Review Questions (Chapter 5) for Econ222

1.	A good will tend to have an inelastic demand if: a. the good has many close substitutes. b. the good is a luxury. c. the market is defined very broadly. d. the time horizon is long.

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2.	A perfectly elastic demand is represented graphically by a: a. relatively steep demand curve. b. relatively flat demand curve. c. vertical demand curve. d. horizontal demand curve.

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3.	What effect will an increase in the price have on Total Revenue, if demand is elastic? a. Total Revenue will increase. b. Total Revenue will decrease. c. Total Revenue will first decrease and then increase. d. Total Revenue will remain unchanged.

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4.	The price elasticity of demand tends to be more elastic: a. at points further up and to the left along the demand curve. b. at points further down and to the right along the demand curve. c. when the demand curve becomes steeper. d. when the demand curve is vertical.

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5.

Suppose that General Cars increases the price of its Cadiclap model from $13,500 to $16,500. As a result of this, the quantity demanded of the Cadiclap model decreases from 600,000 to 400,000 per year. Find the price elasticity of demand of the Cadiclap using the Mid-Point method. a. -3.0 b. -0.5 c. -2.0 d. -0.3

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6.	If a firm needs to increase its Total Revenue, the firm should ________ the price, if the demand for its product is ________. a. drop, inelastic b. raise, elastic c. drop, elastic d. drop, unit elastic

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7.	Suppose that consumers' incomes rise by 3%, and that this causes the quantity demanded for a good to increase by 4.5%. What is the income elasticity of demand? a. 1.50 b. 0.67 c. -1.50 d. -0.67

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8.	Suppose that a good has an income elasticity of demand of -2.0. This means that the good is: a. normal. b. inferior. c. a substitute. d. a complement.

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9.	If two goods have a cross-price elasticity of demand of -0.8. This means that these goods are: a. normal. b. inferior. c. substitutes. d. complements.

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10.	The price of good A increases from $4.50 to $5.50. This causes the quantity demanded of good B to increase from 900 to 1100 units per month. Find the cross price elasticity of demand using the Mid-Point method. a. -1.0 b. +2.0 c. +1.0 d. -2.0

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