finally

Chapter 5


1. In general, elasticity is a measure of
a. the extent to which advances in technology are adopted by producers.
b. the extent to which a market is competitive.
c. how fast the price of a good responds to a shift of the supply curve or demand curve.
d. how much buyers and sellers respond to changes in market conditions.
ANS: D PTS: 1 DIF: 1 REF: 5-0
TOP: Elasticity MSC: Definitional
2. When studying how some event or policy affects a market, elasticity provides information on the
a. direction of the effect on the market.
b. magnitude of the effect on the market.
c. speed of adjustment of the market in response to the event or policy.
d. number of market participants who are directly affected by the event or policy.
ANS: B PTS: 1 DIF: 2 REF: 5-0
TOP: Elasticity MSC: Interpretive
3. How does the concept of elasticity allow us to improve upon our understanding of supply and demand?
a. Elasticity allows us to analyze supply and demand with greater precision than would be the case in the absence of the elasticity concept.
b. Elasticity provides us with a better rationale for statements such as “an increase in x will lead to a decrease in y” than we would have in the absence of the elasticity concept.
c. Without elasticity, we would not be able to address the direction in which price is likely to move in response to a surplus or a shortage.
d. Without elasticity, it is very difficult to assess the degree of competition within a market.
ANS: A PTS: 1 DIF: 2 REF: 5-0
TOP: Elasticity MSC: Interpretive
4. Elasticity improves our understanding of supply and demand by adding
a. measures of equity.
b. measures of efficiency.
c. a quantitative element to our analysis.
d. a qualitative element to our analysis.
ANS: C PTS: 1 DIF: 2 REF: 5-0
TOP: Elasticity MSC: Interpretive
5. The price elasticity of demand measures how much
a. quantity demanded responds to a change in price.
b. quantity demanded responds to a change in income.
c. price responds to a change in demand.
d. demand responds to a change in supply.
ANS: A PTS: 1 DIF: 1 REF: 5-1
TOP: Price elasticity of demand MSC: Definitional
6. The price elasticity of demand measures
a. buyers’ responsiveness to a change in the price of a good.
b. the extent to which demand increases as additional buyers enter the market.
c. how much more of a good consumers will demand when incomes rise.
d. the movement along a supply curve when there is a change in demand.
ANS: A PTS: 1 DIF: 1 REF: 5-1
TOP: Price elasticity of demand MSC: Definitional
7. Demand is said to be elastic if
a. the price of the good responds substantially to changes in demand.
b. demand shifts substantially when income or the expected future price of the good changes.
c. buyers do not respond much to changes in the price of the good.
d. buyers respond substantially to changes in the price of the good.
ANS: D PTS: 1 DIF: 2 REF: 5-1
TOP: Elastic demand MSC: Definitional
8. Demand is said to be inelastic if
a. buyers respond substantially to changes in the price of the good.
b. demand shifts only slightly when the price of the good changes.
c. the quantity demanded changes only slightly when the price of the good changes.
d. the price of the good responds only slightly to changes in demand.
ANS: C PTS: 1 DIF: 2 REF: 5-1
TOP: Inelastic demand MSC: Definitional
9. If demand is inelastic, then
a. buyers do not respond much to a change in price.
b. buyers respond substantially to a change in price, but the response is very slow.
c. buyers do not alter their quantities demanded much in response to advertising, fads, or general changes in tastes.
d. the demand curve is very flat.
ANS: A PTS: 1 DIF: 2 REF: 5-1
TOP: Inelastic demand MSC: Definitional
10. When quantity demanded responds strongly to changes in price, demand is said to be
a. fluid.
b. elastic.
c. dynamic.
d. highly variable.
ANS: B PTS: 1 DIF: 1 REF: 5-1
TOP: Elastic demand MSC: Definitional
11. Which of the following statements about the price elasticity of demand is correct?
a. The price elasticity of demand for a good measures the willingness of buyers of the good to move away from the good as its price increases.
b. Price elasticity of demand reflects the many economic, psychological, and social forces that shape consumer tastes.
c. Other things equal, if good x has close substitutes and good y does not have close substitutes, then the demand for good x will be more elastic than the demand for good y.
d. All of the above are correct.
ANS: D PTS: 1 DIF: 2 REF: 5-1
TOP: Price elasticity of demand MSC: Interpretive
12. For a good that is a necessity,
a. quantity demanded tends to respond substantially to a change in price.
b. demand tends to be inelastic.
c. the law of demand often does not apply.
d. All of the above are correct.
ANS: B PTS: 1 DIF: 2 REF: 5-1
TOP: Price elasticity of demand MSC: Interpretive
13. For a good that is a luxury, demand
a. tends to be inelastic.
b. tends to be elastic.
c. has unit elasticity.
d. cannot be represented by a demand curve in the usual way.
ANS: B PTS: 1 DIF: 2 REF: 5-1
TOP: Price elasticity of demand MSC: Interpretive
14. If a person only occasionally buys a cup of coffee, his demand for coffee is probably
a. represented by a vertical or nearly-vertical demand curve.
b. not easily represented by a demand schedule or demand curve.
c. inelastic.
d. elastic.
ANS: D PTS: 1 DIF: 2 REF: 5-2
TOP: Price elasticity of demand MSC: Interpretive
15. A person who takes a prescription drug to control high cholesterol most likely has a demand for that drug that is
a. inelastic.
b. unit elastic.
c. elastic.
d. highly responsive to changes in income.
ANS: A PTS: 1 DIF: 2 REF: 5-1
TOP: Price elasticity of demand MSC: Interpretive
16. Other things equal, the demand for a good tends to be more inelastic, the
a. fewer the available substitutes.
b. longer the time period considered.
c. more the good is considered a luxury good.
d. more narrowly defined is the market for the good.
ANS: A PTS: 1 DIF: 2 REF: 5-1
TOP: Inelastic demand MSC: Interpretive
17. The demand for Chocolate Chip Cookie Dough ice cream is likely quite elastic because
a. ice cream must be eaten quickly.
b. this particular flavor of ice cream is viewed as a necessity by many ice-cream lovers.
c. the market is broadly defined.
d. other flavors of ice cream are good substitutes for this particular flavor.
ANS: D PTS: 1 DIF: 2 REF: 5-1
TOP: Price elasticity of demand Substitutes MSC: Interpretive
18. The demand for Werthers candy is likely
a. elastic because candy is expensive relative to other snacks.
b. elastic because there are many close substitutes for Werthers.
c. elastic because Werthers are regarded as a necessity by many people.
d. inelastic because it is usually eaten quickly, making the relevant time horizon short.
ANS: B PTS: 1 DIF: 2 REF: 5-1
TOP: Price elasticity of demand MSC: Interpretive
19. There are very few, if any, good substitutes for motor oil. Therefore,
a. the demand for motor oil would tend to be inelastic.
b. the demand for motor oil would tend to be elastic.
c. the demand for motor oil would tend to respond strongly to changes in prices of other goods.
d. the supply of motor oil would tend to respond strongly to changes in people’s tastes for large cars relative to their tastes for small cars.
ANS: A PTS: 1 DIF: 2 REF: 5-1
TOP: Price elasticity of demand MSC: Interpretive
20. Holding all other forces constant, when the price of gasoline rises, the number of gallons of gasoline demanded would fall substantially over a ten-year period because
a. buyers tend to be much less sensitive to a change in price when given more time to react.
b. buyers tend to be much more sensitive to a change in price when given more time to react.
c. buyers will have substantially more income over a ten-year period.
d. the quantity supplied of gasoline increases very little in response to an increase in the price of gasoline.
ANS: B PTS: 1 DIF: 2 REF: 5-1
TOP: Price elasticity of demand MSC: Interpretive
21. A good will have a more inelastic demand,
a. the greater the availability of close substitutes.
b. the broader the definition of the market.
c. the longer the period of time.
d. the more it is regarded as a luxury.
ANS: B PTS: 1 DIF: 2 REF: 5-1
TOP: Price elasticity of demand MSC: Interpretive
22. It is likely that
a. the demand for flat-screen computer monitors is more elastic than the demand for monitors in general.
b. the demand for grandfather clocks is more elastic than the demand for wristwatches.
c. the demand for cardboard is more elastic over a long period of time than over a short period of time.
d. All of the above are correct.
ANS: D PTS: 1 DIF: 2 REF: 5-1
TOP: Price elasticity of demand MSC: Interpretive
23. It is likely that
a. the demand for natural gas is more elastic over a short period of time than over a long period of time.
b. the demand for smoke alarms is more elastic than the demand for Persian rugs.
c. the demand for bourbon whiskey is more elastic than the demand for alcoholic beverages in general.
d. All of the above are correct.
ANS: C PTS: 1 DIF: 2 REF: 5-1
TOP: Price elasticity of demand MSC: Interpretive
24. When the price of bubble gum is $0.50, the quantity demanded is 400 packs per day. When the price falls to $0.40, the quantity demanded increases to 600. Given this information and using the midpoint method, we know that the demand for bubble gum is
a. inelastic.
b. elastic.
c. unit elastic.
d. perfectly inelastic.
ANS: B PTS: 1 DIF: 2 REF: 5-1
TOP: Price elasticity of demand Midpoint method MSC: Applicative
25. Economists compute the price elasticity of demand as the
a. percentage change in price divided by the percentage change in quantity demanded.
b. change in quantity demanded divided by the change in the price.
c. percentage change in quantity demanded divided by the percentage change in price.
d. percentage change in quantity demanded divided by the percentage change in income.
ANS: C PTS: 1 DIF: 2 REF: 5-1
TOP: Price elasticity of demand MSC: Definitional
26. Suppose you calculate the price elasticity of demand for a certain good and you report that the elasticity is 0.8. The fact that the elasticity is a positive number means that
a. when the price of the good increases, the quantity demanded increases in response.
b. demand for the good is elastic.
c. you have dropped the minus sign and reported the absolute value of the elasticity.
d. the good has close substitutes and/or the good is a luxury.
ANS: C PTS: 1 DIF: 2 REF: 5-1
TOP: Price elasticity of demand MSC: Interpretive
27. The midpoint method is used to compute elasticity because it
a. automatically computes a positive number instead of a negative number.
b. results in an elasticity that is the same as the slope of the demand curve.
c. gives the same answer regardless of the direction of change.
d. automatically rounds quantities to the nearest whole unit.
ANS: C PTS: 1 DIF: 2 REF: 5-1
TOP: Price elasticity of demand Midpoint method MSC: Interpretive
28. The main reason for using the midpoint method to calculate an elasticity is that it
a. gives the same answer regardless of whether the price increases or decreases.
b. recognizes that prices are usually increasing, not decreasing.
c. rounds prices to the nearest dollar and quantities to the nearest whole unit.
d. uses fewer numbers than alternative methods.
ANS: A PTS: 1 DIF: 2 REF: 5-1
TOP: Midpoint method MSC: Interpretive
29. Which of the following is not a determinant of the price elasticity of demand for a good?
a. the time horizon
b. the steepness or flatness of the supply curve for the good
c. the definition of the market for the good
d. the availability of substitutes for the good
ANS: B PTS: 1 DIF: 2 REF: 5-1
TOP: Price elasticity of demand MSC: Interpretive
30. The price elasticity of demand for a good measures the willingness of
a. consumers to move away from the good as price rises.
b. consumers to avoid monopolistic markets in favor of competitive markets.
c. firms to produce more of a good as price rises.
d. firms to cater to the tastes of consumers.
ANS: A PTS: 1 DIF: 1 REF: 5-1
TOP: Price elasticity of demand MSC: Interpretive
31. If the quantity demanded of a certain good responds only slightly to a change in the price of the good, then
a. the demand for the good is said to be elastic.
b. the demand for the good is said to be inelastic.
c. the law of demand does not apply to the good.
d. the demand curve for the good shifts only slightly in response to a change in price.
ANS: B PTS: 1 DIF: 1 REF: 5-1
TOP: Inelastic demand MSC: Definitional
32. The greater the price elasticity of demand, the
a. more likely the product is a necessity.
b. smaller the responsiveness of quantity demanded to a change in price.
c. greater the percentage change in price over the percentage change in quantity demanded.
d. greater the responsiveness of quantity demanded to a change in price.
ANS: D PTS: 1 DIF: 2 REF: 5-1
TOP: Price elasticity of demand MSC: Interpretive
33. The value of the price elasticity of demand for a good will be relatively large when
a. there are no good substitutes available for the good.
b. the time period in question is relatively short.
c. the good is a luxury as opposed to a necessity.
d. All of the above are correct.
ANS: C PTS: 1 DIF: 2 REF: 5-1
TOP: Price elasticity of demand MSC: Interpretive
34. Suppose there is a 6 percent increase in the price of good X and a resulting 6 percent decrease in the quantity of X demanded. Price elasticity of demand for X is
a. 0.
b. 1.
c. 6.
d. 36.
ANS: B PTS: 1 DIF: 2 REF: 5-1
TOP: Price elasticity of demand MSC: Applicative
35. Suppose the price of Twinkies decreases from $1.45 to $1.25 and, as a result, the quantity of Twinkies demanded increases from 2,000 to 2,200. Using the midpoint method, the price elasticity of demand for Twinkies in the given price range is
a. 2.00.
b. 1.55.
c. 1.00.
d. 0.64.
ANS: D PTS: 1 DIF: 2 REF: 5-1
TOP: Price elasticity of demand MSC: Applicative
36. If the price elasticity of demand for a good is 4.0, then a 10 percent increase in price results in a
a. 0.4 percent decrease in the quantity demanded.
b. 2.5 percent decrease in the quantity demanded.
c. 4 percent decrease in the quantity demanded.
d. 40 percent decrease in the quantity demanded.
ANS: D PTS: 1 DIF: 2 REF: 5-1
TOP: Price elasticity of demand MSC: Applicative
37. If the price elasticity of demand for a good is 1.65, then a 3 percent decrease in price results in a
a. 0.55 percent increase in the quantity demanded.
b. 1.82 percent increase in the quantity demanded.
c. 4.95 percent increase in the quantity demanded.
d. 5.55 percent increase in the quantity demanded.
ANS: C PTS: 1 DIF: 2 REF: 5-1
TOP: Price elasticity of demand MSC: Applicative
38. If the price elasticity of demand for a good is 0.94, then which of the following events is consistent with a 4 percent decrease in the quantity of the good demanded?
a. a 0.235 percent increase in the price of the good
b. a 2.350 percent increase in the price of the good
c. a 3.760 percent increase in the price of the good
d. a 4.255 percent increase in the price of the good
ANS: D PTS: 1 DIF: 2 REF: 5-1
TOP: Price elasticity of demand MSC: Applicative
39. Using the midpoint method, the price elasticity of demand for a good is computed to be approximately 0.78. Which of the following events is consistent with a 4.68 percent decrease in the quantity of the good demanded?
a. a 3.65 increase in the price of the good
b. a 16.67 percent increase in the price of the good
c. an increase in the price of the good from $48.00 to $50.97
d. an increase in the price of the good from $65.00 to $66.98
ANS: C PTS: 1 DIF: 3 REF: 5-1
TOP: Price elasticity of demand MSC: Applicative
40. Using the midpoint method, the price elasticity of demand for a good is computed to be approximately 1.5. Which of the following events is consistent with a 3.5 percent increase in the price of the good?
a. The quantity of the good demanded decreases from 25,294 to 24,000.
b. The quantity of the good demanded decreases from 50,000 to 48,847.
c. The quantity of the good demanded decreases by 2.33 percent.
d. The quantity of the good demanded decreases by 4.29 percent.
ANS: A PTS: 1 DIF: 3 REF: 5-1
TOP: Price elasticity of demand MSC: Applicative
41. The midpoint method for calculating elasticities is convenient in that it allows us to
a. ignore the percentage change in quantity demanded and instead focus entirely on the percentage change in price.
b. calculate the same value for the elasticity, regardless of whether the price increases or decreases.
c. assume that sellers' total revenue stays constant when the price changes.
d. restrict all elasticity values to between 0 and 1.
ANS: B PTS: 1 DIF: 2 REF: 5-1
TOP: Midpoint method MSC: Interpretive
42. The price elasticity of demand for bread
a. is computed as the percentage change in quantity demanded of bread divided by the percentage change in price of bread.
b. depends, in part, on the availability of close substitutes for bread.
c. reflects the many economic, social, and psychological forces that influence consumers' tastes for bread.
d. All of the above are correct.
ANS: D PTS: 1 DIF: 1 REF: 5-1
TOP: Price elasticity of demand MSC: Interpretive
43. When the price of a good is $5, the quantity demanded is 100 units per month; when the price is $7, the quantity demanded is 80 units per month. Using the midpoint method, the price elasticity of demand is about
a. 0.22.
b. 0.67.
c. 1.33.
d. 1.50.
ANS: B PTS: 1 DIF: 1 REF: 5-1
TOP: Price elasticity of demand MSC: Applicative
44. Consider airfares on flights between New York and Minneapolis. When the airfare is $250, the quantity demanded of tickets is 2,000 per week. When the airfare is $280, the quantity demanded of tickets is 1,700 per week. Using the midpoint method,
a. the price elasticity of demand is about 1.43 and an increase in the airfare will cause airlines' total revenue to decrease.
b. the price elasticity of demand is about 1.43 and an increase in the airfare will cause airlines' total revenue to increase.
c. the price elasticity of demand is about 0.70 and an increase in the airfare will cause airlines' total revenue to decrease.
d. the price elasticity of demand is about 0.70 and an increase in the airfare will cause airlines' total revenue to increase.
ANS: A PTS: 1 DIF: 2 REF: 5-1
TOP: Price elasticity of demand Total revenue MSC: Applicative
45. For a particular good, a 2 percent increase in price causes a 12 percent decrease in quantity demanded. Which of the following statements is most likely applicable to this good?
a. There are no close substitutes for this good.
b. The good is a luxury.
c. The market for the good is broadly defined.
d. The relevant time horizon is short.
ANS: B PTS: 1 DIF: 3 REF: 5-1
TOP: Price elasticity of demand MSC: Analytical
46. For a particular good, a 3 percent increase in price causes a 10 percent decrease in quantity demanded. Which of the following statements is most likely applicable to this good?
a. The relevant time horizon is short.
b. The good is a necessity.
c. The market for the good is broadly defined.
d. There are many close substitutes for this good.
ANS: D PTS: 1 DIF: 3 REF: 5-1
TOP: Price elasticity of demand MSC: Analytical
47. Demand is elastic if elasticity is
a. less than 1.
b. equal to 1.
c. equal to 0.
d. greater than 1.
ANS: D PTS: 1 DIF: 1 REF: 5-1
TOP: Elastic demand MSC: Definitional
48. Demand is inelastic if elasticity is
a. less than 1.
b. equal to 1.
c. greater than 1.
d. equal to 0.
ANS: A PTS: 1 DIF: 1 REF: 5-1
TOP: Inelastic demand MSC: Definitional
49. Demand is said to have unit elasticity if elasticity is
a. less than 1.
b. greater than 1.
c. equal to 1.
d. equal to 0.
ANS: C PTS: 1 DIF: 1 REF: 5-1
TOP: Price elasticity of demand MSC: Definitional
Figure 5-1
50. Refer to Figure 5-1. The section of the demand curve labeled A represents the
a. elastic section of the demand curve.
b. inelastic section of the demand curve.
c. unit elastic section of the demand curve.
d. perfectly elastic section of the demand curve.
