lobsterb.2.4% increase in demand for lobsterC.15% increase in demand for lobsterd.42% increase in demand for lobster

Difficulty: Medium108.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: Medium109.The statistical analysis of economic phenomenon is defined as:a.Standard errorb.Confidence intervalsc.The t-statisticD.Econometrics

Difficulty: Easy110.Which of the following provides a measure of the overall fit of a regression?a.T-statisticB.F-statisticc.P-valued.The t-statistic and the p-value

Difficulty: Easy111.As a general rule-of-thumb, 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 isa.Greater than zerob.Greater than or equal to oneC.Greater than or equal to twod.None of the statements associated with this question are correct

Difficulty: Easy112.If the own price elasticity of demand is infinite in absolute value, thenA.Demand is perfectly elasticb.The demand curve is verticalc.Consumers do not respond at all to changes in priced.The demand curve is vertical and consumers do not respond at all to changes in price

Difficulty: Easy113.When a demand curve is linear,a.Demand is elastic at low pricesB.Demand is inelastic at low pricesc.Demand is unitary elastic at low pricesd.The elasticity is constant at all prices

Difficulty: Hard114.The demand for Cinnamon Toast Crunch brand cereal isa.Equally elastic to the demand for cereal in generalb.Less elastic than the demand for cereal in generalC.More elastic than the demand for cereal in generald.None of the statements associated with this question are correct

Difficulty: Medium115.Which of the following is a correct statement about the own-price elasticity of demand?a.Demand tends to be more inelastic in the short-term than in the long-termb.Demand tends to be more elastic as more substitutes are availablec.Demand tends to be more inelastic for goods that comprise a smaller share of a consumer's budgetD.All of the statements are correct

Difficulty: Easy116.When marginal revenue is zero, demand will bea.Elasticb.InelasticC.Unit elasticd.There is not sufficient information to classify the elasticity of demand

Difficulty: Easy117.When marginal revenue is zero, total revenuea.Will increase when price increasesB.Is maximizedc.Will decrease when price decreasesd.Will decrease as quantity decreases

Difficulty: Medium118.When marginal revenue is positive, demand isA.Elasticb.Inelasticc.Unit elasticd.There is not sufficient information to classify the elasticity of demand

Difficulty: Easy119.When marginal revenue is negative, demand isa.ElasticB.Inelasticc.Unit elasticd.There is not sufficient information to classify the elasticity of demand

Difficulty: Easy120.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 thata.Demand is inelasticB.Marginal revenue is $2c.Marginal revenue is $50d.Demand is unit elastic

Difficulty: Medium121.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 isa.-$5B.$45c.-$45d.$5

Difficulty: Medium122.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 isA.-1b.1c.2d.Cannot be determined from the information contained in the question

Difficulty: Hard123.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 isa.-2b.2c.-0.50D.Cannot be determined from the information contained in the question

Difficulty: Hard124.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 cross-price elasticity of demand between Y and X is 2.0 then a 2 percent price decrease willA.Increase total revenues from X and Y by $520b.Decrease total revenues from X and Y by $520c.Leave total revenues from X and Y unchangedd.Decrease total revenues for X and Y by $600

Difficulty: Medium125.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 cross-price elasticity of demand between Y and X is 1.5 then a 4 percent price increase willA.Increase total revenues from X and Y by $800b.Increase total revenues from X and Y by $8,000c.Decrease total revenues from X and Y by $400d.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 own-price 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 over-the-counter drugs. Another explanation is that surgical procedures are usually needed immediately, while office visits can often wait.

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.

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. ThenAn 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.

131.The cross-price 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 cheeseb. Chessec. 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 cerealb. A 4 percent increase in incomec. 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.

134.Suppose you are the manager of a home-building 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.

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.

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.

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 advertisingb. 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, soThe elasticity changes from -0.203 to -0.202 as Py changes from $40 to $50.

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 cross-price elasticity of demand between goods X and Y at the given pricesb. 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.

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.

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 log-liner 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.

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