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163. Suppose good X has a negative income elasticity of demand. This implies that good X is

a. a normal good. b. a necessity.

c. an inferior good. d. a luxury. ANS: C PTS: 1 DIF: 1 REF: 5-1 TOP: Income elasticity of demand MSC: Interpretive

164. For which of the following types of goods would the income elasticity of demand be positive and relatively large?

a. all inferior goods b. all normal goods

c. goods for which there are many good complements d. luxuries ANS: D PTS: 1 DIF: 2 REF: 5-1 TOP: Income elasticity of demand MSC: Interpretive

165. Assume that a 4 percent increase in income results in a 2 percent increase in the quantity demanded of a good. The

income elasticity of demand for the good is

a. negative and therefore the good is an inferior good. b. negative and therefore the good is a normal good. c. positive and therefore the good is a normal good. d. positive and therefore the good is an inferior good. ANS: C PTS: 1 DIF: 2 REF: 5-1 TOP: Income elasticity of demand | Normal goods MSC: Applicative 166. Assume that a 4 percent decrease in income results in a 6 percent increase in the quantity demanded of a good. The

income elasticity of demand for the good is

a. negative and therefore the good is an inferior good. b. negative and therefore the good is a normal good. c. positive and therefore the good is an inferior good. d. positive and therefore the good is a normal good. ANS: A PTS: 1 DIF: 2 REF: 5-1 TOP: Income elasticity of demand | Inferior goods MSC: Applicative 167. Muriel's income elasticity of demand for football tickets is 1.50. All else equal, this means that if her income

increases by 20 percent, she will buy a. 150 percent more football tickets. b. 50 percent more football tickets. c. 30 percent more football tickets. d. 20 percent more football tickets. ANS: C PTS: 1 DIF: 2 REF: 5-1 TOP: Income elasticity of demand MSC: Applicative

168. When her income increased from $10,000 to $20,000, Heather's consumption of macaroni decreased from 10 pounds

to 5 pounds and her consumption of soy-burgers increased from 2 pounds to 4 pounds. We can conclude that for Heather,

a. macaroni and soy-burgers are both normal goods with income elasticities equal to 1.

b. macaroni is an inferior good and soy-burgers are normal goods; both have income elasticities of 1.

c. macaroni is an inferior good with an income elasticity of -1 and soy-burgers are normal goods with an income

elasticity of 1.

d. macaroni and soy-burgers are both inferior goods with income elasticities equal to -1. ANS: C PTS: 1 DIF: 3 REF: 5-1 TOP: Income elasticity of demand | Normal goods | Inferior goods MSC: Applicative 169. Which of the following should be held constant when calculating an income elasticity of demand?

a. the quantity of the good demanded b. the price of the good c. income

d. All of the above should be held constant. ANS: B PTS: 1 DIF: 2 REF: 5-1 TOP: Income elasticity of demand MSC: Interpretive

198 ? Chapter 5/Elasticity and Its Applications

170. Which of the following should be held constant when calculating an income elasticity of demand?

a. the price of the good b. prices of related goods c. tastes

d. All of the above should be held constant. ANS: D PTS: 1 DIF: 2 REF: 5-1 TOP: Income elasticity of demand MSC: Interpretive

Table 5-1 Income $30,000 $40,000 Quantity of Good X Purchased 2 6 Quantity of Good Y Purchased 20 10 171. Refer to Table 5-1. Using the midpoint method, what is the income elasticity of demand for good X?

a. -3.5 b. -0.29 c. 0.29 d. 3.5 ANS: D PTS: 1 DIF: 2 REF: 5-1 TOP: Income elasticity of demand MSC: Applicative

172. Refer to Table 5-1. Using the midpoint method, the income elasticity of demand for good Y is

a. 2.33 and good Y is a normal good. b. -2.33 and Y is an inferior good. c. -0.43 and Y is an inferior good.

d. -0.43 and Y is a law-of-demand good. ANS: B PTS: 1 DIF: 2 REF: 5-1 TOP: Income elasticity of demand | Inferior goods MSC: Applicative

173. Cross-price elasticity of demand measures how

a. the price of one good changes in response to a change in the price of another good.

b. the quantity demanded of one good changes in response to a change in the quantity demanded of another good. c. the quantity demanded of one good changes in response to a change in the price of another good. d. strongly normal or inferior a good is. ANS: C PTS: 1 DIF: 2 REF: 5-1 TOP: Cross-price elasticity of demand MSC: Definitional 174. The cross-price elasticity of demand can tell us whether goods are

a. normal or inferior. b. elastic or inelastic. c. luxuries or necessities.

d. complements or substitutes. ANS: D PTS: 1 DIF: 2 REF: 5-1 TOP: Cross-price elasticity of demand MSC: Interpretive

175. If the cross-price elasticity of two goods is negative, then those two goods are

a. necessities. b. complements. c. normal goods. d. inferior goods. ANS: B PTS: 1 DIF: 2 REF: 5-1 TOP: Cross-price elasticity of demand MSC: Interpretive

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176. Last month, sellers of good Y took in $100 in total revenue on sales of 50 units of good Y. This month sellers of good