ANS: A PTS: 1 DIF: 2 REF: 5-1
TOP: Elastic demand MSC: Interpretive
51. Refer to Figure 5-1. Suppose the point labeled B is the “halfway point” on the demand curve and it corresponds to a price of $5.00. Then, between prices of $4.90 and $5.10,
a. the price elasticity of demand is less than 1.
b. the price elasticity of demand is equal to 1.
c. the price elasticity of demand is greater than 1.
d. any of the above could be correct, depending on the quantities demanded at prices of $4.90 and $5.10.
ANS: B PTS: 1 DIF: 2 REF: 5-1
TOP: Price elasticity of demand MSC: Interpretive
52. Refer to Figure 5-1. The section of the demand curve labeled C represents the
a. elastic section of the demand curve.
b. perfectly elastic section of the demand curve.
c. unit elastic section of the demand curve.
d. inelastic section of the demand curve.
ANS: D PTS: 1 DIF: 2 REF: 5-1
TOP: Inelastic demand MSC: Interpretive
53. Refer to Figure 5-1. Assume the section of the demand curve labeled A corresponds to prices between $8 and $16. Then, when the price changes between $9 and $10,
a. quantity demanded changes proportionately less than the price.
b. quantity demanded changes proportionately more than the price.
c. quantity demanded changes the same amount proportionately as price.
d. the price elasticity of demand is less than 1.
ANS: B PTS: 1 DIF: 2 REF: 5-1
TOP: Elastic demand MSC: Applicative
54. Refer to Figure 5-1. Assume the section of the demand curve labeled C corresponds to prices between $0 and $15. Then, when the price changes between $7 and $9,
a. quantity demanded changes proportionately less than the price.
b. quantity demanded changes proportionately more than the price.
c. quantity demanded changes the same amount proportionately as price.
d. the price elasticity of demand is greater than 1.
ANS: A PTS: 1 DIF: 2 REF: 5-1
TOP: Inelastic demand MSC: Applicative
55. Refer to Figure 5-1. Assume the section of the demand curve labeled A corresponds to prices between $6 and $12. Then, when the price increases from $8 to $10,
a. the percent decrease in the quantity demanded exceeds the percent increase in the price.
b. the percent increase in the price exceeds the percent decrease in the quantity demanded.
c. sellers’ total revenue increases as a result.
d. it is possible that the quantity demanded fell from 550 to 500 as a result.
ANS: A PTS: 1 DIF: 3 REF: 5-1
TOP: Elastic demand MSC: Applicative
56. Refer to Figure 5-1. Assume, for the good in question, two specific points on the demand curve are (Q = 1,000, P = $40) and (Q = 1,500, P = $30). Then which of the following scenarios is possible?
a. Both of these points lie on section C of the demand curve.
b. The vertical intercept of the demand curve is the point (Q = 0, P = $60).
c. The horizontal intercept of the demand curve is the point (Q = 1,800, P = $0).
d. Any of these scenarios is possible.
ANS: B PTS: 1 DIF: 3 REF: 5-1
TOP: Elastic demand MSC: Analytical
57. Refer to Figure 5-1. Assume, for the good in question, two specific points on the demand curve are (Q = 2,000, P = $15) and (Q = 2,400, P = $12). Then which of the following scenarios is possible?
a. Both of these points lie on section C of the demand curve.
b. The vertical intercept of the demand curve is the point (Q = 0, P = $22).
c. The horizontal intercept of the demand curve is the point (Q = 5,000, P = $0).
d. Any of these scenarios is possible.
ANS: A PTS: 1 DIF: 3 REF: 5-1
TOP: Inelastic demand MSC: Analytical
Figure 5-2
58. Refer to Figure 5-2. The price elasticity of demand between point A and point B, using the midpoint method, is
a. 1.
b. 1.5.
c. 2.
d. 2.5.
ANS: D PTS: 1 DIF: 2 REF: 5-1
TOP: Price elasticity of demand MSC: Applicative
59. Refer to Figure 5-2. The elasticity of demand between point B and point C, using the midpoint method, is
a. 0.5.
b. 0.75.
c. 1.0.
d. 1.3.
ANS: B PTS: 1 DIF: 2 REF: 5-1
TOP: Price elasticity of demand MSC: Applicative
60. Refer to Figure 5-2. If the price decreased from $18 to $6,
a. total revenue would increase by $1,200 and demand is elastic between points A and C.
b. total revenue would increase by $800 and demand is elastic between points A and C.
c. total revenue would decrease by $1,200 and demand is inelastic between points A and C.
d. total revenue would decrease by $800 and demand is inelastic between points A and C.
ANS: A PTS: 1 DIF: 2 REF: 5-1
TOP: Price elasticity of demand Total revenue MSC: Applicative
61. Refer to Figure 5-2. Sellers’ total revenue would increase if the price
a. increased from $4 to $6.
b. increased from $16 to $18.
c. decreased from $8 to $6.
d. All of the above are correct.
ANS: A PTS: 1 DIF: 2 REF: 5-1
TOP: Total revenue MSC: Applicative
62. Refer to Figure 5-2. Sellers’ total revenue would increase if the price
a. increased from $6 to $8.
b. decreased from $18 to $16.
c. decreased from $16 to $15.
d. All of the above are correct.
ANS: D PTS: 1 DIF: 2 REF: 5-1
TOP: Total revenue MSC: Applicative
63. Refer to Figure 5-2. Which of the following price changes would result in no change in sellers’ total revenue?
a. The price increases from $6 to $9.
b. The price increases from $9 to $15.
c. The price decreases from $12 to $9.
d. The price decreases from $9 to $5.
ANS: C PTS: 1 DIF: 3 REF: 5-1
TOP: Total revenue MSC: Applicative
64. When the price of kittens was $25 each, the pet shop sold 20 per month. When they raised the price to $35 each, they sold 14 per month. The price elasticity of demand for kittens is about
a. 1.66.
b. 1.06.
c. 0.94.
d. 0.60.
ANS: B PTS: 1 DIF: 2 REF: 5-1
TOP: Price elasticity of demand MSC: Applicative
65. When the local used bookstore prices economics books at $15.00 each, they generally sell 70 books per month. If they lower the price to $7.00, sales increase to 90 books per month. Given this information, we know that the price elasticity of demand for economics books is about
a. 2.91, and an increase in price from $7.00 to $15.00 results in an increase in total revenue.
b. 2.91, and an increase in price from $7.00 to $15.00 results in a decrease in total revenue.
c. 0.34, and an increase in price from $7.00 to $15.00 results in an increase in total revenue.
d. 0.34, and an increase in price from $7.00 to $15.00 results in a decrease in total revenue.
ANS: C PTS: 1 DIF: 2 REF: 5-1
TOP: Price elasticity of demand Total revenue MSC: Applicative
66. Demand is said to be inelastic if the
a. quantity demanded changes proportionately more than price.
b. price changes proportionately more than income.
c. quantity demanded changes proportionately less than price.
d. quantity demanded changes proportionately the same as price.
ANS: C PTS: 1 DIF: 2 REF: 5-1
TOP: Inelastic demand MSC: Definitional
67. Demand is said to be unit elastic if
a. quantity demanded changes by the same percent as the price.
b. quantity demanded changes by a larger percent than the price.
c. the demand curve shifts by the same percentage amount as the price.
d. quantity demanded does not respond to a change in price.
ANS: A PTS: 1 DIF: 2 REF: 5-1
TOP: Price elasticity of demand MSC: Definitional
68. Elasticity of demand is closely related to the slope of the demand curve. The more responsive buyers are to a change in price, the
a. steeper the demand curve will be.
b. flatter the demand curve will be.
c. further to the right the demand curve will sit.
d. closer to the vertical axis the demand curve will sit.
ANS: B PTS: 1 DIF: 2 REF: 5-1
TOP: Price elasticity of demand MSC: Interpretive
69. The flatter the demand curve through a given point, the
a. greater the price elasticity of demand at that point.
b. smaller the price elasticity of demand at that point.
c. closer the price elasticity of demand will be to the slope of the curve.
d. greater the absolute value of the change in total revenue when there is a movement from that point upward and to the left along the demand curve.
ANS: A PTS: 1 DIF: 3 REF: 5-1
TOP: Price elasticity of demand MSC: Analytical
70. A perfectly elastic demand implies that
a. buyers will not respond to any change in price.
b. any rise in price above that represented by the demand curve will result in a quantity demanded of zero.
c. quantity demanded and price change by the same percent as we move along the demand curve.
d. price will rise by an infinite amount when there is a change in quantity demanded.
ANS: B PTS: 1 DIF: 2 REF: 5-1
TOP: Perfectly elastic demand MSC: Interpretive
71. The case of perfectly elastic demand is illustrated by a demand curve that is
a. vertical.
b. horizontal.
c. downward-sloping but relatively steep.
d. downward-sloping but relatively flat.
ANS: B PTS: 1 DIF: 1 REF: 5-1
TOP: Perfectly elastic demand MSC: Interpretive
72. The smaller the price elasticity of demand, the
a. steeper the demand curve will be through a given point.
b. flatter the demand curve will be through a given point.
c. more strongly buyers respond to a change in price between any two prices P1 and P2.
d. larger the decrease in equilibrium price when the supply curve shifts rightward from S1 to S2.
ANS: A PTS: 1 DIF: 3 REF: 5-1
TOP: Price elasticity of demand MSC: Analytical
73. In the case of perfectly inelastic demand,
a. the change in quantity demanded equals the change in price.
b. the percentage change in quantity demanded equals the percentage change in price.
c. infinitely-large changes in quantity demanded result from very small changes in the price.
d. quantity demanded stays the same whenever price changes.
ANS: D PTS: 1 DIF: 2 REF: 5-1
TOP: Perfectly inelastic demand MSC: Interpretive
74. When demand is perfectly inelastic, the demand curve will be
a. negatively sloped, because buyers decrease their purchases when the price rises.
b. vertical, because buyers purchase the same amount as before whenever the price rises or falls.
c. positively sloped, because buyers respond by increasing the market quantity demanded of the good when price rises.
d. positively sloped, because buyers respond by increasing their total expenditure on the good when price rises.
ANS: B PTS: 1 DIF: 2 REF: 5-1
TOP: Perfectly inelastic demand MSC: Interpretive
75. When small changes in price lead to infinite changes in quantity demanded, demand is perfectly
a. elastic and the demand curve will be horizontal.
b. inelastic and the demand curve will be horizontal.
c. elastic and the demand curve will be vertical.
d. inelastic and the demand curve will be vertical.
ANS: A PTS: 1 DIF: 2 REF: 5-1
TOP: Perfectly elastic demand MSC: Interpretive
76. When quantity moves proportionately the same amount as price, demand is
a. elastic and the price elasticity of demand is 1.
b. perfectly elastic and the price elasticity of demand is infinitely large.
c. perfectly inelastic and the price elasticity of demand is 0.
d. unit elastic and the price elasticity of demand is 1.
ANS: D PTS: 1 DIF: 2 REF: 5-1
TOP: Price elasticity of demand MSC: Interpretive
77. When demand is perfectly inelastic, the price elasticity of demand
a. is zero and the demand curve is vertical.
b. is zero and the demand curve is horizontal.
c. approaches infinity and the demand curve is vertical.
d. approaches infinity and the demand curve is horizontal.
ANS: A PTS: 1 DIF: 2 REF: 5-1
TOP: Perfectly inelastic demand MSC: Interpretive
78. A perfectly inelastic demand implies that buyers
a. decrease their purchases when the price rises.
b. purchase the same amount as before when the price rises or falls.
c. increase their purchases only slightly when the price falls.
d. respond substantially to an increase in price.
ANS: B PTS: 1 DIF: 2 REF: 5-1
TOP: Perfectly inelastic demand MSC: Interpretive
79. Suppose demand is perfectly inelastic and the supply of the good in question decreases. As a result,
a. the equilibrium quantity decreases and the equilibrium price is unchanged.
b. the equilibrium price increases and the equilibrium quantity is unchanged.
c. the equilibrium quantity and the equilibrium price both are unchanged.
d. buyers’ total expenditure on the good is unchanged.
ANS: B PTS: 1 DIF: 2 REF: 5-1
TOP: Perfectly inelastic demand Equilibrium price Equilibrium quantity MSC: Applicative
80. Suppose demand is perfectly elastic and the supply of the good in question decreases. As a result,
a. the equilibrium quantity decreases and the equilibrium price is unchanged.
b. the equilibrium price increases and the equilibrium quantity is unchanged.
c. the equilibrium quantity and the equilibrium price both are unchanged.
d. buyers’ total expenditure on the good is unchanged.
ANS: A PTS: 1 DIF: 2 REF: 5-1
TOP: Perfectly elastic demand Equilibrium price Equilibrium quantity MSC: Applicative
81. Alice says that she would buy one banana split a day regardless of the price. If she is telling the truth,
a. Alice's demand for banana splits is perfectly inelastic.
b. Alice's price elasticity of demand for banana splits is 1.
c. Alice's income elasticity of demand for banana splits is 0.
d. None of the above answers is correct.
ANS: A PTS: 1 DIF: 2 REF: 5-1
TOP: Perfectly inelastic demand MSC: Interpretive
82. Jean-Paul says that he will spend exactly 75 cents a day on M&Ms, regardless of the price of M&Ms. Jean-Paul’s demand for M&Ms is
a. perfectly elastic.
b. unit elastic.
c. perfectly inelastic.
d. None of the above answers is correct.
ANS: B PTS: 1 DIF: 2 REF: 5-1
TOP: Price elasticity of demand MSC: Interpretive
83. Which of the following expressions is valid for the price elasticity of demand?
a. Price elasticity of demand =
b. Price elasticity of demand =
c. Price elasticity of demand =
d. Price elasticity of demand =
ANS: B PTS: 1 DIF: 2 REF: 5-1
TOP: Price elasticity of demand MSC: Applicative
84. Which of the following expressions can be used to compute the price elasticity of demand?
a. Price elasticity of demand =
b. Price elasticity of demand =
c. Price elasticity of demand =
d. Price elasticity of demand =
ANS: C PTS: 1 DIF: 3 REF: 5-1
TOP: Price elasticity of demand MSC: Analytical
85. For which of the following goods would demand be most elastic?
a. clothing
b. blue jeans
c. Tommy Hilfiger jeans
d. All three would have the same elasticity of demand since they are all related.
ANS: C PTS: 1 DIF: 2 REF: 5-1
TOP: Price elasticity of demand MSC: Applicative
86. In any market, total revenue is calculated by taking the price of the good and
a. dividing it by the price elasticity of demand.
b. multiplying it by the price elasticity of demand.
c. multiplying it by the quantity of the good.
d. multiplying it by the quantity of the good and then subtracting the costs of production.
ANS: C PTS: 1 DIF: 1 REF: 5-1
TOP: Total revenue MSC: Definitional
87. How does total revenue change as one moves downward and to the right along a linear demand curve?
a. It always increases.
b. It always decreases.
c. It first increases, then decreases.
d. It is unaffected by a movement along the demand curve.
ANS: C PTS: 1 DIF: 3 REF: 5-1
TOP: Total revenue Demand curve MSC: Analytical
88. On a downward-sloping linear demand curve, total revenue reaches its maximum value at the
a. midpoint of the demand curve.
b. lower end of the demand curve.
c. upper end of the demand curve.
d. It is impossible to tell without knowing prices and quantities demanded.
ANS: A PTS: 1 DIF: 3 REF: 5-1
TOP: Total revenue Demand curve MSC: Analytical
89. Suppose the point (Q = 2,000, P = $60) is the midpoint on a certain downward-sloping, linear demand curve. Then
a. an increase in price from $40 to $42 will increase total revenue.
b. a decrease in price from $61 to $59 will leave total revenue unchanged.
c. the maximum value of total revenue is $120,000.
d. All of the above are correct.
ANS: D PTS: 1 DIF: 3 REF: 5-1
TOP: Total revenue Demand curve MSC: Analytical
90. If the price elasticity of demand is 1.5, regardless of which two points on the demand curve are used to compute the elasticity, then
a. demand is perfectly inelastic and the demand curve is vertical.
b. demand is elastic and the demand curve is a straight, downward-sloping line.
c. demand is perfectly elastic and the demand curve is horizontal.
d. demand is elastic and the demand curve is something other than a straight, downward-sloping line.
ANS: D PTS: 1 DIF: 3 REF: 5-1
TOP: Price elasticity of demand MSC: Applicative
Figure 5-3
91. Refer to Figure 5-3. If price falls within the A range of the demand curve we can expect total revenue to
a. increase.
b. decrease.
c. stay the same.
d. This determination cannot be made without further information.
ANS: A PTS: 1 DIF: 2 REF: 5-1
TOP: Total revenue MSC: Applicative
92. Refer to Figure 5-3. If price falls within the C range of the demand curve we can expect total revenue to
a. increase.
b. decrease.
c. stay the same.
d. This determination cannot be made without further information.
ANS: B PTS: 1 DIF: 2 REF: 5-1
TOP: Total revenue MSC: Applicative
93. Refer to Figure 5-3. If price is originally within the C range of the demand curve and then it increases to a value within the A range of the demand curve, we can expect total revenue to
a. increase.
b. decrease.
c. stay the same.
d. This determination cannot be made without further information.
ANS: D PTS: 1 DIF: 2 REF: 5-1
TOP: Total revenue MSC: Applicative
Figure 5-4
94. Refer to Figure 5-4. As price falls from PA to PB, which demand curve represents the most elastic demand?
a. D1
b. D2
c. D3
d. All of the above are equally elastic.
ANS: A PTS: 1 DIF: 2 REF: 5-1
TOP: Price elasticity of demand MSC: Applicative
95. Refer to Figure 5-4. As price falls from PA to PB, we could use the three demand curves to calculate three different values of the price elasticity of demand. Which of the three demand curves would produce the smallest elasticity?
a. D1
b. D2
c. D3
d. All of the above are equally elastic.
ANS: C PTS: 1 DIF: 2 REF: 5-1
TOP: Price elasticity of demand MSC: Applicative
96. When demand is inelastic, a decrease in price will cause
a. an increase in total revenue.
b. a decrease in total revenue.
c. no change in total revenue, but an increase in quantity demanded.
d. no change in total revenue, but a decrease in quantity demanded.
ANS: B PTS: 1 DIF: 2 REF: 5-1
TOP: Inelastic demand Total revenue MSC: Applicative
Figure 5-5
97. Refer to Figure 5-5. When the price is $30, total revenue is
a. $3,000.
b. $5,000.
c. $7,000.
d. $9,000.
ANS: D PTS: 1 DIF: 1 REF: 5-1
TOP: Total revenue MSC: Interpretive
98. Refer to Figure 5-5. When price falls from $50 to $40, it can be inferred that demand between those two prices is
a. inelastic, since total revenue decreases from $8,000 to $5,000.
b. inelastic, since total revenue increases from $5,000 to $8,000.
c. elastic, since total revenue increases from $5,000 to $8,000.
d. unit elastic, since total revenue increases from $5,000 to $8,000.
ANS: C PTS: 1 DIF: 2 REF: 5-1
TOP: Elastic demand Total revenue MSC: Applicative
99. Refer to Figure 5-5. An increase in price from $20 to $30 would
a. increase total revenue by $2,000.
b. decrease total revenue by $2,000.
c. increase total revenue by $1,000.
d. decrease total revenue by $1,000.
ANS: C PTS: 1 DIF: 2 REF: 5-1
TOP: Total revenue MSC: Applicative
100. Refer to Figure 5-5. An increase in price from $30 to $35 would
a. increase total revenue by $250
b. decrease total revenue by $250.
c. increase total revenue by $500.
d. decrease total revenue by $500.
ANS: B PTS: 1 DIF: 2 REF: 5-1
TOP: Total revenue MSC: Applicative
101. An increase in price causes an increase in total revenue when
a. demand is elastic.
b. demand is inelastic.
c. demand is unit elastic.
d. All of the above are possible.
