Chapter 5

Practice Quiz
Price Elasticity of
Demand and Supply
1. If an increase in bus fares in Charlotte, North Carolina reduces total revenue of the
public transit system, this is evidence that demand is
a. price elastic.
b. price inelastic.
c. unitary elastic.
d. perfectly elastic.
ANS:
a. When price increases and the total revenue decreases, by definition, this represents an
elastic demand curve. The revenue lost from selling fewer units is not offset by the
revenue gained by charging a higher price.
2. Which of the following is the result of an increase in total revenue?
a. Price increases when demand is elastic.
b. Price decreases when demand is elastic.
c. Price increases when demand is unitary elastic.
d. Price decreases when demand is inelastic.
ANS:
b. When price decreases and the total revenue increases, the revenue gained by the
increase in sales more than offsets the revenue lost from the lower price. By definition,
this represents an elastic demand curve.
3. You are on a committee that is considering ways to raise money for your citys
symphony program. You would recommend increasing the price of symphony tickets
only if you thought the demand curve for these tickets was
a. inelastic.
b. elastic.
c. unitary elastic.
d. perfectly elastic.
ANS:
a. When the demand curve is inelastic, the revenue gained from the higher price more
than offsets the revenue lost from the decline in sales.

4. The price elasticity of demand for a horizontal demand curve is

a. perfectly elastic.
b. perfectly inelastic.
c. unitary elastic.
d. inelastic.
e. elastic.
ANS:
a. A perfectly elastic demand curve exists when any increase in price leads to zero sales.
The only curve that would illustrate this would be a horizontal line at the beginning price.
5. Suppose the quantity of steak purchased by the Jones family is 110 pounds per year
when the price is $2.10 per pound and 90 pounds per year when the price is $3.90 per
pound. The price elasticity of demand coefficient for this family is
a. 0.33.
b. 0.50.
c. 1.00.
d. 2.00.
ANS:
a. (110-90)/(110+90=20)/200=1/10 divided by 2.10- 3.90/2.10+3.90=1.80/6.00=Elasticity
coefficient =1/10x6.00/1.80=0.33
6. If a 5 percent reduction in the price of a good produces a 3 percent increase in the
quantity demanded, the price elasticity of demand over this range of the demand curve is
a. elastic.
b. perfectly elastic.
c. unitary elastic.
d. inelastic.
e. perfectly inelastic.
ANS:
d. Since the percentage change in quantity demanded is less than the percentage change
in price, this range is defined inelastic.

7. A manufacturer of Beanie Babies hires an economist to study the price elasticity of

demand for this product. The economist estimates that the price elasticity of demand
coefficient for a range of prices close to the selling price is greater than 1. The
relationship between changes in price and quantity demanded for this segment of the
demand curve is
a. elastic.
b. inelastic.
c. perfectly elastic.
d. perfectly inelastic.
e. unitary elastic.
ANS:
a. Elasticity > 1 = elastic demand
8. A downward-sloping straight line demand curve will have a
a. higher price elasticity of demand coefficient along the top of the demand curve.
b. lower price elasticity coefficient along the top of the demand curve.
c. constant price elasticity of demand coefficient throughout the length of the demand
curve.
d. positive slope.
ANS:
a. The quantity demanded by consumers is more sensitive to a price change at higher
prices than at lower prices.
9. The price elasticity of demand coefficient for a good will be lower
a. if there are few or no substitutes available.
b. if a small portion of the budget will be spent on the good.
c. in the short run than in the long run.
d. if all of the above are true.
ANS:
d. A low elasticity of demand means that there is a low sensitivity to a change in price.
When the good has few substitutes, or the purchase represents a small portion of ones
budget, or they do not have much time to adjust to the price change, price elasticity of
demand is inelastic.

10. The income elasticity of demand for shoes is estimated to be 1.50. We can conclude
that shoes
a. have a relatively steep demand curve.
b. have a relatively flat demand curve.
c. are a normal good.
d. are an inferior good.
ANS:
c. If the income elasticity coefficient is a positive number, then the good or service is a
normal good.
11. To determine whether two goods are substitutes or complements, an economist would
estimate the
a. price elasticity of demand.
b. income elasticity of demand.
c. cross-elasticity of demand.
d. price elasticity of supply.
ANS:
c. Cross-elasticity of demand shows what will happen to the demand for one good if the
price of a complementary good, or a good that is a substitute, changes.
12. If the government wanted to raise tax revenue and shift most of the tax burden to the
sellers, it would impose a tax on a good with a
a. steep (inelastic) demand curve and a steep (inelastic) supply curve.
b. steep (inelastic) demand curve and a flat (elastic) supply curve.
c. flat (perfectly elastic) demand curve and a steep (inelastic) supply curve.
d. flat (perfectly elastic) demand curve and a flat (elastic) supply curve.
ANS:
c. An elastic demand curve would mean that a leftward shift in the supply curve would
lead to a big decrease in quantity demanded and little change in price, so the businesses
would lose total revenue.

13. As shown in Exhibit 11, assume the government places a $1 per pack sales tax on
cigarettes. The percentage of the burden of taxation paid by consumers of a pack of
cigarettes is
a. zero.
b. 25 percent.
c. 50 percent.
d. 100 percent.
ANS:
c. Since the result of the $1 per pack tax is an increase of $0.50 per pack in the
equilibrium price paid by consumers, 50 percent of the taxation burden is paid by
consumers.
14. As shown in Exhibit 11, assume the government places a $1 per pack sales tax on
cigarettes. The percentage of the burden of taxation paid by tobacco sellers is
a. zero.
b. 50 percent.
c. 75 percent.
d. 100 percent.
ANS:
b. Since the result of the $1 per pack tax is a decrease of $0.50 per pack in the revenue
earned by sellers, 50 percent of the taxation burden is paid by tobacco sellers.

15. As shown in Exhibit 11, the $1 per pack sales tax on cigarettes raises tax revenue per
day totaling
a. $5 million.
b. $6 million.
c. $10 million.
d. $15 million.
ANS:
b. The tax revenue per day equals the $1 tax per pack times the 6 million packs sold at the
new $2.50 after-tax equilibrium.