Y raised their price and took in $120 in total revenue on sales of 40 units of good Y. At the same time, the price of good X stayed the same, but sales of good X increased from 20 units to 40 units. We can conclude that goods X and Y are

a. substitutes, and have a cross-price elasticity of 0.60. b. complements, and have a cross-price elasticity of 0.60. c. substitutes, and have a cross-price elasticity of 1.67. d. complements, and have a cross-price elasticity of 1.67. ANS: C PTS: 1 DIF: 3 REF: 5-1

TOP: Cross-price elasticity of demand | Substitutes MSC: Applicative

177. Suppose the cross-price elasticity of demand between hot dogs and mustard is -2.00. This implies that a 20 percent

increase in the price of hot dogs will cause the quantity of mustard purchased to a. fall by 200 percent. b. fall by 40 percent. c. rise by 200 percent. d. rise by 40 percent. ANS: B PTS: 1 DIF: 2 REF: 5-1 TOP: Cross-price elasticity of demand MSC: Applicative 178. If two goods are substitutes, their cross-price elasticity will be

a. positive. b. negative. c. zero.

d. equal to the difference between the income elasticities of demand for the two goods. ANS: A PTS: 1 DIF: 2 REF: 5-1 TOP: Cross-price elasticity of demand MSC: Interpretive

179. If, for two goods, the cross-price elasticity of demand is 1.25, then

a. the two goods are luxuries. b. the two goods are substitutes.

c. one of the goods is normal and the other good is inferior.

d. the demand for one of the goods conforms to the law of demand and the demand for the other good violates the

law of demand.

ANS: B PTS: 1 DIF: 2 REF: 5-1 TOP: Cross-price elasticity of demand MSC: Interpretive 180. Food and clothing tend to have

a. small income elasticities because consumers, regardless of their incomes, choose to buy relatively constant

quantities of these goods.

b. small income elasticities because consumers buy proportionately more of both goods at higher income levels than

they buy at low income levels.

c. large income elasticities because they are necessities.

d. large income elasticities because they are relatively inexpensive. ANS: A PTS: 1 DIF: 2 REF: 5-1 TOP: Income elasticity of demand MSC: Applicative

181. The income elasticity of demand for caviar tends to be

a. high because caviar is relatively expensive.

b. low because caviar is packaged in small containers.

c. high because buyers generally feel that they can do without it. d. low because it is almost always in short supply. ANS: C PTS: 1 DIF: 2 REF: 5-1 TOP: Income elasticity of demand MSC: Interpretive

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182. Suppose the income elasticity of demand for basketballs is 1.20. A 3 percent increase in the price of basketballs will

result in

a. a 3.6 percent decrease in the quantity of basketballs demanded. b. a 3.6 percent increase in the quantity of basketballs demanded. c. a 4 percent decrease in the number of basketballs demanded. d. None of the above is correct. ANS: D PTS: 1 DIF: 2 REF: 5-1 TOP: Income elasticity of demand MSC: Applicative

183. Get Smart University is contemplating an increase in tuition to enhance revenue. If GSU feels that raising tuition

would enhance revenue, they are a. ignoring the law of demand.

b. assuming that the demand for university education is elastic. c. assuming that the demand for university education is inelastic. d. assuming that the supply of university education is elastic. ANS: C PTS: 1 DIF: 2 REF: 5-1 TOP: Price elasticity of demand MSC: Applicative

184. The price elasticity of supply measures how much

a. the quantity supplied responds to changes in input prices.

b. the quantity supplied responds to changes in the price of the good. c. the price of the good responds to changes in supply. d. sellers respond to changes in technology. ANS: B PTS: 1 DIF: 1 REF: 5-2 TOP: Price elasticity of supply MSC: Definitional 185. The price elasticity of supply measures how responsive

a. sellers are to a change in price.

b. sellers are to a change in buyers' income. c. buyers are to a change in production costs. d. equilibrium price is to a change in supply. ANS: A PTS: 1 DIF: 1 REF: 5-2 TOP: Price elasticity of supply MSC: Definitional

186. If the price elasticity of supply is 1.5 and a price increase led to a 1.8% increase in quantity supplied, then the price

increase amounted to a. 0.67%. b. 0.83%. c. 1.20%. d. 2.70%. ANS: C PTS: 1 DIF: 2 REF: 5-2 TOP: Price elasticity of supply MSC: Applicative 187. On a certain supply curve, one point is (quantity supplied = 200, price = $4.00) and another point is (quantity

supplied = 250, price = $4.50). Using the midpoint method, the price elasticity of supply is about a. 0.22. b. 0.53. c. 1.89. d. 2.22. ANS: C PTS: 1 DIF: 1 REF: 5-2 TOP: Price elasticity of supply MSC: Definitional 188. A key determinant of the price elasticity of supply is

a. the ability of sellers to change the price of the good they produce. b. the ability of sellers to change the amount of the good they produce. c. how responsive buyers are to changes in sellers' prices. d. the slope of the demand curve. ANS: B PTS: 1 DIF: 2 REF: 5-2 TOP: Price elasticity of supply MSC: Interpretive