ANS: B PTS: 1 DIF: 2 REF: 5-1
TOP: Inelastic demand Total revenue MSC: Applicative
Figure 5-6
102. Refer to Figure 5-6. If price increases from $10 to $15, total revenue will
a. increase by $20, so demand must be inelastic in this price range.
b. increase by $5, so demand must be inelastic in this price range.
c. decrease by $20, so demand must be elastic in this price range.
d. decrease by $10, so demand must be elastic in this price range.
ANS: A PTS: 1 DIF: 2 REF: 5-1
TOP: Inelastic demand Total revenue MSC: Applicative
103. Refer to Figure 5-6. Suppose this demand curve is a straight, downward-sloping line all the way from the horizontal intercept to the vertical intercept. We choose two prices, P1 and P2, and the corresponding quantities demanded, Q1 and Q2, for the purpose of calculating the price elasticity of demand. Also suppose P2 > P1. In which of the following cases could we possibly find that (i) demand is elastic and (ii) an increase in price from P1 to P2 causes an increase in total revenue?
a. 0 < P1 < P2 < $10.
b. $10 < P1 < P2 < $15.
c. P1 > $15.
d. None of the above is correct.
ANS: D PTS: 1 DIF: 3 REF: 5-1
TOP: Price elasticity of demand Total revenue MSC: Analytical
104. Refer to Figure 5-6. A decrease in price from $15 to $10 leads to
a. a decrease in total revenue of $10, so the price elasticity of demand is greater than 1 in this price range.
b. a decrease in total revenue of $10, so the price elasticity of demand is less than 1 in this price range.
c. a decrease in total revenue of $20, so the price elasticity of demand is less than 1 in this price range.
d. a decrease in total revenue of $20, so demand is elastic in this price range.
ANS: C PTS: 1 DIF: 2 REF: 5-1
TOP: Inelastic demand Total revenue MSC: Applicative
Figure 5-7
105. Refer to Figure 5-7. Total revenue when the price is P1 is represented by the area(s)
a. B + D.
b. A + B.
c. C + D.
d. D.
ANS: A PTS: 1 DIF: 2 REF: 5-1
TOP: Demand curve Total revenue MSC: Applicative
106. Refer to Figure 5-7. Total revenue when the price is P2 is represented by the area(s)
a. B + D.
b. A + B.
c. C + D.
d. D.
ANS: B PTS: 1 DIF: 2 REF: 5-1
TOP: Demand curve Total revenue MSC: Applicative
107. Refer to Figure 5-7. If rectangle D is larger than rectangle A, then
a. demand is elastic between prices P1 and P2.
b. a decrease in price from P2 to P1 will cause an increase in total revenue.
c. the magnitude of the percent change in price between P1 and P2 is smaller than the magnitude of the corresponding percent change in quantity demanded.
d. All of the above are correct.
ANS: D PTS: 1 DIF: 3 REF: 5-1
TOP: Price elasticity of demand Total revenue MSC: Analytical
Figure 5-8. A demand curve is shown on the graph below. On the graph, Q represents quantity demanded and P represents price.

108. Refer to Figure 5-8. The maximum value of total revenue corresponds to a price of
a. $18.
b. $30.
c. $42.
d. $48.
ANS: B PTS: 1 DIF: 2 REF: 5-1
TOP: Total revenue MSC: Applicative
109. Refer to Figure 5-8. Demand is unit elastic between prices of
a. $18 and $24.
b. $24 and $30.
c. $24 and $36.
d. $30 and $36.
ANS: C PTS: 1 DIF: 2 REF: 5-1
TOP: Price elasticity of demand MSC: Applicative
110. Refer to Figure 5-8. Using the midpoint method, between prices of $12 and $18, price elasticity of demand is
a. 0.33.
b. 0.67.
c. 1.33.
d. 1.89.
ANS: A PTS: 1 DIF: 2 REF: 5-1
TOP: Price elasticity of demand MSC: Applicative
111. Refer to Figure 5-8. Using the midpoint method, between prices of $48 and $54, price elasticity of demand is about
a. 0.92.
b. 3.89.
c. 4.33.
d. 5.67.
ANS: D PTS: 1 DIF: 2 REF: 5-1
TOP: Price elasticity of demand MSC: Applicative
112. Refer to Figure 5-8. At a price of $48 per unit, sellers' total revenue amounts to
a. $150.
b. $200.
c. $288.
d. $364.
ANS: C PTS: 1 DIF: 1 REF: 5-1
TOP: Total revenue MSC: Definitional
113. If the demand for donuts is elastic, then a decrease in the price of donuts will
a. increase total revenue of donut sellers.
b. decrease total revenue of donut sellers.
c. not change total revenue of donut sellers.
d. There is not enough information to answer this question.
ANS: A PTS: 1 DIF: 2 REF: 5-1
TOP: Elastic demand Total revenue MSC: Applicative
114. The local pizza restaurant makes such great bread sticks that consumers do not respond much at all to a change in the price. If the owner is only interested in increasing revenue, he should
a. lower the price of the bread sticks.
b. leave the price of the bread sticks alone.
c. raise the price of the bread sticks.
d. reduce costs.
ANS: C PTS: 1 DIF: 2 REF: 5-1
TOP: Inelastic demand Total revenue MSC: Interpretive
115. Eric produces jewelry boxes. If the demand for jewelry boxes is elastic and Eric wants to increase his total revenue, he should
a. increase the price of his jewelry boxes.
b. decrease the price of his jewelry boxes.
c. not change the price of his jewelry boxes.
d. None of the above answers is correct.
ANS: B PTS: 1 DIF: 2 REF: 5-1
TOP: Elastic demand Total revenue MSC: Interpretive
116. When demand is inelastic within a certain price range, then within that price range,
a. an increase in price would increase total revenue because the decrease in quantity demanded is proportionately less than the increase in price.
b. an increase in price would decrease total revenue because the decrease in quantity demanded is proportionately greater than the increase in price.
c. a decrease in price would increase total revenue because the increase in quantity demanded is proportionately smaller than the decrease in price.
d. a decrease in price would not affect total revenue.
ANS: A PTS: 1 DIF: 3 REF: 5-1
TOP: Inelastic demand Total revenue MSC: Applicative
117. When demand is inelastic the price elasticity of demand is
a. less than 1, and price and total revenue will move in the same direction.
b. less than 1, and price and total revenue will move in opposite directions.
c. greater than 1, and price and total revenue will move in the same direction.
d. greater than 1, and price and total revenue will move in opposite directions.
ANS: A PTS: 1 DIF: 2 REF: 5-1
TOP: Inelastic demand Total revenue MSC: Applicative
118. If the price elasticity of demand for tuna is 0.7, then a 1.5% increase in the price of tuna will decrease the quantity demanded of tuna by
a. 1.05% and tuna sellers' total revenue will increase as a result.
b. 1.05% and tuna sellers' total revenue will decrease as a result.
c. 2.14% and tuna sellers' total revenue will increase as a result.
d. 2.14% and tuna sellers' total revenue will decrease as a result.
ANS: A PTS: 1 DIF: 3 REF: 5-1
TOP: Price elasticity of demand Total revenue MSC: Analytical
119. If the price elasticity of demand for aluminum foil is 1.45, then a 2.4% decrease in the price of aluminum foil will increase the quantity demanded of aluminum foil by
a. 1.66% and aluminum foil sellers' total revenue will increase as a result.
b. 1.66% and aluminum foil sellers' total revenue will decrease as a result.
c. 3.48% and aluminum foil sellers' total revenue will increase as a result.
d. 3.48% and aluminum foil sellers' total revenue will decrease as a result.
ANS: C PTS: 1 DIF: 3 REF: 5-1
TOP: Price elasticity of demand Total revenue MSC: Analytical
120. Holding all other forces constant, if raising the price of a good leads to a fall in total revenue, then the demand for the good must be
a. unit elastic.
b. inelastic.
c. elastic.
d. None of the above is correct, since a price increase always leads to an increase in total revenue.
ANS: C PTS: 1 DIF: 2 REF: 5-1
TOP: Elastic demand Total revenue MSC: Applicative
121. If a change in the price of a good results in no change in total revenue, then
a. the demand for the good must be elastic.
b. the demand for the good must be inelastic.
c. the demand for the good must be unit elastic.
d. buyers must not respond very much to a change in price.
ANS: C PTS: 1 DIF: 2 REF: 5-1
TOP: Price elasticity of demand Total revenue MSC: Interpretive
122. When demand is unit elastic, price elasticity of demand
a. equals 1 and total revenue and price move in the same direction.
b. equals 1 and total revenue and price move in opposite directions.
c. equals 1 and total revenue does not change when price changes.
d. equals 0 and total revenue does not change when price changes.
ANS: C PTS: 1 DIF: 2 REF: 5-1
TOP: Price elasticity of demand Total revenue MSC: Interpretive
123. If the demand curve is linear and downward sloping, which of the following statements is not correct?
a. Demand is more elastic on the lower part of the demand curve than on the upper part.
b. Different pairs of points on the demand curve can result in different values of the price elasticity of demand.
c. Different pairs of points on the demand curve cannot result in different values of the slope of the demand curve.
d. Starting from a point on the upper part of the demand curve, an increase in price leads to a decrease in total revenue.
ANS: A PTS: 1 DIF: 3 REF: 5-1
TOP: Price elasticity of demand Total revenue MSC: Analytical
124. For a vertical demand curve,
a. slope is undefined and price elasticity of demand is equal to 0.
b. slope is equal to 0 and price elasticity of demand is undefined.
c. slope and price elasticity of demand both are undefined.
d. slope and price elasticity of demand both are equal to 0.
ANS: A PTS: 1 DIF: 2 REF: 5-1
TOP: Perfectly inelastic demand MSC: Interpretive
125. In which of these instances is demand said to be perfectly inelastic?
a. An increase in price of 2% causes a decrease in quantity demanded of 2%.
b. A decrease in price of 2% causes an increase in quantity demanded of 0%.
c. A decrease in price of 2% causes a decrease in total revenue of 0%.
d. The demand curve is horizontal.
ANS: B PTS: 1 DIF: 2 REF: 5-1
TOP: Perfectly inelastic demand MSC: Interpretive
126. For a horizontal demand curve,
a. slope is undefined and price elasticity of demand is equal to 0.
b. slope is equal to 0 and price elasticity of demand is undefined.
c. slope and price elasticity of demand both are undefined.
d. slope and price elasticity of demand both are equal to 0.
ANS: B PTS: 1 DIF: 2 REF: 5-1
TOP: Perfectly elastic demand MSC: Interpretive
127. As we move downward and to the right along a linear, downward-sloping demand curve,
a. slope and elasticity both remain constant.
b. slope changes but elasticity remains constant.
c. slope and elasticity both change.
d. slope remains constant but elasticity changes.
ANS: D PTS: 1 DIF: 2 REF: 5-1
TOP: Price elasticity of demand MSC: Interpretive
128. When we move upward and to the left along a linear demand curve, price elasticity of demand
a. first becomes smaller, then larger.
b. always becomes larger.
c. always becomes smaller.
d. first becomes larger, then smaller.
ANS: B PTS: 1 DIF: 2 REF: 5-1
TOP: Price elasticity of demand MSC: Interpretive
129. Moving downward and to the right along a linear demand curve, we know that total revenue
a. first increases, then decreases.
b. first decreases, then increases.
c. always increases.
d. always decreases.
ANS: A PTS: 1 DIF: 2 REF: 5-1
TOP: Demand curve Total revenue MSC: Interpretive
130. Total revenue will be at its largest value on a linear demand curve at
a. the top of the curve, where prices are highest.
b. the midpoint of the curve.
c. the low end of the curve, where quantity demanded is highest.
d. None of the above is correct.
ANS: B PTS: 1 DIF: 2 REF: 5-1
TOP: Demand curve Total revenue MSC: Interpretive
131. Total revenue
a. always increases as price increases.
b. increases as price increases, as long as demand is elastic.
c. decreases as price increases, as long as demand is inelastic.
d. remains unchanged as price increases when demand is unit elastic.
ANS: D PTS: 1 DIF: 2 REF: 5-1
TOP: Price elasticity of demand Total revenue MSC: Applicative
132. In which of the following situations will total revenue increase?
a. Price elasticity of demand is 1.2 and the price of the good decreases.
b. Price elasticity of demand is 0.5 and the price of the good increases.
c. Price elasticity of demand is 3.0 and the price of the good decreases.
d. All of the above are correct.
ANS: D PTS: 1 DIF: 2 REF: 5-1
TOP: Price elasticity of demand Total revenue MSC: Analytical
133. Suppose you are in charge of setting prices at a local sandwich shop. The business needs to increase its total revenue and your job is on the line. If the demand for sandwiches is elastic, you
a. should increase the price of sandwiches.
b. should decrease the price of sandwiches.
c. should not change the price of sandwiches.
d. could not determine what to do with price until you determine whether supply is elastic or inelastic.
ANS: B PTS: 1 DIF: 2 REF: 5-1
TOP: Elastic demand Total revenue MSC: Applicative
134. You have just been hired as a business consultant to determine what pricing policy would be appropriate in order to increase the total revenue of a major shoe store. The first step you would take would be to
a. increase the price of every shoe in the store.
b. look for ways to cut costs and increase profit for the store.
c. determine the price elasticity of demand for the store's products.
d. determine the price elasticity of supply for the store’s products.
ANS: C PTS: 1 DIF: 2 REF: 5-1
TOP: Price elasticity of demand Total revenue MSC: Interpretive
135. Harry's Barber Shop increased its total monthly revenue from $1,500 to $1,800 when it raised the price of a haircut from $5 to $9. The price elasticity of demand for Harry's Haircuts is
a. 0.567.
b. 0.700.
c. 1.429.
d. 2.200.
ANS: B PTS: 1 DIF: 3 REF: 5-1
TOP: Price elasticity of demand Total revenue MSC: Applicative
136. Barb's Bakery earned $200 in total revenue last month when it sold 100 loaves of bread. This month it earned $300 in total revenue when it sold 60 loaves of bread. The price elasticity of demand for Barb's bread is
a. 0.27.
b. 0.58.
c. 1.25.
d. 1.71.
ANS: B PTS: 1 DIF: 3 REF: 5-1
TOP: Price elasticity of demand Total revenue MSC: Applicative
137. You are in charge of the local city-owned golf course. You need to increase the revenue generated by the golf course in order to meet expenses. The mayor advises you to increase the price of a round of golf. The city manager recommends reducing the price of a round of golf. You realize that
a. the mayor thinks demand is elastic and the city manager thinks demand is inelastic.
b. both the mayor and the city manager think that demand is elastic.
c. both the mayor and the city manager think that demand is inelastic.
d. the mayor thinks demand is inelastic and the city manager thinks demand is elastic.
ANS: D PTS: 1 DIF: 2 REF: 5-1
TOP: Price elasticity of demand Total revenue MSC: Applicative
138. Suppose that when the price of corn is $2 per bushel, farmers can sell 10 million bushels. When the price of corn is $3 per bushel, farmers can sell 8 million bushels. Which of the following statements is true?
a. The demand for corn is income inelastic, and so an increase in the price of corn will increase the total revenue of corn farmers.
b. The demand for corn is income elastic, and so an increase in the price of corn will increase the total revenue of corn farmers.
c. The demand for corn is price inelastic, and so an increase in the price of corn will increase the total revenue of corn farmers.
d. The demand for corn is price elastic, and so an increase in the price of corn will increase the total revenue of corn farmers.
ANS: C PTS: 1 DIF: 3 REF: 5-1
TOP: Price elasticity of demand Total revenue MSC: Applicative
139. Suppose a producer is able to separate customers into two groups, one having an inelastic demand and the other having an elastic demand. If the producer's objective is to increase total revenue, she should
a. increase the price charged to customers with the elastic demand and decrease the price charged to customers with the inelastic demand.
b. decrease the price charged to customers with the elastic demand and increase the price charged to customers with the inelastic demand.
c. charge the same price to both groups of customers.
d. increase the price for both groups of customers.
ANS: B PTS: 1 DIF: 3 REF: 5-1
TOP: Elastic demand Inelastic demand Total revenue MSC: Analytical
140. Suppose that 50 candy bars are demanded at a particular price. If the price of candy bars rises from that price by 4 percent, the number of candy bars demanded falls to 46. Using the midpoint approach to calculate the price elasticity of demand, it follows that the
a. demand for candy bars in this price range is elastic.
b. demand for candy bars in this price range is inelastic.
c. demand for candy bars in this price range is unit elastic.
d. price elasticity of demand for candy bars in this price range is 0.
ANS: A PTS: 1 DIF: 2 REF: 5-1
TOP: Price elasticity of demand MSC: Applicative
141. Suppose that 50 candy bars are demanded at a particular price. If the price of candy bars rises from that price by 5 percent, the number of candy bars demanded falls to 48. Using the midpoint approach to calculate the price elasticity of demand, it follows that the
a. demand for candy bars in this price range is elastic.
b. price increase will decrease the total revenue of candy bar sellers.
c. price elasticity of demand for candy bars in this price range is about 1.22.
d. price elasticity of demand for candy bars in this price range is about 0.82.
ANS: D PTS: 1 DIF: 3 REF: 5-1
TOP: Price elasticity of demand Total revenue MSC: Applicative
Figure 5-9
142. Refer to Figure 5-9. Between point A and point B,
a. the slope is equal to -1/4 and the price elasticity of demand is equal to 2/3.
b. the slope is equal to -1/4 and the price elasticity of demand is equal to 3/2.
c. the slope is equal to -3/2 and the price elasticity of demand is equal to 1/4.
d. the slope is equal to -2/3 and the price elasticity of demand is equal to 3/2.
ANS: B PTS: 1 DIF: 2 REF: 5-1
TOP: Price elasticity of demand MSC: Applicative
143. Refer to Figure 5-9. Between point A and point B on the graph, demand is
a. perfectly elastic.
b. inelastic.
c. unit elastic.
d. elastic, but not perfectly elastic.
ANS: D PTS: 1 DIF: 2 REF: 5-1
TOP: Elastic demand MSC: Applicative
144. The price elasticity of demand changes as we move along a
a. horizontal demand curve.
b. vertical demand curve.
c. linear, downward-sloping demand curve.
d. All of the above are correct.
ANS: C PTS: 1 DIF: 2 REF: 5-1
TOP: Demand curve Price elasticity of demand MSC: Interpretive
145. The difference between slope and elasticity is that
a. slope is a ratio of two changes and elasticity is a ratio of two percentage changes.
b. slope is a ratio of two percentage changes and elasticity is a ratio of two changes.
c. slope measures changes in quantity demanded more accurately than elasticity.
d. none of the above; there is no difference between slope and elasticity.
ANS: A PTS: 1 DIF: 2 REF: 5-1
TOP: Price elasticity of demand MSC: Interpretive
146. For which of the following goods is demand probably most inelastic?
a. camcorders
b. insulin
c. apples
d. devices that remove cores from apples
ANS: B PTS: 1 DIF: 2 REF: 5-1
TOP: Elastic demand MSC: Interpretive
147. According to a Los Angeles Times article published in May 2005, John Felmy, chief economist at the American Petroleum Institute, asserts that the short-run price elasticity of demand for gasoline is about
a. 0.10.
b. 0.25.
c. 0.50.
d. 1.00.
