EABD - chapter 3

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. decrease.
b. increase.
c. remain constant.
d. either increase or remain constant, depending upon the size of the price increase.

• A

• B

• C

• D

2. 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 using the arc formula (mid-point method)?
a. 0.57
b. 1.2
c. 0.02
d. 1.24

• A

• B

• C

• D

3. We would expect the own price elasticity of demand for food to be:
a. less elastic than the demand for cereal.
b. more elastic than the demand for cereal.
c. the same as that for soap.
d. perfectly inelastic.

• A

• B

• C

• D

4. 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. 1.12
b. 0.38
c. 1.92
d. 0.52

• A

• B

• C

• D

5. 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 goods.
b. video recorder film is a substitute for video recorders.
c. the demand for video recorders is inelastic.
d. the demand for video recorders is neither inferior nor inelastic, and video recorder
film is not a substitute for video recorders.

• A

• B

• C

• D

6. Suppose the own price elasticity of demand for good X is -0.5, and the price of good X
increases by 10 percent. We would expect the quantity demanded of good X to:
a. increase by 5 percent.
b. increase by 20 percent.
c. decrease by 5 percent.
d. decrease by 20 percent.

• A

• B

• C

• D

7. 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 to:
a. decrease.
b. increase.

c. remain constant.
d. either increase or remain constant, depending upon the size of the price decrease.

• A

• B

• C

• D

8. 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 is:
a. -$5.
b. $45.
c. -$45.
d. $5.

• A

• B

• C

• D

9. Suppose the own price elasticity of demand for good X is -0.25, and the quantity of good
X increases by 5 percent. What would you expect to happen to the total expenditures on
good X?
a. Increase
b. Decrease
c. Remain unchanged
d. Neither increase, decrease nor remain unchanged

• A

• B

• C

• D