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1. Which of the following is not characteristic of the demand for a commodity that is elastic?
a. The relative change in quantity demanded is greater than the relative in price
b. Buyers are relatively sensitive to price changes
c. Total revenue declines if price is increased
d. The elasticity coefficient is less than one
2. Suppose the price elasticity of demand for bread is 0.20 if the bread falls by 10 percent, the quantity demanded will increase by:
a. 2 percent and total expenditures on bread will rise
b. 2 percent and total expenditures on bread will fall
c. 20 percent and total expenditures on bread will fall
d. 20 percent and total expenditures on bread will rise
3. If a consumer is equilibrium, an increase in money income will:
a. Move him to a new equilibrium on a lower indifference curve
b. Make his indifferent curves steeper, but will not alter the equilibrium position
c. Have no effect on the equilibrium position because product prices have not change
d. Move him a new equilibrium on a high indifferent curve
4. The larger the coefficient of price elasticity of demand for a product, the:
a. Larger the resulting price change for an increase in supply
b. More rapid the rate at which the marginal utility of that product diminishes
c. Smaller the resulting price change for an increase in supply
5. A manufactures of frozen pizzas found that total revenue decreased when price was lowed from $5to $4. It was also found that total revenue decreased when price was raised from $5 to $6. Thus,
a. The demand for pizza is elastic above $5 and inelastic below $5
b. The demand for pizza is elastic both above and below $5
c. The demand for pizza is inelastic above $5 and elastic below$5
d. $5 is not the equilibrium price of pizza
6. The elasticity of demand for a product is likely to be greater
a. if the product is necessity, rather than a luxury
b. the greater the amount good of time over which buyers adjust to a price change
c. The smaller the proportion of one
Explanation / Answer
1)d. The elasticity coefficient is less than one
reason : for commodity that is elastic in demand elasticity coefficient is >1
2)a. 2 percent and total expenditures on bread will rise
Reason : as quantity change = elasticity*price change = 0.2*105 =2% and d(expenditure)/dQ = Q*(1-e). So as e< 1. expenditure will rise with increase in quantity
3) d. Move him a new equilibrium on a high indifferent curve
Reason : increae in income shifts budget curve upwards making tangent to higher indifference curve
4)a. Larger the resulting price change for an increase in supply
reason : As leaticity indicates price sensitivity to qauntity change. So if elasticity is more,price change is more
5)b. The demand for pizza is elastic both above and below $5
reason : As d(revenue)/dQ = Q*(1-e). So if e is greater than 1 (i.e is elastic) then rvenue decreases. So both below and above $5, it iselastic
6)b. the greater the amount good of time over which buyers adjust to a price change
reason : if the adjustment time is more, then greater the buyers will react. So elasticity will be >q
7)d. More of X and less of Y
reason :as marginal rate of substitution = (MUx/Px)/(MUy/Py). So as it is >1 in this case. we have to substitute more of X for Y
8)b. Equilibrium quantity but equilibrium price will be unchanged
reason : As perfectly elastic indicates hotizantal supply curve , hence price will remain unchange, only quantity changes
9)b. Greater their substitutability
Reason : as cross elasticity measures strenth of substitutability. if it is more thenGreater their substitutability
10)d. The more elastic the supply curve.
reason : As leaticity indicates price sensitivity to qauntity change. So if elasticity is more,price change is more
11) c. Surplus will be greater the more elastic the supply.
reason : at price above equilibrium surplus will be there and it incraeases with increase in elasticity
12)a. Negative and therefore X is an inferior good.
Reason : As with increase in income , quantity decraesed. So elasticity is neagtive. if income elaticity is negative , then it is inferior good
13)c. It can be concluded that the supply of the product is inelastic.
Reason: As d(revenue)/dQ = Q*(1-e). So if e is less than 1 (i.e is inelastic) then rvenue increases
14)b. Greater the elasticity of both demand and supply.
reason : if elastcity is greater then shortage will be graeter as both curves becomes less steeper
15)d. They all help explain the down sloping demand curve
reason : Demand curve is derived from indifference curve analyis using diminishing marginal utility principle. hence They all help explain the down sloping demand curve
16)d. Consumer
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