ANS: A PTS: 1 DIF: 2 REF: 5-1
TOP: Price elasticity of demand MSC: Interpretive
148. According to a Los Angeles Times article published in May 2005, recent estimates indicate that
a. the short-run and long-run price elasticities of demand for gasoline are 0.1 and 0.5, respectively.
b. the short-run and long-run price elasticities of demand for gasoline are 0.1 and 1.0, respectively.
c. the short-run and long-run price elasticities of demand for gasoline are 0.2 and 1.5, respectively.
d. the short-run and long-run price elasticities of demand for gasoline are 0.5 and 1.5, respectively.
ANS: B PTS: 1 DIF: 3 REF: 5-1
TOP: Price elasticity of demand MSC: Applicative
149. Whether a good is a luxury or necessity depends on
a. the price of the good.
b. the preferences of the buyer.
c. the intrinsic properties of the good.
d. how scarce the good is.
ANS: B PTS: 1 DIF: 2 REF: 5-1
TOP: Demand MSC: Interpretive
150. Last year, Sheila bought 6 pairs of shoes when her income was $40,000. This year, her income is $50,000 and she purchased 10 pairs of shoes. Holding other factors constant, it follows that Sheila
a. considers shoes to be a necessity.
b. considers shoes to be an inferior good.
c. considers shoes to be a normal good.
d. has a low price elasticity of demand for shoes.
ANS: C PTS: 1 DIF: 2 REF: 5-1
TOP: Normal goods MSC: Interpretive
151. Last year, Sheila bought 6 pairs of shoes when her income was $40,000. This year, her income is $52,000 and she purchased 7 pairs of shoes. Holding other factors constant and using the midpoint method, it follows that Sheila’s income elasticity of demand is about
a. 0.59 and Sheila regards shoes as an inferior good.
b. 0.59 and Sheila regards shoes as a normal good.
c. 1.7 and Sheila regards shoes as an inferior good.
d. 1.7 and Sheila regards shoes as a normal good.
ANS: B PTS: 1 DIF: 2 REF: 5-1
TOP: Income elasticity of demand Normal goods MSC: Applicative
152. When the rental price of DVD movies is $4, Denise rents five per month. When the price is $3, she rents nine per month. Denise's demand for DVD rentals is
a. elastic and her demand curve would be relatively flat.
b. elastic and her demand curve would be relatively steep.
c. inelastic and her demand curve would be relatively flat.
d. inelastic and her demand curve would be relatively steep.
ANS: A PTS: 1 DIF: 2 REF: 5-1
TOP: Elastic demand MSC: Applicative
153. Your younger sister needs $50 to buy a new bike. She has opened a lemonade stand to make the money she needs. She currently is charging 25 cents per cup, but she wants to adjust her price to earn the $50 faster. If you know that the demand for lemonade is elastic, what is your advice to her?
a. Leave the price at 25 cents and be patient.
b. Raise the price to increase total revenue.
c. Lower the price to increase total revenue.
d. There isn't enough information given to answer this question.
ANS: C PTS: 1 DIF: 2 REF: 5-1
TOP: Elastic demand Total revenue MSC: Applicative
154. Income elasticity of demand measures how
a. the quantity demanded changes as consumer income changes.
b. consumer purchasing power is affected by a change in the price of a good.
c. the price of a good is affected when there is a change in consumer income.
d. many units of a good a consumer can buy given a certain income level.
ANS: A PTS: 1 DIF: 1 REF: 5-1
TOP: Income elasticity of demand MSC: Definitional
155. If a 6 percent increase in income results in a 10 percent increase in the quantity demanded of pizza, then the income elasticity of demand for pizza is
a. negative and therefore pizza is an normal good.
b. negative and therefore pizza is a inferior good.
c. positive and therefore pizza is an inferior good.
d. positive and therefore pizza is a normal good.
ANS: D PTS: 1 DIF: 2 REF: 5-1
TOP: Income elasticity of demand MSC: Applicative
156. For which of the following goods is the income elasticity of demand likely highest?
a. water
b. diamonds
c. hamburgers
d. housing
ANS: B PTS: 1 DIF: 2 REF: 5-1
TOP: Income elasticity of demand MSC: Interpretive
157. Necessities such as food and clothing tend to have
a. high price elasticities of demand and high income elasticities of demand.
b. high price elasticities of demand and low income elasticities of demand.
c. low price elasticities of demand and high income elasticities of demand.
d. low price elasticities of demand and low income elasticities of demand.
ANS: D PTS: 1 DIF: 2 REF: 5-1
TOP: Price elasticity of demand Income elasticity of demand MSC: Interpretive
158. Last year, Joan bought 50 pounds of hamburger when her household’s income was $40,000. This year, her household income was only $30,000 and Joan bought 60 pounds of hamburger. All else constant, Joan's income elasticity of demand for hamburger is
a. positive, so Joan considers hamburger to be an inferior good.
b. positive, so Joan considers hamburger to be a normal good and a necessity.
c. negative, so Joan considers hamburger to be an inferior good.
d. negative, so Joan considers hamburger to be a normal good, but not a necessity.
ANS: C PTS: 1 DIF: 2 REF: 5-1
TOP: Inferior goods Income elasticity of demand MSC: Interpretive
159. If an increase in income results in a decrease in the quantity demanded of a good, then for that good,
a. the cross-price elasticity of demand is negative.
b. the price elasticity of demand is negative.
c. the income elasticity of demand is negative.
d. an increase in the market supply will increase the equilibrium price of the good.
ANS: C PTS: 1 DIF: 2 REF: 5-1
TOP: Income elasticity of demand MSC: Interpretive
160. Which of the following expressions represents a cross-price elasticity of demand?
a. percentage change in quantity demanded of apples divided by percentage change in quantity supplied of apples
b. percentage change in quantity demanded of apples divided by percentage change in price of pears
c. percentage change in price of apples divided by percentage change in quantity demanded of apples
d. percentage change in quantity demanded of apples divided by percentage change in income
ANS: B PTS: 1 DIF: 1 REF: 5-1
TOP: Cross-price elasticity of demand MSC: Definitional
161. To determine whether a good is considered normal or inferior, one could examine the value of the
a. income elasticity of demand for that good.
b. price elasticity of demand for that good.
c. price elasticity of supply for that good.
d. cross-price elasticity of demand for that good.
ANS: A PTS: 1 DIF: 1 REF: 5-1
TOP: Income elasticity of demand MSC: Interpretive
162. You and your college roommate eat three packages of Ramen noodles each week. After graduation last month, both of you were hired at several times your college income. You still enjoy Ramen noodles very much and buy even more, but your roommate plans to buy fewer Ramen noodles in favor of foods she prefers more. When looking at income elasticity of demand for Ramen noodles,
a. yours would be negative and your roommate's would be positive.
b. yours would be positive and your roommate's would be negative.
c. yours would be zero and your roommate's would approach infinity.
d. yours would approach infinity and your roommate's would be zero.
ANS: B PTS: 1 DIF: 2 REF: 5-1
TOP: Income elasticity of demand MSC: Interpretive
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
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
Quantity of Good X
Purchased
Quantity of Good Y
Purchased
$30,000
2
20
$40,000
6
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
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
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
189. Frequently, in the short run, the quantity supplied of a good is
a. impossible, or nearly impossible, to measure.
b. not very responsive to price changes.
c. determined by the quantity demanded of the good.
d. determined by psychological forces and other non-economic forces.
ANS: B PTS: 1 DIF: 2 REF: 5-2
TOP: Short run Quantity supplied MSC: Interpretive
190. Holding all other factors constant and using the midpoint method, if a pencil manufacturer increases production by 20 percent when the market price of pencils increases from $0.50 to $0.60, then supply is
a. inelastic, since the price elasticity of supply is equal to .91.
b. inelastic, since the price elasticity of supply is equal to 1.1.
c. elastic, since the price elasticity of supply is equal to 0.91.
d. elastic, since the price elasticity of supply is equal to 1.1.
ANS: D PTS: 1 DIF: 2 REF: 5-2
TOP: Price elasticity of supply MSC: Applicative
191. If the quantity supplied responds only slightly to changes in price, then
a. supply is said to be elastic.
b. supply is said to be inelastic.
c. an increase in price will not shift the supply curve very much.
d. even a large decrease in demand will change the equilibrium price only slightly.
ANS: B PTS: 1 DIF: 2 REF: 5-2
TOP: Price elasticity of supply MSC: Interpretive
192. A key determinant of the price elasticity of supply is
a. the length of the time period.
b. the definition of the market.
c. the number of close substitutes for the good in question.
d. the extent to which buyers alter their quantities demanded in response to changes in their incomes.
ANS: A PTS: 1 DIF: 2 REF: 5-2
TOP: Price elasticity of supply MSC: Interpretive
193. The supply of a good will be more elastic, the
a. more the good is considered a luxury.
b. broader is the definition of the market for the good.
c. larger the number of close substitutes for the good.
d. longer the time period being considered.
ANS: D PTS: 1 DIF: 2 REF: 5-2
TOP: Price elasticity of supply MSC: Interpretive
Figure 5-10
194. Refer to Figure 5-10. The price elasticity of supply between point A and point B, using the midpoint method, is approximately
a. 0.58.
b. 0.71.
c. 1.06.
d. 1.4.
ANS: B PTS: 1 DIF: 2 REF: 5-2
TOP: Price elasticity of supply MSC: Applicative
195. Refer to Figure 5-10. The price elasticity of supply between point B and point C, using the midpoint method, is approximately
a. 1.44.
b. 1.29.
c. 0.96.
d. 0.78.
ANS: D PTS: 1 DIF: 2 REF: 5-2
TOP: Price elasticity of supply MSC: Applicative
196. Refer to Figure 5-10. If, holding the supply curve fixed, there were an increase in demand that caused the equilibrium price to increase from $6 to $8, then sellers’ total revenue would
a. increase.
b. decrease.
c. remain unchanged.
d. The effect on total revenue cannot be determined from the given information.
ANS: A PTS: 1 DIF: 2 REF: 5-2
TOP: Total revenue MSC: Applicative
Figure 5-11
197. Refer to Figure 5-11. Which supply curve represents perfectly inelastic supply?
a. S1
b. S2
c. S3
d. It is impossible to tell without more information.
ANS: A PTS: 1 DIF: 1 REF: 5-2
TOP: Perfectly inelastic supply MSC: Interpretive
198. Refer to Figure 5-11. Which supply curve is most likely relevant over a very long period of time?
a. S1
b. S2
c. S3
d. All of the above are equally likely to be relevant over a very long period of time.
ANS: C PTS: 1 DIF: 2 REF: 5-2
TOP: Perfectly elastic supply MSC: Interpretive
199. Suppose that an increase in the price of carrots from $1.30 to $1.80 per pound increases the quantity of carrots that carrot farmers produce from 1.2 million pounds to 1.6 million pounds. Using the midpoint method, what is the approximate value of the price elasticity of supply?
a. -1.04
b. 0.67
c. 0.89
d. 1.13
ANS: C PTS: 1 DIF: 2 REF: 5-2
TOP: Price elasticity of supply MSC: Applicative
200. An increase in the price of pure chocolate morsels from $2.25 to $2.45 causes suppliers of chocolate morsels to increase their quantity supplied from 125 bags per minute to 145 bags per minute. Supply is
a. elastic and the price elasticity of supply is 1.74.
b. elastic and the price elasticity of supply is 0.57.
c. inelastic and the price elasticity of supply is 1.74.
d. inelastic and the price elasticity of supply is 0.57.
ANS: A PTS: 1 DIF: 3 REF: 5-2
TOP: Price elasticity of supply MSC: Applicative
201. If the supply curve for news magazines is an upward-sloping line and goes through the point (quantity supplied = 0, price = $1.00), then the price elasticity of supply for news magazines is
a. less than one.
b. greater than one.
c. perfectly inelastic.
d. equal to the price elasticity of demand for news magazines.
ANS: B PTS: 1 DIF: 2 REF: 5-2
TOP: Price elasticity of supply MSC: Applicative
202. If a 30 percent change in price causes a 15 percent change in quantity supplied, then the price elasticity of supply is
a. 0.5 and supply is elastic.
b. 0.5 and supply is inelastic.
c. 2 and supply is inelastic.
d. 2 and supply is elastic.
ANS: B PTS: 1 DIF: 3 REF: 5-2
TOP: Price elasticity of supply MSC: Applicative
203. A bakery would be willing to supply 500 bagels per day at a price of $0.50 each. At a price of $0.80, the bakery would be willing to supply 1,100 bagels. Using the midpoint method, the elasticity of supply for bagels is about
a. 0.62.
b. 0.77.
c. 1.24.
d. 1.63.
ANS: D PTS: 1 DIF: 2 REF: 5-2
TOP: Price elasticity of supply MSC: Applicative
204. In the long run, the quantity supplied of most goods
a. will increase in almost all cases, regardless of what happens to price.
b. cannot respond at all to a change in price.
c. can respond to a change in price, but the change is almost always inconsequential.
d. can respond substantially to a change in price.
ANS: D PTS: 1 DIF: 2 REF: 5-2
TOP: Price elasticity of supply Long run MSC: Interpretive
205. When a supply curve is relatively flat,
a. sellers are not at all responsive to a change in price.
b. the equilibrium price changes substantially when the demand for the good changes.
c. the supply is relatively elastic.
d. the supply is relatively inelastic.
ANS: C PTS: 1 DIF: 2 REF: 5-2
TOP: Inelastic supply MSC: Interpretive
206. In January the price of widgets was $2.00 and Wendy's Widgets produced 80 widgets. In February the price of widgets was $2.50 and Wendy's Widgets produced 110 widgets. In March the price of widgets was $3.00 and Wendy's Widgets produced 140 widgets. The price elasticity of supply of Wendy's Widgets was
a. 0.70 when the price increased from $2.00 to $2.50 and 0.76 when the price increased from $2.50 to $3.00.
b. 0.88 when the price increased from $2.00 to $2.50 and 1.08 when the price increased from $2.50 to $3.00.
c. 1.42 when the price increased from $2.00 to $2.50 and 1.32 when the price increased from $2.50 to $3.00.
d. 1.50 when the price increased from $2.00 to $2.50 and 1.18 when the price increased from $2.50 to $3.00.
ANS: C PTS: 1 DIF: 3 REF: 5-2
TOP: Price elasticity of supply MSC: Applicative
207. If sellers do not adjust their quantities supplied at all in response to a change in price,
a. advances in technology must be prevalent.
b. the time period under consideration must be very long.
c. supply is perfectly elastic.
d. supply is perfectly inelastic.
ANS: D PTS: 1 DIF: 2 REF: 5-2
TOP: Perfectly inelastic supply MSC: Interpretive
208. If an increase in the price of a good results in an increase in total revenue for the firm, then the supply of the good must be
a. unit elastic.
b. inelastic.
c. elastic.
d. Nothing can be said about price elasticity of supply from the information given.
ANS: D PTS: 1 DIF: 2 REF: 5-2
TOP: Price elasticity of supply Total revenue MSC: Applicative
209. If the price elasticity of supply for wheat is less than 1, then the supply of wheat is
a. inelastic.
b. elastic.
c. unit elastic.
d. quite sensitive to change in price.
ANS: A PTS: 1 DIF: 2 REF: 5-2
TOP: Inelastic supply MSC: Interpretive
210. If the price elasticity of supply is zero, then
a. supply is more elastic than it is in any other case.
b. the supply curve is horizontal.
c. the quantity supplied is the same, regardless of price.
d. a change in demand will cause a relatively small change in the equilibrium price.
ANS: C PTS: 1 DIF: 2 REF: 5-2
TOP: Perfectly inelastic supply MSC: Interpretive
211. If two supply curves pass through the same point and one is steep and the other is flat, which of the following statements is correct?
a. The flatter supply curve represents a supply that is inelastic relative to the supply represented by the steeper supply curve.
b. The steeper supply curve represents a supply that is inelastic relative to the supply represented by the flatter supply curve.
c. Given two prices with which to calculate the price elasticity of supply, that elasticity is the same for both curves.
d. A decrease in demand will increase total revenue if the steeper supply curve is relevant, while a decrease in demand will decrease total revenue if the flatter supply cure is relevant.
ANS: B PTS: 1 DIF: 2 REF: 5-2
TOP: Price elasticity of supply MSC: Interpretive
212. Which of the following statements is valid when the market supply curve is vertical?
a. Market quantity supplied does not change when the price changes.
b. Supply is perfectly elastic.
c. An increase in market demand will increase the equilibrium quantity.
d. An increase in market demand will not increase the equilibrium price.
ANS: A PTS: 1 DIF: 2 REF: 5-2
TOP: Perfectly inelastic supply MSC: Interpretive
213. Which of the following statements is not valid when supply is perfectly elastic?
a. The elasticity of supply approaches infinity.
b. The supply curve is horizontal.
c. Very small changes in price lead to large changes in quantity supplied.
d. The time period under consideration is more likely a short period rather than a long period.
ANS: D PTS: 1 DIF: 3 REF: 5-2
TOP: Perfectly elastic supply MSC: Applicative
214. A linear, upward-sloping supply curve has
a. a constant slope and a changing elasticity of supply.
b. a changing slope and a constant elasticity of supply.
c. both a constant slope and a constant elasticity of supply.
d. both a changing slope and a changing elasticity of supply.
ANS: A PTS: 1 DIF: 2 REF: 5-2
TOP: Price elasticity of supply MSC: Interpretive
215. If the quantity supplied is the same regardless of price, then supply is
a. elastic.
b. perfectly elastic.
c. perfectly inelastic.
d. inelastic.
ANS: C PTS: 1 DIF: 2 REF: 5-2
TOP: Perfectly inelastic supply MSC: Definitional
216. When supply is perfectly elastic, the value of the price elasticity of supply is
a. 0.
b. 1.
c. greater than 0 and less than 1.
d. infinity.
ANS: D PTS: 1 DIF: 2 REF: 5-2
TOP: Perfectly elastic supply MSC: Interpretive
217. As price elasticity of supply increases, the supply curve
a. becomes flatter.
b. becomes steeper.
c. becomes downward sloping.
d. shifts to the right.
ANS: A PTS: 1 DIF: 2 REF: 5-2
TOP: Price elasticity of supply MSC: Interpretive
218. Which of the following would be true as the price elasticity of supply approaches infinity?
a. Very small changes in price lead to very large changes in quantity supplied.
b. Very large changes in price lead to very small changes in quantity supplied.
c. Very small changes in price lead to no change in quantity supplied.
d. Very large changes in price lead to no change in quantity supplied.
ANS: A PTS: 1 DIF: 2 REF: 5-2
TOP: Perfectly elastic supply MSC: Interpretive
219. A key determinant of the price elasticity of supply is the time period under consideration. Which of the following statements best explains this fact?
a. Supply curves are steeper over long periods of time than over short periods of time.
b. Buyers of goods tend to be more responsive to price changes over long periods of time than over short periods of time.
c. The number of firms in a market tends to be more variable over short periods of time than over long periods of time.
d. Firms tend to be more responsive to price changes over long periods of time than over short periods of time.
ANS: D PTS: 1 DIF: 2 REF: 5-2
TOP: Price elasticity of supply MSC: Interpretive
220. Some firms eventually experience problems with their capacity to produce output as their output levels increase. For these firms,
a. market power is substantial.
b. supply is perfectly inelastic.
c. supply is more elastic at low levels of output and less elastic at high levels of output.
d. supply is less elastic at low levels of output and more elastic at high levels of output.
ANS: C PTS: 1 DIF: 3 REF: 5-2
TOP: Price elasticity of supply MSC: Applicative
Figure 5-12
221. Refer to Figure 5-12. Along which of these segments of the supply curve is supply least elastic?
a. between E and F
b. between C and D
c. between A and C
d. between A and B
ANS: A PTS: 1 DIF: 2 REF: 5-2
TOP: Price elasticity of supply MSC: Applicative
222. Refer to Figure 5-12. Along which of these segments of the supply curve is supply most elastic?
a. between A and B
b. between C and D
c. between D and F
d. between E and F
ANS: A PTS: 1 DIF: 2 REF: 5-2
TOP: Price elasticity of supply MSC: Applicative
223. Refer to Figure 5-12. Using the midpoint method, what is the price elasticity of supply between points D and E?
a. 1.89
b. 1.26
c. 0.53
d. 0.34
ANS: C PTS: 1 DIF: 2 REF: 5-2
TOP: Price elasticity of supply MSC: Applicative
224. Refer to Figure 5-12. Using the midpoint method, what is the price elasticity of supply between points B and C?
a. 1.67
b. 1.19
c. 0.84
d. 0.61
ANS: B PTS: 1 DIF: 2 REF: 5-2
TOP: Price elasticity of supply MSC: Applicative
225. Generally, a firm is more willing and able to increase quantity supplied in response to a price change when
a. the relevant time period is short rather than long.
b. the relevant time period is long rather than short.
c. supply is inelastic.
d. the firm is experiencing capacity problems.
ANS: B PTS: 1 DIF: 2 REF: 5-2
TOP: Price elasticity of supply MSC: Applicative
Table 5-2

Supply Curve A
Supply Curve B
Supply Curve C
Price
$1.00
$2.00
$1.00
$3.00
$2.00
$5.00
Quantity
Supplied

500

600

600

900

400

700

226. Refer to Table 5-2. Which of the three supply curves represents the least elastic supply?
a. supply curve A
b. supply curve B
c. supply curve C
d. There is no difference in the elasticity of the three supply curves.
ANS: A PTS: 1 DIF: 2 REF: 5-2
TOP: Price elasticity of supply MSC: Applicative
227. Refer to Table 5-2. Which of the three supply curves represents the most elastic supply?
a. supply curve A
b. supply curve B
c. supply curve C
d. There is no difference in the elasticity of the three supply curves.
ANS: C PTS: 1 DIF: 2 REF: 5-2
TOP: Price elasticity of supply MSC: Applicative
228. Refer to Table 5-2. Along which of the supply curves does quantity supplied move proportionately more than the price?
a. along supply curve B only
b. along supply curves B and C
c. along all three supply curves
d. Quantity supplied moves proportionately more than the price along none of the three supply curves.
ANS: D PTS: 1 DIF: 3 REF: 5-2
TOP: Price elasticity of supply MSC: Applicative
229. The discovery of a new hybrid wheat would increase the supply of wheat. As a result, wheat farmers would realize an increase in total revenue if
a. the supply of wheat is elastic.
b. the supply of wheat is inelastic.
c. the demand for wheat is inelastic.
d. the demand for wheat is elastic.
ANS: D PTS: 1 DIF: 2 REF: 5-3
TOP: Supply Price elasticity of demand Total revenue MSC: Applicative
230. Because the demand for wheat tends to be inelastic, the development of a new, more productive hybrid wheat would tend to
a. increase the total revenue of wheat farmers.
b. decrease the total revenue of wheat farmers.
c. decrease the demand for wheat.
d. decrease the supply of wheat.
ANS: B PTS: 1 DIF: 2 REF: 5-3
TOP: Supply Price elasticity of demand Total revenue MSC: Applicative
231. Knowing that the demand for wheat is inelastic, if all farmers voluntarily plowed under 10 percent of their wheat crop, then
a. consumers of wheat would buy more wheat.
b. wheat farmers would suffer a reduction in their total revenue.
c. wheat farmers would experience an increase in their total revenue.
d. the demand for wheat would decrease.
ANS: C PTS: 1 DIF: 2 REF: 5-3
TOP: Supply Price elasticity of demand Total revenue MSC: Applicative
232. Technological advances in wheat production can lower farmers' total revenue because the
a. demand for wheat is inelastic.
b. demand for wheat is elastic.
c. supply of wheat is elastic.
d. supply of wheat is inelastic.
ANS: A PTS: 1 DIF: 2 REF: 5-2
TOP: Price elasticity of demand Total revenue MSC: Applicative
233. When a technological advance in wheat production is developed and applied to wheat farming, which of the following consequences is most likely?
a. The price of wheat decreases by 6 percent and the quantity of wheat sold increases by 10 percent.
b. The price of wheat decreases by 10 percent and the quantity of wheat sold increases by 6 percent.
c. Wheat farmers' total revenue increases.
d. All of the above are equally likely.
ANS: B PTS: 1 DIF: 2 REF: 5-3
TOP: Price elasticity of demand Total revenue MSC: Applicative
234. If corn farmers know that the demand for corn is inelastic, and they want to increase their total revenue, they should all
a. plant more corn so that they would be able to sell more each year.
b. increase spending on fertilizer in an attempt to produce more corn on the acres they farm.
c. reduce the number of acres they plant in corn.
d. contribute to a fund that promotes technological advances in corn production.
ANS: C PTS: 1 DIF: 2 REF: 5-3
TOP: Price elasticity of demand Total revenue MSC: Applicative
235. Which of the following was not a reason OPEC failed to keep the price of oil high?
a. Over the long run, producers of oil outside of OPEC responded to higher prices by increasing oil exploration and by building new extraction capacity.
b. Consumers responded to higher prices with greater conservation.
c. Consumers replaced old inefficient cars with newer efficient ones.
d. The agreement OPEC members signed allowed each country to produce as much oil as each wanted.
ANS: D PTS: 1 DIF: 2 REF: 5-3
TOP: OPEC MSC: Applicative
236. OPEC successfully raised the world price of oil in the 1970s and early 1980s, primarily due to
a. an inelastic demand for oil and a reduction in the amount of oil supplied.
b. a reduction in the amount of oil supplied and a world-wide oil embargo.
c. a world-wide oil embargo and an elastic demand for oil.
d. a reduction in the amount of oil supplied and an elastic demand for oil.
ANS: A PTS: 1 DIF: 2 REF: 5-3
TOP: OPEC MSC: Applicative
237. In the market for oil in the short run, demand
a. and supply are both elastic.
b. and supply are both inelastic.
c. is elastic and supply is inelastic.
d. is inelastic and supply is elastic.
ANS: B PTS: 1 DIF: 2 REF: 5-3
TOP: Price elasticity of demand Price elasticity of supply MSC: Interpretive
238. A decrease in supply will cause the largest increase in price when
a. both supply and demand are inelastic.
b. both supply and demand are elastic.
c. demand is elastic and supply is inelastic.
d. demand is inelastic and supply is elastic.
ANS: A PTS: 1 DIF: 3 REF: 5-3
TOP: Price elasticity of demand Price elasticity of supply MSC: Analytical
239. A decrease in supply will cause the smallest increase in price when
a. both supply and demand are inelastic.
b. demand is elastic and supply is inelastic.
c. both supply and demand are elastic.
d. demand is inelastic and supply is elastic.
ANS: C PTS: 1 DIF: 3 REF: 5-3
TOP: Price elasticity of demand Price elasticity of supply MSC: Analytical
240. Which of the following statements does not help to explain why government drug interdiction increases drug-related crime?
a. The demand for illegal drugs is inelastic.
b. Interdiction results in drug addicts having a greater need for quick cash.
c. Interdiction results in an increase in the amount of money needed to buy the same amount of drugs.
d. Government drug programs are more lenient now with drug offenders than they were in the 1980s.
ANS: D PTS: 1 DIF: 2 REF: 5-3
TOP: Government Price elasticity of demand MSC: Applicative
241. Which of the following statements is not correct concerning government attempts to reduce the flow of illegal drugs into the country?
a. Drug interdiction raises prices and total revenue in the drug market.
b. Drug interdiction can increase drug-related crime.
c. Drug interdiction shifts the demand curve for drugs to the left.
d. Drug interdiction shifts the supply curve of drugs to the left.
ANS: C PTS: 1 DIF: 2 REF: 5-3
TOP: Government Demand Supply MSC: Applicative
242. Given the market for illegal drugs, when the government is successful in reducing the flow of drugs into the United States,
a. supply decreases, demand is unaffected, and price increases.
b. demand decreases, supply is unaffected, and price decreases.
c. demand and supply both decrease, leaving price essentially unchanged.
d. supply decreases, demand increases, and price increases substantially as a result.
ANS: A PTS: 1 DIF: 2 REF: 5-3
TOP: Government Demand Supply MSC: Applicative
243. There are fewer farmers in the United States today than 200 years ago because of
a. more educational opportunities and increases in farm technology.
b. increased government regulations in farming and increased farm technology.
c. an elastic demand for food and more attractive urban alternatives to farming.
d. increases in farm technology and an inelastic demand for food.
ANS: D PTS: 1 DIF: 2 REF: 5-3
TOP: Technology Inelastic demand MSC: Applicative
244. How did the farm population in the United States change between 1950 and 2000?
a. It dropped from 10 million to fewer than 3 million people.
b. It dropped from 20 million to fewer than 5 million people.
c. It dropped from 30 million to just over 6 million people.
d. It increased from 10 million to almost 12 million people.
ANS: A PTS: 1 DIF: 1 REF: 5-3
TOP: Population MSC: Definitional
245. Between 1950 and 2000 there was a
a. 20 percent drop in the number of farmers, but farm output more than tripled.
b. 30 percent drop in the number of farmers, but farm output more than tripled.
c. 50 percent drop in the number of farmers, but farm output more than doubled.
d. 70 percent drop in the number of farmers, but farm output more than doubled.
ANS: D PTS: 1 DIF: 2 REF: 5-3
TOP: Population Output MSC: Definitional
246. An advance in farm technology that results in an increased market supply is
a. good for farmers because it raises prices for their products, but bad for consumers because it raises prices consumers pay for food.
b. bad for farmers because total revenue will fall, but good for consumers because prices for food will fall.
c. good for farmers because it raises prices for their products, and also good for consumers because more output is available for consumption.
d. bad for farmers because total revenue will fall, and bad for consumers because farmers will raise the price of food to increase their total revenue.
ANS: B PTS: 1 DIF: 2 REF: 5-3
TOP: Technology Supply MSC: Applicative
247. Farm programs that pay farmers not to plant crops on all their land
a. hurt farmers by lowering their total revenue, and hurt consumers by causing shortages of some food items.
b. help farmers by cutting costs, which helps consumers by lowering food prices.
c. help farmers by increasing total revenue in the market, but hurt consumers by raising prices.
d. help farmers directly since they receive government payments, but has no real effect on consumers.
ANS: C PTS: 1 DIF: 2 REF: 5-3
TOP: Total revenue MSC: Applicative
248. If marijuana were legalized, it is likely that there would be an increase in the supply of marijuana. Advocates of marijuana legalization argue that this would significantly reduce the amount of revenue going to the criminal organizations that currently supply marijuana. These advocates believe that the
a. supply for marijuana is elastic.
b. demand for marijuana is elastic.
c. supply for marijuana is inelastic.
d. demand for marijuana is inelastic.
ANS: D PTS: 1 DIF: 2 REF: 5-3
TOP: Price elasticity of demand Total revenue MSC: Applicative
249. Under which of the following conditions would the interdiction of illegal drugs result in a decrease in the quantity of drugs sold and in a decrease in total spending on illegal drugs by drug users?
a. The interdiction has the effect of shifting the demand curve for illegal drugs to the right.
b. The price elasticity of demand for illegal drugs is 1.3.
c. The price elasticity of supply for illegal drugs is 0.8.
d. As a result of the interdiction, the price of illegal drugs increases by 20 percent and the quantity of illegal drugs sold decreases by 16 percent.
ANS: B PTS: 1 DIF: 2 REF: 5-3
TOP: Price elasticity of demand Total revenue MSC: Applicative




Chapter 6


1. Price controls are usually enacted
a. as a means of raising revenue for public purposes.
b. when policymakers believe that the market price of a good or service is unfair to buyers or sellers.
c. when policymakers detect inefficiencies in a market.
d. All of the above are correct.
ANS: B PTS: 1 DIF: 1 REF: 6-0
TOP: Price ceilings Price floors MSC: Interpretive
2. The presence of price controls in a market usually is an indication that
a. an insufficient quantity of a good or service was being produced in that market to meet the public’s need.
b. the usual forces of supply and demand were not able to establish an equilibrium price in that market.
c. policymakers believed that the price that prevailed in that market in the absence of price controls was unfair to buyers or sellers.
d. policymakers correctly believed that, in that market, price controls would generate no inequities of their own.
ANS: C PTS: 1 DIF: 2 REF: 6-0
TOP: Price ceilings Price floors MSC: Interpretive
3. Policymakers sometimes are attracted to price controls because
a. they view the market's outcome as inefficient.
b. they view the market's outcome as unfair.
c. it is politically popular to impose price controls in markets in which the demand for the good or service is inelastic.
d. they are required to do so under the Employment Act of 1946.
ANS: B PTS: 1 DIF: 2 REF: 6-0
TOP: Price ceilings Price floors MSC: Interpretive
4. Price controls
a. always produce an equitable outcome.
b. always produce an efficient outcome.
c. can generate inequities of their own.
d. produce revenue for the government.
ANS: C PTS: 1 DIF: 2 REF: 6-0
TOP: Price ceilings Price floors MSC: Interpretive
5. Policymakers use taxes
a. to raise revenue for public purposes, but not to influence market outcomes.
b. both to raise revenue for public purposes and to influence market outcomes.
c. when they realize that price controls alone are insufficient to correct market inequities.
d. only in those markets in which the burden of the tax falls clearly on the sellers.
ANS: B PTS: 1 DIF: 2 REF: 6-0
TOP: Taxes MSC: Interpretive
6. A legal maximum price at which a good can be sold is a price
a. floor.
b. stabilization.
c. support.
d. ceiling.
ANS: D PTS: 1 DIF: 1 REF: 6-1
TOP: Price ceilings MSC: Definitional
7. A price ceiling
a. is a legal maximum on the price at which a good can be sold.
b. is often imposed in markets in which “cutthroat competition” would prevail without a price ceiling.
c. is often imposed when sellers of a good are successful in their attempts to convince the government that the market outcome is unfair without a price ceiling.
d. All of the above are correct.
ANS: A PTS: 1 DIF: 2 REF: 6-1
TOP: Price ceilings MSC: Interpretive
8. A legal minimum price at which a good can be sold is
a. exemplified by rent-control laws.
b. usually intended to enhance efficiency in a market.
c. called a price ceiling.
d. called a price floor.
ANS: D PTS: 1 DIF: 1 REF: 6-1
TOP: Price floors MSC: Definitional
9. A price floor
a. is a legal minimum on the price at which a good can be sold.
b. can result when sellers of a good are successful in their attempts to convince the government that the market outcome without a price floor is unfair to them.
c. can create inequities in a market.
d. All of the above are correct.
ANS: D PTS: 1 DIF: 1 REF: 6-1
TOP: Price floors MSC: Definitional
10. Which of the following is the most likely explanation for the imposition of a price floor in the market for corn?
a. Policymakers have studied the effects of the price floor carefully and they recognize that the price floor is advantageous for society as a whole.
b. Buyers and sellers of corn have agreed that the price floor is good for both of them and have therefore pressured policy makers into enacting the price floor.
c. Buyers of corn, recognizing that the price floor is good for them, have pressured policy makers into enacting the price floor.
d. Sellers of corn, recognizing that the price floor is good for them, have pressured policy makers into enacting the price floor.
ANS: D PTS: 1 DIF: 2 REF: 6-1
TOP: Price floors MSC: Interpretive
11. A price ceiling will be binding only if it is set
a. equal to equilibrium price.
b. above equilibrium price.
c. below equilibrium price.
d. none of the above; a price ceiling is never binding.
ANS: C PTS: 1 DIF: 2 REF: 6-1
TOP: Price ceilings MSC: Interpretive
12. A price ceiling is binding when it is set
a. above the equilibrium price, causing a shortage.
b. above the equilibrium price, causing a surplus.
c. below the equilibrium price, causing a shortage.
d. below the equilibrium price, causing a surplus.
ANS: C PTS: 1 DIF: 2 REF: 6-1
TOP: Price ceilings Shortages MSC: Interpretive
13. Suppose a price ceiling is not binding; this means that
a. the equilibrium price is above the price ceiling.
b. the equilibrium price is below the price ceiling.
c. it has no legal enforcement mechanism.
d. people are finding a way to circumvent the law.
ANS: B PTS: 1 DIF: 2 REF: 6-1
TOP: Price ceilings MSC: Interpretive
14. A price ceiling that is not binding will
a. cause a surplus in the market.
b. cause a shortage in the market.
c. cause the market to be less efficient than it would be without the price ceiling.
d. have no effect on the market price.
ANS: D PTS: 1 DIF: 2 REF: 6-1
TOP: Price ceilings MSC: Interpretive
15. A shortage results when
a. a binding price ceiling is imposed.
b. a binding price floor is imposed.
c. a price ceiling is imposed but it is not binding.
d. a price floor is imposed but it is not binding.
ANS: A PTS: 1 DIF: 2 REF: 6-1
TOP: Price ceilings MSC: Interpretive
16. When, in a particular market, the law of demand and the law of supply both apply, the imposition of a binding price ceiling in that market causes quantity demanded to be
a. greater than quantity supplied.
b. less than quantity supplied.
c. equal to quantity supplied.
d. Any of the above is possible.
ANS: A PTS: 1 DIF: 2 REF: 6-1
TOP: Price ceilings Shortages MSC: Interpretive
17. To say that a price ceiling is binding is to say that the price ceiling
a. results in a scarcity.
b. is set above the equilibrium price.
c. results in excess demand.
d. All of the above are correct.
ANS: C PTS: 1 DIF: 2 REF: 6-1
TOP: Price ceilings Shortages MSC: Interpretive
Figure 6-1
18. Refer to Figure 6-1. A binding price ceiling is shown in
a. panel (a) but not panel (b).
b. panel (b) but not panel (a).
c. both panel (a) and panel (b).
d. neither panel (a) nor panel (b).
ANS: B PTS: 1 DIF: 2 REF: 6-1
TOP: Price ceilings MSC: Applicative
19. Refer to Figure 6-1. In which panel(s) of the figure would there be a shortage of the good at the ceiling price?
a. panel (a) but not panel (b)
b. panel (b) but not panel (a)
c. panel (a) and panel (b)
d. neither panel (a) nor panel (b)
ANS: B PTS: 1 DIF: 2 REF: 6-1
TOP: Price ceilings Shortages MSC: Applicative
20. Refer to Figure 6-1. The situation in panel (a) may be described as one in which
a. the price ceiling is not binding.
b. the price “ceiling” really functions as a price floor.
c. a surplus of the good will be observed.
d. All of the above are correct.
ANS: A PTS: 1 DIF: 2 REF: 6-1
TOP: Price ceilings MSC: Applicative
Figure 6-2
21. Refer to Figure 6-2. A binding price ceiling would be the result if the price ceiling were set at
a. $14.
b. $12.
c. $10.
d. $8.
ANS: D PTS: 1 DIF: 2 REF: 6-1
TOP: Price ceilings MSC: Applicative
22. Refer to Figure 6-2. Which of the following statements is correct?
a. A price ceiling set at $12 would be binding, but a price ceiling set at $8 would not be binding.
b. A price floor set at $8 would be binding, but a price ceiling set at $8 would not be binding.
c. A price ceiling set at $9 would result in an excess supply.
d. A price floor set at $11 would result in a surplus.
ANS: D PTS: 1 DIF: 2 REF: 6-1
TOP: Price ceilings Price floors MSC: Applicative
23. Refer to Figure 6-2. If the government imposes a price floor of $14 in this market, the result would be a
a. surplus of 20.
b. surplus of 40.
c. shortage of 20.
d. shortage of 40.
ANS: B PTS: 1 DIF: 2 REF: 6-1
TOP: Price floors Surpluses MSC: Applicative
24. Refer to Figure 6-2. If the government imposes a price ceiling of $8 in this market, the result would be a
a. surplus of 10.
b. surplus of 20.
c. shortage of 10.
d. shortage of 20.
ANS: D PTS: 1 DIF: 2 REF: 6-1
TOP: Price ceilings Shortages MSC: Applicative
25. Refer to Figure 6-2. If the government imposes a price ceiling of $12 in this market, the result would be
a. a surplus of 10.
b. a surplus of 20.
c. a shortage of 20.
d. neither a surplus nor a shortage.
ANS: D PTS: 1 DIF: 3 REF: 6-1
TOP: Price ceilings MSC: Applicative
26. Refer to Figure 6-2. In which of the following cases would sellers have to develop a rationing mechanism?
a. A price ceiling is set at $8.
b. A price ceiling is set at $12.
c. A price floor is set at $8.
d. A price floor is set at $10.
ANS: A PTS: 1 DIF: 3 REF: 6-1
TOP: Price ceilings Price floors MSC: Applicative
27. A price floor is binding if it
a. is set lower than the equilibrium market price.
b. results in an observed price that is the same as the equilibrium price.
c. leads to a surplus.
d. is strictly enforced by the government.
ANS: C PTS: 1 DIF: 2 REF: 6-1
TOP: Price floors Surpluses MSC: Interpretive
28. An example of a price floor is
a. the regulation of gasoline prices in the U.S. in the 1970s.
b. rent control.
c. the minimum wage.
d. any restriction on price that leads to a shortage.
ANS: C PTS: 1 DIF: 1 REF: 6-1
TOP: Price ceilings Price floors MSC: Definitional
29. When a price floor is binding, the equilibrium price is
a. lower than the price floor.
b. higher than the price floor.
c. equal to the price floor.
d. It is impossible to compare the equilibrium price with the price floor.
ANS: A PTS: 1 DIF: 2 REF: 6-1
TOP: Price floors MSC: Interpretive
30. A binding price floor in a market is set
a. above equilibrium price and causes a shortage.
b. above equilibrium price and causes a surplus.
c. below equilibrium price and causes a surplus.
d. below equilibrium price and causes a shortage.
ANS: B PTS: 1 DIF: 2 REF: 6-1
TOP: Price floors Surpluses MSC: Interpretive
31. A price floor is not binding if
a. the price floor is higher than the equilibrium price of the good.
b. the quantity of the good demanded with the price floor is less than the quantity demanded of the good without the price floor.
c. the quantity of the good supplied with the price floor is less than the quantity supplied of the good without the price floor.
d. All of the above are correct.
ANS: C PTS: 1 DIF: 3 REF: 6-1
TOP: Price floors Quantity demanded Quantity supplied MSC: Analytical
32. A binding price floor causes
a. excess demand.
b. a shortage.
c. a surplus.
d. quantity demanded to exceed quantity supplied.
ANS: C PTS: 1 DIF: 2 REF: 6-1
TOP: Price floors Surpluses MSC: Interpretive
Figure 6-3
33. Refer to Figure 6-3. Which of the panels represents a binding price floor?
a. panel (a) but not panel (b)
b. panel (b) but not panel (a)
c. panel (a) and panel (b)
d. neither panel (a) nor panel (b)
ANS: B PTS: 1 DIF: 2 REF: 6-1
TOP: Price floors MSC: Applicative
34. Refer to Figure 6-3. In panel (b), with the price floor in effect, there will be
a. a shortage of wheat.
b. equilibrium in the market.
c. a surplus of wheat.
d. an excess demand for wheat.
ANS: C PTS: 1 DIF: 2 REF: 6-1
TOP: Price floors Surpluses MSC: Applicative
35. If a price ceiling is a binding constraint on the market,
a. the equilibrium price must be below the price ceiling.
b. there is excess supply.
c. sellers cannot sell all they want to sell at the price ceiling.
d. buyers cannot buy all they want to buy at the price ceiling.
ANS: D PTS: 1 DIF: 2 REF: 6-1
TOP: Price ceilings MSC: Interpretive
36. When a price ceiling is imposed in a market and the ceiling is binding,
a. price no longer serves as a rationing device.
b. the quantity supplied at the price ceiling exceeds the quantity that would have been supplied without the price ceiling.
c. buyers and sellers both benefit in equal measure.
d. buyers and sellers both are harmed in equal measure.
ANS: A PTS: 1 DIF: 2 REF: 6-1
TOP: Price ceilings MSC: Interpretive
37. Suppose the government has imposed a price ceiling on televisions. Which of the following events could transform the price ceiling from one that is not binding into one that is binding?
a. Firms take advantage of an advance in technology that reduces the amount of labor necessary to produce televisions.
b. The number of firms selling televisions decreases.
c. Consumers' income decreases, and televisions are a normal good.
d. All of the above are correct.
ANS: B PTS: 1 DIF: 2 REF: 6-1
TOP: Price ceilings MSC: Applicative
38. When a binding price ceiling is imposed to benefit buyers, a result is that
a. every buyer in the market benefits.
b. every seller in the market benefits, but the overall benefit to sellers is smaller than the overall benefit to buyers.
c. every buyer in the market benefits and every seller in the market is harmed.
d. some buyers will not be able to buy any amount of the good.
ANS: D PTS: 1 DIF: 2 REF: 6-1
TOP: Price ceilings MSC: Interpretive
39. Which of the following statements is correct?
a. A price ceiling is not binding when the price ceiling is set above the equilibrium price.
b. A price floor is not binding when the price floor is set below the equilibrium price.
c. A binding price ceiling causes a shortage and a binding price floor causes a surplus.
d. All of the above are correct.
ANS: D PTS: 1 DIF: 2 REF: 6-1
TOP: Price ceilings Price floors MSC: Interpretive
40. Which of the following observations would be consistent with a binding price ceiling in a market?
a. A smaller quantity of the good is bought and sold after the price ceiling becomes effective than before the price ceiling became effective.
b. A smaller quantity of the good is demanded after the price ceiling becomes effective than before the price ceiling became effective.
c. A larger quantity of the good is supplied after the price ceiling becomes effective than before the price ceiling became effective.
d. All of the above are correct.
ANS: A PTS: 1 DIF: 2 REF: 6-1
TOP: Price ceilings MSC: Interpretive
41. Which of the following observations would be consistent with a binding price floor in a market?
a. A smaller quantity of the good is bought and sold after the price floor becomes effective than before the price floor became effective.
b. A smaller quantity of the good is demanded after the price floor becomes effective than before the price floor became effective.
c. A larger quantity of the good is supplied after the price floor becomes effective than before the price floor became effective.
d. All of the above are correct.
ANS: D PTS: 1 DIF: 2 REF: 6-1
TOP: Price floors MSC: Interpretive
42. If a binding price ceiling were imposed in the computer market,
a. the demand for computers would increase.
b. the supply of computers would decrease.
c. a shortage of computers would develop.
d. All of the above are correct.
ANS: C PTS: 1 DIF: 2 REF: 6-1
TOP: Price ceilings MSC: Interpretive
43. If a binding price ceiling were imposed in the computer market,
a. the quantity of computers demanded would increase.
b. the quantity of computers supplied would decrease.
c. a shortage of computers would develop.
d. All of the above are correct.
ANS: D PTS: 1 DIF: 2 REF: 6-1
TOP: Price ceilings MSC: Interpretive
44. Suppose the equilibrium price of a physical examination ("physical") by a doctor is $200, and the government imposes a price ceiling of $150 per physical. As a result of the price ceiling,
a. the demand curve for physicals shifts to the right.
b. the supply curve for physicals shifts to the left.
c. the quantity demanded of physicals increases and the quantity supplied of physicals decreases.
d. the number of physicals performed will increase.
ANS: C PTS: 1 DIF: 2 REF: 6-1
TOP: Price ceilings MSC: Applicative
45. When policymakers set prices by legal decree, they
a. are usually following the advice of mainstream economists.
b. are usually improving the organization of economic activity.
c. are obscuring the signals that normally guide the allocation of society’s resources.
d. are demonstrating a willingness to sacrifice equity for the sake of a gain in efficiency.
ANS: C PTS: 1 DIF: 2 REF: 6-1
TOP: Price ceilings Price floors MSC: Interpretive
46. An outcome that can result from either a price ceiling or a price floor is
a. a surplus in the market.
b. a shortage in the market.
c. a nonbinding price control.
d. long lines of frustrated buyers.
ANS: C PTS: 1 DIF: 2 REF: 6-1
TOP: Price ceilings Price floors MSC: Applicative
47. An outcome that can result from either a price ceiling or a price floor is
a. an enhancement of efficiency.
b. undesirable rationing mechanisms.
c. excess supply.
d. excess demand.
ANS: B PTS: 1 DIF: 2 REF: 6-1
TOP: Price ceilings Price floors MSC: Applicative
Figure 6-4
48. Refer to Figure 6-4. If the government imposes a price ceiling in this market at a price of $5.00, the result would be a
a. shortage of 20 units.
b. shortage of 10 units.
c. surplus of 20 units.
d. surplus of 10 units.
ANS: A PTS: 1 DIF: 2 REF: 6-1
TOP: Price ceilings Shortages MSC: Applicative
49. Refer to Figure 6-4. For a price ceiling to be binding, it would have to be set at
a. any price below $6.00.
b. a price between $4.00 and $6.00.
c. a price between $6.00 and $8.00.
d. any price above $6.00.
ANS: A PTS: 1 DIF: 2 REF: 6-1
TOP: Price ceilings MSC: Applicative
50. Refer to Figure 6-4. Which of the following price controls would cause a shortage of 10 units of the good?
a. a price ceiling of $5.50
b. a price floor of $5.50
c. a price ceiling of $6.50
d. a price floor of $6.50
ANS: A PTS: 1 DIF: 2 REF: 6-1
TOP: Price ceilings MSC: Applicative
51. Refer to Figure 6-4. Suppose a price floor of $7.00 is imposed. As a result,
a. buyers’ total expenditure on the good decreases by $20.00.
b. the supply curve will shift to the left so as to now pass through the point (Q = 40, P = $7.00).
c. the quantity of the good demanded decreases by 20 units.
d. the price of the good continues to serve as the rationing mechanism.
ANS: A PTS: 1 DIF: 3 REF: 6-1
TOP: Price floors MSC: Analytical
52. Refer to Figure 6-4. Suppose a price ceiling of $4.50 is imposed. As a result,
a. there is a shortage of 15 units of the good.
b. the demand curve will shift to the left so as to now pass through the point (Q = 35, P = $4.50).
c. the situation is very much like the one created by a binding minimum wage.
d. the quantity of the good that is bought and sold is the same as it would have been had a price floor of $7.50 been imposed.
ANS: D PTS: 1 DIF: 3 REF: 6-1
TOP: Price ceilings MSC: Analytical
Figure 6-5
53. Refer to Figure 6-5. If the government imposes a price ceiling of $2.00 in this market, the result is a
a. surplus of 30 units of the good.
b. shortage of 20 units of the good.
c. shortage of 30 units of the good.
d. shortage of 50 units of the good.
ANS: D PTS: 1 DIF: 2 REF: 6-1
TOP: Price ceilings Shortages MSC: Applicative
54. Refer to Figure 6-5. In this market, which of the following price controls would be binding?
a. a price ceiling of $2.00, and it would cause a shortage
b. a price ceiling of $5.00, and it would cause a surplus
c. a price floor of $2.00, and it would cause a shortage
d. All of the above are correct.
ANS: A PTS: 1 DIF: 2 REF: 6-1
TOP: Price ceilings Shortages MSC: Applicative
55. Refer to Figure 6-5. The price of the good would continue to serve as the rationing mechanism if
a. a price ceiling of $4.00 were imposed.
b. a price ceiling of $5.00 were imposed.
c. a price floor of $3.00 were imposed.
d. All of the above are correct.
ANS: D PTS: 1 DIF: 2 REF: 6-1
TOP: Price ceilings Price floors MSC: Applicative
56. Refer to Figure 6-5. When a certain price control is imposed in this market, the resulting quantity of the good that is actually bought and sold is such that buyers are willing and able to pay a maximum of P1 dollars per unit for that quantity and sellers are willing and able to accept a minimum of P2 dollars per unit for that quantity. If P1 - P2 = $3.00, then the price control in question is
a. a price ceiling of $2.00.
b. a price ceiling of $5.00.
c. a price floor of $5.00.
d. either a price ceiling of $2.00 or a price floor of $5.00.
ANS: D PTS: 1 DIF: 3 REF: 6-1
TOP: Price ceilings Price floors MSC: Analytical
57. Rationing by long lines is
a. inefficient, because it wastes buyers' time.
b. efficient, because those who are willing to wait the longest get the goods.
c. the only way scarce goods can be rationed.
d. only necessary if price ceilings are not binding.
ANS: A PTS: 1 DIF: 1 REF: 6-1
TOP: Shortages MSC: Interpretive
58. Price ceilings and price floors that are binding
a. are desirable because they make markets more efficient and more equitable.
b. cause surpluses and shortages to persist since price cannot adjust to the market equilibrium price.
c. can have the effect of restoring a market to equilibrium.
d. are imposed because they can make the poor in the economy better off without causing adverse effects.
ANS: B PTS: 1 DIF: 2 REF: 6-1
TOP: Price ceilings Price floors MSC: Interpretive
59. In the 1970s, long lines at gas stations in the United States were primarily a result of the fact that
a. OPEC raised the price of crude oil in world markets.
b. U.S. gasoline producers raised the price of gasoline.
c. the U.S. government maintained a price ceiling on gasoline.
d. Americans typically commute long distances.
ANS: C PTS: 1 DIF: 2 REF: 6-1
TOP: Price ceilings Shortages MSC: Interpretive
60. Other than OPEC, the shortage of gasoline in the U.S. in the 1970s could also be blamed on
a. a sharp increase in the demand for gasoline that was brought on by the Vietnam War.
b. the government’s policy of maintaining a price ceiling on gasoline.
c. an indifference among U.S. consumers toward conservation.
d. the lack of substitutes for crude oil.
ANS: B PTS: 1 DIF: 2 REF: 6-1
TOP: OPEC Price ceilings Shortages MSC: Interpretive
61. When OPEC raised the price of crude oil in the 1970s, it caused the
a. demand for gasoline to increase.
b. demand for gasoline to decrease.
c. supply of gasoline to increase.
d. supply of gasoline to decrease.
ANS: D PTS: 1 DIF: 2 REF: 6-1
TOP: OPEC Supply MSC: Interpretive
62. When OPEC raised the price of crude oil in the 1970s, it caused the
a. supply of gasoline to decrease.
b. quantity of gasoline demanded to decrease.
c. equilibrium price of gasoline to increase.
d. All of the above are correct.
ANS: D PTS: 1 DIF: 2 REF: 6-1
TOP: OPEC Supply Quantity demanded MSC: Interpretive
63. In the United States, before OPEC increased the price of crude oil in 1973, there was
a. no price ceiling on gasoline.
b. a price ceiling on gasoline but it was not binding.
c. a price ceiling on gasoline and it was binding.
d. a price floor on gasoline but it was not binding.
ANS: B PTS: 1 DIF: 2 REF: 6-1
TOP: Price ceilings MSC: Definitional
64. Economists blame the long lines at gasoline stations in the U.S. in the 1970s on
a. U.S. government regulations pertaining to the price of gasoline.
b. the Organization of Petroleum Exporting Countries (OPEC).
c. major oil companies operating in the U.S.
d. consumers who bought gasoline frequently, even when their cars' gasoline tanks were nearly full.
ANS: A PTS: 1 DIF: 1 REF: 6-1
TOP: Price ceilings MSC: Interpretive
Figure 6-6
65. Refer to Figure 6-6. When the price ceiling applies in this market and the supply curve for gasoline shifts from S1 to S2,
a. the price will increase to P3.
b. a surplus will occur at the new market price of P2.
c. the market price will stay at P1 due to the price ceiling.
d. a shortage will occur at the price ceiling of P2.
ANS: D PTS: 1 DIF: 2 REF: 6-1
TOP: Price ceilings Shortages MSC: Applicative
66. Refer to Figure 6-6. When the price ceiling applies in this market and the supply curve for gasoline shifts from S1 to S2, the resulting quantity of gasoline that is bought and sold is
a. less than Q3.
b. Q3
c. between Q1 and Q3.
d. at least Q1.
ANS: A PTS: 1 DIF: 2 REF: 6-1
TOP: Price ceilings MSC: Applicative
67. Refer to Figure 6-6. Which of the following statements best relates the figure to the events of the 1970s?
a. Buyers of gasoline paid a price of P1 before 1973; they paid a price of P2 after OPEC increased the price of crude oil in 1973, and there was a shortage of gasoline at that price.
b. Buyers of gasoline paid a price of P1 before 1973; they paid a price of P3 after OPEC increased the price of crude oil in 1973, and there was a shortage of gasoline at that price.
c. Buyers of gasoline paid a price of P2 before 1973; they paid a price of P3 after OPEC increased the price of crude oil in 1973, with no shortage of gasoline at that price.
d. The price ceiling was binding before 1973; the price ceiling was no longer binding after OPEC increased the price of crude oil in 1973.
ANS: A PTS: 1 DIF: 2 REF: 6-1
TOP: OPEC Price ceilings MSC: Applicative
68. Rent control
a. serves as an example of how a social problem can be alleviated or even solved by government policies.
b. serves as an example of a price floor.
c. is regarded by most economists as an inefficient way of helping the poor.
d. is the most efficient way to allocate scarce housing resources.
ANS: C PTS: 1 DIF: 2 REF: 6-1
TOP: Rent control MSC: Interpretive
69. The long-run effects of rent controls are a good illustration of the principle that
a. society faces a short-run tradeoff between unemployment and inflation.
b. the cost of something is what you give up to get it.
c. people respond to incentives.
d. government can sometimes improve on market outcomes.
ANS: C PTS: 1 DIF: 2 REF: 6-1
TOP: Rent control Long run MSC: Interpretive
70. Which of the following statements about the effects of rent control is correct?
a. The short-run effect of rent control is a surplus of apartments, and the long-run effect of rent control is a shortage of apartments.
b. The short-run effect of rent control is a relatively small shortage of apartments, and the long-run effect of rent control is a larger shortage of apartments.
c. In the long run, rent control leads to a shortage of apartments, and the quality of available apartments is improved by rent control.
d. The effects of rent control are very noticeable to the public in the short run, because the primary effects of rent control occur very quickly.
ANS: B PTS: 1 DIF: 2 REF: 6-1
TOP: Rent control MSC: Interpretive
71. Over time, housing shortages caused by rent control
a. increase, because the demand for, and supply of, housing are less elastic in the long run.
b. increase, because the demand for, and supply of, housing are more elastic in the long run.
c. decrease, because the demand for, and supply of, housing are less elastic in the long run.
d. decrease, because the demand for, and supply of, housing are more elastic in the long run.
ANS: B PTS: 1 DIF: 2 REF: 6-1
TOP: Rent control Long run MSC: Interpretive
72. Economists generally believe that rent control is
a. an efficient and equitable way to help the poor.
b. not efficient, but the best available means of solving a serious social problem.
c. a highly inefficient way to help the poor raise their standard of living.
d. an efficient way to allocate housing, but not a good way to help the poor.
ANS: C PTS: 1 DIF: 2 REF: 6-1
TOP: Rent control MSC: Interpretive
73. In the housing market, rent control causes
a. quantity supplied to fall and quantity demanded to fall.
b. quantity supplied to fall and quantity demanded to rise.
c. quantity supplied to rise and quantity demanded to fall.
d. quantity supplied to rise and quantity demanded to rise.
ANS: B PTS: 1 DIF: 2 REF: 6-1
TOP: Rent control Quantity demanded Quantity supplied MSC: Interpretive
Figure 6-7
74. Refer to Figure 6-7. Which panel best represents a binding rent control in the short run?
a. panel (a)
b. panel (b)
c. neither panel
d. either panel (a) or panel (b), depending upon local housing conditions
ANS: A PTS: 1 DIF: 1 REF: 6-1
TOP: Rent control MSC: Interpretive
75. Refer to Figure 6-7. Which panel(s) best represent(s) a non-binding rent control in the long run?
a. panel (a)
b. panel (b)
c. neither panel
d. either panel (a) or panel (b), depending upon local housing conditions
ANS: C PTS: 1 DIF: 2 REF: 6-1
TOP: Rent control MSC: Interpretive
76. Which of the following is not a rationing mechanism used by landlords in cities with rent control?
a. waiting lists
b. race
c. price
d. bribes
ANS: C PTS: 1 DIF: 1 REF: 6-1
TOP: Rent control MSC: Interpretive
77. Under rent control, bribery is a mechanism to
a. bring the total price of an apartment (including the bribe) closer to the equilibrium price.
b. allocate housing to the poorest individuals in the market.
c. force the total price of an apartment (including the bribe) to be less than the market price.
d. allocate housing to the most deserving tenants.
ANS: A PTS: 1 DIF: 2 REF: 6-1
TOP: Rent control MSC: Interpretive
78. One economist has argued that rent control is "the best way to destroy a city, other than bombing." Why would an economist say this?
a. He fears that low rents will cause low-income people to move into the city, reducing the quality of life for other people.
b. He fears that rent control will benefit landlords at the expense of tenants, increasing inequality in the city.
c. He fears that rent controls will cause a construction boom, which will make the city crowded and more polluted.
d. He fears that rent control will eliminate the incentive to maintain buildings, leading to a deterioration of the city.
ANS: D PTS: 1 DIF: 2 REF: 6-1
TOP: Rent control MSC: Interpretive
79. Under rent control, tenants can expect
a. lower rent and higher quality housing.
b. lower rent and lower quality housing.
c. higher rent and a shortage of rental housing.
d. higher rent and a surplus of rental housing.
ANS: B PTS: 1 DIF: 2 REF: 6-1
TOP: Rent control MSC: Interpretive
80. Under rent control, landlords cease to be responsive to tenants' concerns about the quality of the housing because
a. with shortages and waiting lists, they have no incentive to maintain and improve their property.
b. they become resigned to the fact that many of their apartments are going to be vacant at any given time.
c. with rent control the government guarantees landlords a minimal level of profit.
d. with rent control it becomes the government's responsibility to maintain rental housing.
ANS: A PTS: 1 DIF: 2 REF: 6-1
TOP: Rent control MSC: Interpretive
81. The goal of a rent-control policy is to
a. facilitate controlled economic experiments in urban areas.
b. help landlords by assuring them a low vacancy rate for their apartments.
c. help the poor by assuring them an adequate supply of apartments.
d. help the poor by making housing more affordable.
ANS: D PTS: 1 DIF: 1 REF: 6-1
TOP: Rent control MSC: Interpretive
82. Which of the following is not a result of government-imposed rent control?
a. fewer new apartments offered for rent
b. less maintenance provided by landlords
c. bribery
d. higher quality housing
ANS: D PTS: 1 DIF: 2 REF: 6-1
TOP: Rent control MSC: Interpretive
83. Which of the following statements about rent control in New York City is accurate?
a. Rent control has proven successful in providing low-cost housing for poor people.
b. Rent control has produced an increase in available rental units.
c. Many well-to-do people live in rent-controlled apartments.
d. All of the above are accurate statements.
ANS: C PTS: 1 DIF: 2 REF: 6-1
TOP: Rent control MSC: Definitional
84. Approximately what proportion of rental apartments in New York City are subject to some sort of rent control?
a. 10 percent
b. 33 percent
c. 67 percent
d. 90 percent
ANS: C PTS: 1 DIF: 2 REF: 6-1
TOP: Rent control MSC: Definitional
85. In New York City, rent-control laws have resulted in
a. substantial benefits to people who are relatively wealthy and few, if any, benefits to the poor.
b. the passage of other laws that make it almost impossible for landlords to evict tenants.
c. a very slow rate of growth of the housing supply.
d. All of the above are correct.
ANS: D PTS: 1 DIF: 2 REF: 6-1
TOP: Rent control MSC: Interpretive
86. In the United States, rent-control policies were first adopted during
a. the Civil War.
b. the Great Depression.
c. World War II.
d. the 1960s.
ANS: C PTS: 1 DIF: 2 REF: 6-1
TOP: Rent control MSC: Definitional
87. The minimum wage is an example of
a. a price ceiling.
b. a price floor.
c. a wage subsidy.
d. a price control that is not binding.
ANS: B PTS: 1 DIF: 1 REF: 6-1
TOP: Minimum wage MSC: Interpretive
88. Which of the following characterizations is correct?
a. Rent control and the minimum wage are both examples of price ceilings.
b. Rent control is an example of a price ceiling and the minimum wage is an example of a price floor.
c. Rent control is an example of a price floor and the minimum wage is an example of a price ceiling.
d. Rent control and the minimum wage are both examples of price floors.
ANS: B PTS: 1 DIF: 2 REF: 6-1
TOP: Rent control Minimum wage MSC: Interpretive
89. Minimum wage laws dictate the
a. average price employers must pay for labor.
b. highest price employers may pay for labor.
c. lowest price employers may pay for labor.
d. quality of labor which must be supplied.
ANS: C PTS: 1 DIF: 1 REF: 6-1
TOP: Minimum wage MSC: Definitional
90. The U.S. Congress first instituted a minimum wage in
a. 1890.
b. 1914.
c. 1938.
d. 1974.
ANS: C PTS: 1 DIF: 1 REF: 6-1
TOP: Minimum wage MSC: Definitional
91. The minimum wage was instituted in order to ensure workers
a. a middle-class standard of living.
b. employment.
c. a minimally adequate standard of living.
d. unemployment compensation.
ANS: C PTS: 1 DIF: 1 REF: 6-1
TOP: Minimum wage MSC: Definitional
92. As of 2005, the U.S. minimum wage according to federal law was
a. $4.25 per hour.
b. $4.85 per hour.
c. $5.15 per hour.
d. $5.45 per hour.
ANS: C PTS: 1 DIF: 1 REF: 6-1
TOP: Minimum wage MSC: Definitional
93. Which of the following is a correct statement about the labor market?
a. Workers determine the supply of labor, and firms determine the demand for labor.
b. Workers determine the demand for labor, and firms determine the supply of labor.
c. Workers determine the supply of labor, and government determines the demand for labor.
d. The forces of supply and demand, while present in the labor market, have nothing to balance in that market.
ANS: A PTS: 1 DIF: 1 REF: 6-1
TOP: Labor demand Labor supply MSC: Interpretive
94. Which of the following is a correct statement about the labor market?
a. Price controls are absent from the labor market, just as they are absent from many markets in the economy.
b. “The labor market” really consists of a multitude of labor markets for different types of workers.
c. Workers determine the demand for labor, and firms determine the supply of labor.
d. The forces of supply and demand, while present in the labor market, have nothing to balance in that market.
ANS: B PTS: 1 DIF: 2 REF: 6-1
TOP: Labor demand Labor supply MSC: Interpretive
95. A binding minimum wage
a. alters both the quantity demanded and quantity supplied of labor.
b. affects only the quantity of labor demanded; it does not affect the quantity of labor supplied.
c. has no effect on the quantity of labor demanded or the quantity of labor supplied.
d. causes only temporary unemployment, since the market will adjust and eliminate any temporary surplus of workers.
ANS: A PTS: 1 DIF: 2 REF: 6-1
TOP: Minimum wage Quantity demanded Quantity supplied MSC: Interpretive
96. At a minimum wage that exceeds the equilibrium wage,
a. the quantity demanded of labor will exceed the quantity supplied.
b. the quantity supplied of labor will exceed the quantity demanded.
c. the minimum wage will not be binding.
d. the market for skilled workers is affected, but the market for unskilled workers remains unaffected.
ANS: B PTS: 1 DIF: 2 REF: 6-1
TOP: Minimum wage Surpluses MSC: Interpretive
97. A minimum wage that is set above a market's equilibrium wage will result in
a. an excess demand for labor, that is, unemployment.
b. an excess demand for labor, that is, a shortage of workers.
c. an excess supply of labor, that is, unemployment.
d. an excess supply of labor, that is, a shortage of workers.
ANS: C PTS: 1 DIF: 2 REF: 6-1
TOP: Minimum wage Unemployment MSC: Interpretive
98. A minimum wage that is set below a market's equilibrium wage will result in
a. an excess demand for labor, that is, unemployment.
b. an excess demand for labor, that is, a shortage of workers.
c. an excess supply of labor, that is, unemployment.
d. None of the above is correct.
ANS: D PTS: 1 DIF: 2 REF: 6-1
TOP: Minimum wage MSC: Interpretive
99. The minimum wage, if it is binding, lowers the incomes of
a. no workers.
b. only those workers who cannot find jobs.
c. only those workers who have jobs.
d. all workers.
ANS: B PTS: 1 DIF: 2 REF: 6-1
TOP: Minimum wage Income MSC: Interpretive
100. The minimum wage has its greatest impact on the market for
a. female workers.
b. older workers.
c. black workers.
d. teenage workers.
ANS: D PTS: 1 DIF: 1 REF: 6-1
TOP: Minimum wage Labor force MSC: Interpretive
101. To which of the following types of jobs does the minimum wage not apply?
a. jobs for teenagers
b. jobs for members of minority groups
c. internships
d. All of the above are correct.
ANS: C PTS: 1 DIF: 1 REF: 6-1
TOP: Minimum wage MSC: Definitional
102. Studies of the effects of the minimum wage typically find that a 10 percent increase in the minimum wage depresses teenage employment by about
a. 1 percent to 3 percent.
b. 2 percent to 6 percent.
c. 5 percent to 9 percent.
d. none of the above; the typical finding is that a 10 percent increase in the minimum wage has no measurable effect on teenage employment.
ANS: A PTS: 1 DIF: 2 REF: 6-1
TOP: Minimum wage MSC: Interpretive
103. The typical study on the effect of the minimum wage on teenage employment finds that a 10 percent increase in the minimum wage
a. depresses teenage employment by 1 to 3 percent.
b. depresses teenage employment by 10 to 13 percent.
c. has no effect on teenage employment.
d. raises wages of teenagers by 10 percent.
ANS: A PTS: 1 DIF: 1 REF: 6-1
TOP: Minimum wage MSC: Definitional
104. If we were to construct an elasticity of teenage employment with respect to the minimum wage, the value of that elasticity would be about
a. -1.0 to -0.4.
b. -0.3 to -0.1.
c. 0.2 to 0.7.
d. 0.5 to 1.0.
ANS: B PTS: 1 DIF: 3 REF: 6-1
TOP: Minimum wage Elasticity MSC: Applicative
105. Advocates of the minimum wage
a. deny that the minimum wage produces any adverse effects.
b. emphasize the benefits to teenagers of increases in the minimum wage.
c. emphasize the low annual incomes of those who work for the minimum wage.
d. All of the above are correct.
ANS: C PTS: 1 DIF: 2 REF: 6-1
TOP: Minimum wage MSC: Interpretive
106. The minimum wage
a. alters the quantity of labor demanded, but not the quantity of labor supplied.
b. is binding for all workers, regardless of their levels of experience and skills.
c. has its greatest impact on the market for teenage labor.
d. All of the above are correct.
ANS: C PTS: 1 DIF: 1 REF: 6-1
TOP: Minimum wage MSC: Interpretive
107. Opponents of the minimum wage point out that the minimum wage
a. encourages teenagers to drop out of school.
b. prevents some workers from getting needed on-the-job training.
c. contributes to the problem of unemployment.
d. All of the above are correct.
ANS: D PTS: 1 DIF: 2 REF: 6-1
TOP: Minimum wage MSC: Interpretive
108. There are several criticisms of the minimum wage. Which of the following is not one of those criticisms?
a. The minimum wage often hurts those people who it is intended to help.
b. The minimum wage results in an excess supply of low-skilled labor.
c. The minimum wage prevents some younger workers from getting needed on-the-job training.
d. The minimum wage fails to raise the wage of any employed person.
ANS: D PTS: 1 DIF: 2 REF: 6-1
TOP: Minimum wage MSC: Interpretive
109. The proportion of minimum-wage earners who are in families with incomes below the poverty line is
a. less than one-third.
b. between one-third and one-half.
c. between one-half and two-thirds.
d. greater than two-thirds.
ANS: A PTS: 1 DIF: 2 REF: 6-1
TOP: Minimum wage Income MSC: Definitional
110. Which of the following is not a function of prices in a market system?
a. Prices have the crucial job of balancing supply and demand.
b. Prices send signals to buyers and sellers to help them make rational economic decisions.
c. Prices coordinate economic activity.
d. Prices ensure an equitable distribution of goods and services among consumers.
ANS: D PTS: 1 DIF: 2 REF: 6-1
TOP: Prices Market economy MSC: Interpretive
111. When government imposes a price ceiling or a price floor in a market,
a. price no longer serves as a rationing device.
b. efficiency in the market is enhanced.
c. shortages and surpluses are eliminated.
d. buyers and sellers both become better off.
ANS: A PTS: 1 DIF: 1 REF: 6-1
TOP: Price ceilings Price floors MSC: Interpretive
112. Which of the following would be the least likely result of a price ceiling imposed in the market for rental cars?
a. an accumulation of dirt in the interior of rental cars
b. poor engine maintenance in rental cars
c. free gasoline given to people as an incentive to a rent a car
d. slow replacement of old rental cars with new ones
ANS: C PTS: 1 DIF: 2 REF: 6-1
TOP: Price ceilings MSC: Applicative
113. Which of the following is the most correct statement about price controls?
a. Price controls always help those they are designed to help.
b. Price controls never help those they are designed to help.
c. Price controls often hurt those they are designed to help.
d. Price controls always hurt those they are designed to help.
ANS: C PTS: 1 DIF: 2 REF: 6-1
TOP: Price ceilings Price floors MSC: Interpretive
114. You have responsibility for economic policy in the country of Freedonia. Recently the neighboring country of Sylvania has cut off all exports of oranges to Freedonia. Harpo, who is one of your advisors, suggests that you should impose a binding price ceiling in order to avoid a shortage of oranges. Chico, another one of your advisors, argues that without a binding price floor, a shortage will certainly develop. Zeppo, a third advisor, says that the best way to avoid a shortage of oranges is to take no action at all. Which of your three advisors is most likely to have studied economics?
a. Harpo
b. Chico
c. Zeppo
d. Apparently, all three advisors have studied economics, but their views on positive economics are different.
ANS: C PTS: 1 DIF: 2 REF: 6-1
TOP: Price ceilings Price floors MSC: Applicative
115. Unlike minimum wage laws, wage subsidies
a. discourage firms from hiring the working poor.
b. cause unemployment.
c. help only wealthy workers.
d. raise living standards of the working poor without creating unemployment.
ANS: D PTS: 1 DIF: 2 REF: 6-1
TOP: Minimum wage Standard of living Unemployment MSC: Interpretive
116. An alternative to rent-control laws that would not reduce the quantity of housing supplied is
a. the payment by government of a fraction of a poor family’s rent.
b. higher taxes on rental income earned by landlords.
c. a policy that prevents landlords from evicting tenants.
d. a policy that allows government to confiscate residential property for the purpose of commercial development.
ANS: A PTS: 1 DIF: 2 REF: 6-1
TOP: Rent control Quantity supplied MSC: Applicative
117. One disadvantage of government subsidies over price controls is that subsidies
a. prevent the attainment of equilibrium in the markets in which they are imposed.
b. make higher taxes necessary.
c. are always unfair to those with low incomes.
d. cause unemployment.
ANS: B PTS: 1 DIF: 2 REF: 6-1
TOP: Public policy Taxes MSC: Applicative
118. The Earned Income Tax Credit is an example of
a. a minimum-wage policy.
b. a price ceiling.
c. a wage subsidy.
d. a rent subsidy.
ANS: C PTS: 1 DIF: 1 REF: 6-1
TOP: Earned Income Tax Credit MSC: Definitional
119. The term tax incidence refers to the
a. widespread view that taxes always will be a fact of life.
b. ongoing debate about which types of taxes make the most economic sense.
c. division of the tax burden between buyers and sellers.
d. division of the tax burden between sales taxes and income taxes.
ANS: C PTS: 1 DIF: 1 REF: 6-2
TOP: Tax incidence MSC: Definitional
120. A law is passed that requires the buyers of a good to pay a tax on each unit of the good they buy. The initial effect of the tax is on
a. the supply of the good.
b. the demand for the good.
c. both the supply of the good and the demand for the good.
d. the price of the good.
ANS: B PTS: 1 DIF: 2 REF: 6-2
TOP: Tax Demand MSC: Interpretive
121. When a tax is imposed on the buyers of a good, the demand curve shifts
a. downward by the amount of the tax.
b. upward by the amount of the tax.
c. downward by less than the amount of the tax.
d. upward by more than the amount of the tax.
ANS: A PTS: 1 DIF: 2 REF: 6-2
TOP: Tax Demand curve MSC: Interpretive
122. A tax on bicycles that buyers of bicycles are required to pay shifts
a. the demand curve downward, causing both the price received by sellers and the equilibrium quantity to fall.
b. the demand curve upward, causing both the price received by sellers and the equilibrium quantity to rise.
c. the supply curve downward, causing the price received by sellers to fall and the equilibrium quantity to rise.
d. the supply curve upward, causing the price received by sellers to rise and the equilibrium quantity to fall.
ANS: A PTS: 1 DIF: 3 REF: 6-2
TOP: Tax Demand Equilibrium MSC: Applicative
123. Assume the law of demand and the law of supply both apply to the market for cars. If the government imposed a $500 tax per car on buyers of cars, then the price received by sellers of cars would
a. decrease by less than $500.
b. decrease by exactly $500.
c. decrease by more than $500.
d. increase by an indeterminate amount.
ANS: A PTS: 1 DIF: 2 REF: 6-2
TOP: Tax Equilibrium price MSC: Applicative
Figure 6-8
124. Refer to Figure 6-8. The equilibrium price in the market before the tax is imposed is
a. $8.
b. $6.
c. $5.
d. $3.
ANS: B PTS: 1 DIF: 1 REF: 6-2
TOP: Equilibrium price MSC: Applicative
125. Refer to Figure 6-8. As the figure is drawn, who sends the tax payments to the government?
a. the buyers
b. the sellers
c. A portion of the tax payments is sent by the buyers and the remaining portion is sent by the sellers.
d. The question of who sends the tax payments cannot be determined from the figure.
ANS: A PTS: 1 DIF: 2 REF: 6-2
TOP: Tax MSC: Applicative
126. Refer to Figure 6-8. The effective price that buyers pay after the tax is imposed is
a. $8.
b. $6.
c. $5.
d. $3.
ANS: A PTS: 1 DIF: 2 REF: 6-2
TOP: Tax Equilibrium price MSC: Applicative
127. Refer to Figure 6-8. The price that sellers receive after the tax is imposed is
a. $8.
b. $6.
c. $5.
d. $3.
ANS: C PTS: 1 DIF: 2 REF: 6-2
TOP: Tax Equilibrium price MSC: Applicative
128. Refer to Figure 6-8. The amount of the tax per unit is
a. $1.
b. $2.
c. $3.
d. $5.
ANS: C PTS: 1 DIF: 2 REF: 6-2
TOP: Tax MSC: Applicative
129. Refer to Figure 6-8. The burden of the tax on buyers is
a. $1.00 per unit.
b. $1.50 per unit.
c. $2.00 per unit.
d. $3.00 per unit.
ANS: C PTS: 1 DIF: 2 REF: 6-2
TOP: Tax burden MSC: Applicative
130. Refer to Figure 6-8. The burden of the tax on sellers is
a. $1.00 per unit.
b. $1.50 per unit.
c. $2.00 per unit.
d. $3.00 per unit.
ANS: A PTS: 1 DIF: 2 REF: 6-2
TOP: Tax burden MSC: Applicative
131. Refer to Figure 6-8. Suppose the same S and D curves apply, and a tax of the same amount per unit as shown here is imposed. Now, however, the sellers of the good, rather than the buyers, are required to pay the tax to the government. Now, relative to the case depicted in the figure,
a. the burden on buyers will be larger and the burden on sellers will be smaller.
b. the burden on buyers will be smaller and the burden on sellers will be larger.
c. the burden on buyers will be the same and the burden on sellers will be the same.
d. The relative burdens in the two cases cannot be determined without further information.
ANS: C PTS: 1 DIF: 3 REF: 6-2
TOP: Tax burden MSC: Applicative
Figure 6-9
132. Refer to Figure 6-9. The effective price paid by buyers after the tax is imposed is
a. $18.
b. $14.
c. $12.
d. $8.
ANS: A PTS: 1 DIF: 2 REF: 6-1
TOP: Tax Equilibrium price MSC: Applicative
133. Refer to Figure 6-9. The price received by sellers after the tax is imposed is
a. $18.
b. $14.
c. $12.
d. $8.
ANS: D PTS: 1 DIF: 2 REF: 6-2
TOP: Tax Equilibrium price MSC: Applicative
134. Refer to Figure 6-9. The amount of the tax per unit is
a. $10.
b. $6.
c. $4.
d. $2.
ANS: A PTS: 1 DIF: 2 REF: 6-2
TOP: Tax MSC: Applicative
135. Refer to Figure 6-9. The per-unit burden of the tax is
a. $4 on buyers and $4 on sellers.
b. $5 on buyers and $5 on sellers.
c. $4 on buyers and $6 on sellers.
d. $6 on buyers and $4 on sellers.
ANS: C PTS: 1 DIF: 2 REF: 6-2
TOP: Tax burden MSC: Applicative
136. Refer to Figure 6-9. How much tax revenue does this tax produce for the government?
a. $480
b. $600
c. $800
d. $1,080
ANS: B PTS: 1 DIF: 2 REF: 6-2
TOP: Tax MSC: Applicative
137. If buyers are required to pay a $0.10 tax per bag on Hershey's kisses, the demand curve for kisses will shift
a. upward by $0.10 per bag.
b. upward by $0.05 per bag.
c. downward by $0.10 per bag.
d. downward by $0.05 per bag.
ANS: C PTS: 1 DIF: 2 REF: 6-2
TOP: Tax Demand curve MSC: Interpretive
138. A tax on the buyers of popcorn
a. increases the size of the popcorn market.
b. reduces the size of the popcorn market.
c. has no effect on the size of the popcorn market.
d. may increase, decrease, or have no effect on the size of the popcorn market.
ANS: B PTS: 1 DIF: 2 REF: 6-2
TOP: Tax MSC: Interpretive
139. A tax on the buyers of coffee will
a. increase the effective price of coffee paid by buyers, increase the price of coffee received by sellers, and increase the equilibrium quantity of coffee.
b. decrease the effective price of coffee paid by buyers, increase the price of coffee received by sellers, and decrease the equilibrium quantity of coffee.
c. increase the effective price of coffee paid by buyers, decrease the price of coffee received by sellers, and decrease the equilibrium quantity of coffee.
d. increase the effective price of coffee paid by buyers, decrease the price of coffee received by sellers, and increase the equilibrium quantity of coffee.
ANS: C PTS: 1 DIF: 3 REF: 6-2
TOP: Tax Equilibrium price Equilibrium quantity MSC: Analytical
140. When a tax is imposed on tea and buyers of tea are required to send in the tax payments to the government,
a. buyers of tea and sellers of tea both are made worse off.
b. buyers of tea are made worse off and the well-being of sellers is unaffected.
c. buyers of tea are made worse off and sellers of tea are made better-off.
d. the well-being of both buyers of tea and sellers of tea is unaffected.
ANS: A PTS: 1 DIF: 2 REF: 6-2
TOP: Tax incidence MSC: Interpretive
141. Which is the most correct statement about the burden of a tax imposed on buyers of sugar?
a. Buyers bear the entire burden of the tax.
b. Sellers bear the entire burden of the tax.
c. Buyers and sellers share the burden of the tax.
d. The government bears the entire burden of the tax.
ANS: C PTS: 1 DIF: 2 REF: 6-2
TOP: Tax incidence MSC: Interpretive
142. Suppose a tax is imposed on the buyers of a good or service. The burden of the tax will fall
a. entirely on the buyers.
b. entirely on the sellers.
c. entirely on the government.
d. on both the buyers and the sellers.
ANS: D PTS: 1 DIF: 2 REF: 6-2
TOP: Tax incidence MSC: Interpretive
143. When a tax is placed on the buyers of milk, the
a. size of the milk market is reduced.
b. effective price of milk paid by buyers decreases.
c. supply of milk decreases.
d. price of milk received by sellers decreases, and the size of the milk market is unchanged.
ANS: A PTS: 1 DIF: 2 REF: 6-2
TOP: Tax MSC: Interpretive
144. When a tax is placed on the buyers of a product, a result is that, relative to the pre-tax situation,
a. buyers pay more and sellers receive more.
b. buyers pay more and sellers receive less.
c. buyers pay less and sellers receive more.
d. buyers pay less and sellers receive less.
ANS: B PTS: 1 DIF: 2 REF: 6-2
TOP: Tax Equilibrium price MSC: Interpretive
145. The initial impact of a tax on the sellers of a product is
a. on the supply of the product.
b. on the demand for the product.
c. on both the supply of the product and the demand for the product.
d. more difficult to characterize than is the initial impact of a tax on the buyers of a product
ANS: A PTS: 1 DIF: 2 REF: 6-2
TOP: Tax Supply MSC: Interpretive
146. If a tax is levied on the sellers of a product, the demand curve
a. will shift downward.
b. will shift upward.
c. will shift either upward or downward, depending on the amount of the tax.
d. will not shift.
ANS: D PTS: 1 DIF: 2 REF: 6-2
TOP: Tax Demand curve MSC: Interpretive
147. A tax imposed on the sellers of a good will
a. raise the price paid by buyers and lower the equilibrium quantity.
b. raise the price paid by buyers and raise the equilibrium quantity.
c. raise the effective price received by sellers and raise the equilibrium quantity.
d. raise the effective price received by sellers and lower the equilibrium quantity.
ANS: A PTS: 1 DIF: 2 REF: 6-2
TOP: Tax Equilibrium price MSC: Applicative
148. A tax imposed on the sellers of a good
a. raises both the price buyers pay and the effective price for sellers.
b. raises the price buyers pay and lowers the effective price for sellers.
c. lowers the price buyers pay and raises the effective price for sellers.
d. lowers both the price buyers pay and the effective price for sellers.
ANS: B PTS: 1 DIF: 2 REF: 6-2
TOP: Tax Equilibrium price MSC: Applicative
149. When a tax is placed on the sellers of a product, the
a. size of the market is decreased.
b. effective price received by sellers decreases and the price paid by buyers increases.
c. supply of the product decreases.
d. All of the above are correct.
ANS: D PTS: 1 DIF: 2 REF: 6-2
TOP: Tax MSC: Applicative
Figure 6-10
150. Refer to Figure 6-10. The equilibrium price in the market before the tax is imposed is
a. $1.00.
b. $3.50.
c. $5.00.
d. $6.00.
ANS: C PTS: 1 DIF: 1 REF: 6-2
TOP: Equilibrium price MSC: Applicative
151. Refer to Figure 6-10. The price paid by buyers after the tax is imposed is
a. $1.00.
b. $3.50.
c. $5.00.
d. $6.00.
ANS: D PTS: 1 DIF: 2 REF: 6-2
TOP: Tax Equilibrium price MSC: Applicative
152. Refer to Figure 6-10. The effective price sellers receive after the tax is imposed is
a. $1.00.
b. $3.50.
c. $5.00.
d. $6.00.
ANS: B PTS: 1 DIF: 2 REF: 6-2
TOP: Tax Equilibrium price MSC: Applicative
153. Refer to Figure 6-10. The amount of the tax per unit is
a. $1.00.
b. $1.50.
c. $2.50.
d. $3.50.
ANS: C PTS: 1 DIF: 2 REF: 6-2
TOP: Tax MSC: Applicative
154. Refer to Figure 6-10. From this tax the government will collect a total of
a. $125.00.
b. $175.00.
c. $200.00.
d. $250.00.
ANS: A PTS: 1 DIF: 2 REF: 6-2
TOP: Tax MSC: Applicative
155. Refer to Figure 6-10. Buyers effectively pay how much of the tax per unit?
a. $1.00.
b. $1.50.
c. $2.50.
d. $3.00.
ANS: A PTS: 1 DIF: 2 REF: 6-2
TOP: Tax incidence MSC: Applicative
156. Refer to Figure 6-10. Sellers effectively pay how much of the tax per unit?
a. $1.00.
b. $1.50.
c. $2.50.
d. $3.00.
ANS: B PTS: 1 DIF: 2 REF: 6-2
TOP: Tax incidence MSC: Applicative
157. Refer to Figure 6-10. Suppose the same S and D curves apply, and a tax of the same amount per unit as shown here is imposed. Now, however, the buyers of the good, rather than the sellers, are required to pay the tax to the government. Now,
a. the burden on buyers will be larger than in the case illustrated in Figure 6-10.
b. the burden on sellers will be smaller than in the case illustrated in Figure 6-10.
c. a downward shift of the demand curve replaces the upward shift of the supply curve.
d. All of the above are correct.
ANS: C PTS: 1 DIF: 3 REF: 6-2
TOP: Tax incidence MSC: Applicative
Figure 6-11. On the graph below, the shift of the supply curve from S1 to S2 represents the imposition of a tax on a good. On the axes, Q represents the quantity of the good and P represents the price.
158. Consider Figure 6-11. Before the tax is imposed,
a. buyers pay $5 per unit.
b. sellers receive $5 per unit.
c. total revenue for sellers amounts to $50.
d. All of the above are correct.
ANS: D PTS: 1 DIF: 2 REF: 6-2
TOP: Tax MSC: Applicative
159. Consider Figure 6-11. The amount of the tax per unit is
a. $1.50.
b. $2.00.
c. $2.50.
d. $3.00.
ANS: D PTS: 1 DIF: 2 REF: 6-2
TOP: Tax MSC: Applicative
160. Consider Figure 6-11. From the appearance of the graph, it is apparent that, for every unit of the good that is sold,
a. sellers are required to send one dollar to the government and buyers are required to send two dollars to the government.
b. sellers are required to send two dollars to the government and buyers are required to send one dollar to the government.
c. sellers are required to send three dollars to the government and buyers are required to send nothing to the government.
d. sellers are required to send nothing to the government and buyers are required to send two dollars to the government.
ANS: C PTS: 1 DIF: 2 REF: 6-2
TOP: Tax MSC: Applicative
161. Consider Figure 6-11. As a result of the tax,
a. the price paid by buyers rises from $5 to $7.
b. the price received by sellers (after paying the tax) falls from $5 to $3.
c. the government collects $30 in tax revenue.
d. All of the above are correct.
ANS: A PTS: 1 DIF: 2 REF: 6-2
TOP: Tax MSC: Applicative
162. Consider Figure 6-11. Which of the following statements correctly characterizes the burden of the tax?
a. One-fourth of the burden falls on buyers and three-fourths of the burden falls on sellers.
b. One-third of the burden falls on buyers and two-thirds of the burden falls on sellers.
c. One-half of the burden falls on buyers and one-half of the burden falls on sellers.
d. Two-thirds of the burden falls on buyers and one-third of the burden falls on sellers.
ANS: D PTS: 1 DIF: 2 REF: 6-2
TOP: Tax burden MSC: Applicative
163. Consider Figure 6-11. Which of these statements about the effects of the tax is correct?
a. The tax is paid by sellers; sellers bear one-half of the burden of the tax; government collects $24 from the tax.
b. The tax is paid by sellers; sellers bear one-third of the burden of the tax; government collects $24 from the tax.
c. The tax is paid by sellers; sellers bear two-thirds of the burden of the tax; government collects $30 from the tax.
d. The tax is paid by buyers; buyers bear two-thirds of the burden of the tax; government collects $16 from the tax.
ANS: B PTS: 1 DIF: 3 REF: 6-2
TOP: Tax burden MSC: Applicative
164. Consider Figure 6-11. Suppose the demand curve is not the one drawn on the graph; instead, the demand curve is a vertical line passing through the point (Q = 10, P = 5). Using the two supply curves that are drawn, which of the following statements would describe the effects of the tax correctly?
a. The price paid by buyers would be $9.
b. The price received by sellers (after paying the tax) would be $6.50.
c. The government would collect $27 from the tax.
d. Buyers of the good would bear 100 percent of the burden of the tax.
ANS: D PTS: 1 DIF: 3 REF: 6-3
TOP: Tax burden MSC: Analytical
165. A tax on the sellers of TVs
a. leads sellers to supply a smaller quantity at every price.
b. leads buyers to demand a smaller quantity at every price.
c. leads sellers to supply a larger quantity at every price.
d. causes the supply curve to shift to the right.
ANS: A PTS: 1 DIF: 2 REF: 6-2
TOP: Tax Quantity supplied MSC: Interpretive
166. A tax of $0.10 per Snickers bar on the sellers of Snickers will cause the
a. supply curve for Snickers to shift down by $0.10.
b. supply curve for Snickers to shift up by $0.10.
c. supply curve for Snickers to shift down by $0.05.
d. demand curve for Snickers to shift up by $0.10.
ANS: B PTS: 1 DIF: 2 REF: 6-2
TOP: Tax Supply curve MSC: Interpretive
167. Suppose there is currently a tax of $50 per ticket on airline tickets. The supply curve for airline tickets slopes upward and the demand curve for airline tickets slopes downward. Sellers of tickets are required to pay the tax to the government. If the tax is reduced from $50 per ticket to $30 per ticket, then
a. the demand curve will shift upward by $20 and the price paid by buyers will decrease, but the decrease will be less than $20.
b. the demand curve will shift upward by more than $20 and the price paid by buyers will decrease by $20.
c. the supply curve will shift downward by $20 and the price paid by buyers will decrease, but the decrease will be less than $20.
d. the supply curve will shift downward by more than $20 and the effective price received by sellers will increase by $20.
ANS: C PTS: 1 DIF: 3 REF: 6-2
TOP: Tax Supply curve Tax incidence MSC: Analytical
168. A tax on the sellers of cell phones will
a. reduce the size of the cell phone market.
b. place a burden on the sellers of cell phones but not on the buyers of cell phones.
c. affect the price paid by buyers of cell phones, but not the size of the market.
d. affect the size of the market, but it will have no effect on the effective price received by sellers of cell phones.
ANS: A PTS: 1 DIF: 2 REF: 6-2
TOP: Tax incidence MSC: Applicative
169. A tax on the sellers of jewelry will
a. increase the price the buyers pay and increase the effective price the sellers receive.
b. increase the price the buyers pay and decrease the effective price the sellers receive.
c. decrease the price the buyers pay and increase the effective price the sellers receive.
d. decrease the price the buyers pay and decrease the effective price the sellers receive.
ANS: B PTS: 1 DIF: 2 REF: 6-2
TOP: Tax incidence MSC: Interpretive
170. Suppose the demand curve for motorcycles slopes downward and the supply curve for motorcycles slopes upward. If the government passes a law requiring buyers of motorcycles to send $500 to the government for every motorcycle they buy, then
a. the demand curve for motorcycles shifts downward by $500.
b. buyers of motorcycles pay $500 more per motorcycle than they were paying before the tax.
c. sellers of motorcycles are unaffected by the tax.
d. All of the above are correct.
ANS: A PTS: 1 DIF: 2 REF: 6-2
TOP: Tax Demand curve MSC: Interpretive
171. Which of the following statements is correct concerning the burden of a tax imposed on candles?
a. Buyers bear the entire burden of the tax.
b. Sellers bear the entire burden of the tax.
c. Buyers and sellers share the burden of the tax.
d. We have to know whether it is the buyers or the sellers that are required to pay the tax to the government in order to make this determination.
ANS: C PTS: 1 DIF: 2 REF: 6-2
TOP: Tax incidence MSC: Applicative
172. A tax imposed on the sellers of blueberries
a. increases sellers’ costs, shifts the supply curve to the left (upward), and reduces profits.
b. increases sellers’ costs, shifts the supply curve to the right (downward), and reduces profits.
c. increases sellers’ costs, causes a movement upward and to the right along the supply curve, and reduces profits.
d. is passed on in full to the buyers of blueberries and profits remain unchanged.
ANS: A PTS: 1 DIF: 2 REF: 6-2
TOP: Tax Supply curve MSC: Applicative
173. A $2.00 tax placed on the sellers of mailboxes will shift the supply curve
a. upward by exactly $2.00.
b. upward by less than $2.00.
c. downward by exactly $2.00.
d. downward by less than $2.00.
ANS: A PTS: 1 DIF: 2 REF: 6-2
TOP: Tax Supply curve MSC: Interpretive
174. When a tax is placed on the sellers of lemonade,
a. the sellers bear the entire burden of the tax.
b. the buyers bear the entire burden of the tax.
c. the burden of the tax will be always be equally divided between the buyers and the sellers.
d. the burden of the tax will be shared by the buyers and the sellers, but the division of the burden is not always equal.
ANS: D PTS: 1 DIF: 2 REF: 6-2
TOP: Tax incidence MSC: Applicative
175. Revenue from the Federal Insurance Contribution Act (FICA) tax is used to
a. help retire the national debt.
b. cover crop insurance claims.
c. pay the salaries of members of Congress.
d. pay for Social Security and Medicare.
ANS: D PTS: 1 DIF: 1 REF: 6-2
TOP: FICA taxes MSC: Definitional
176. The Federal Insurance Contribution Act (FICA) tax is an example of
a. a payroll tax.
b. a sales tax.
c. a farm subsidy.
d. an income subsidy.
ANS: A PTS: 1 DIF: 1 REF: 6-2
TOP: FICA taxes MSC: Definitional
177. A payroll tax is a
a. fixed number of dollars that every firm must pay to the government for each worker that the firm hires.
b. tax that each firm must pay to the government before the firm can hire workers and operate its business.
c. tax on the wages that firms pay their workers.
d. tax on all wages above the minimum wage.
ANS: C PTS: 1 DIF: 2 REF: 6-2
TOP: Payroll taxes MSC: Definitional
178. Congress intended that
a. the entire FICA tax be paid by workers.
b. the entire FICA tax be paid by large firms.
c. the entire FICA tax be paid by small firms.
d. half the FICA tax be paid by workers, and half be paid by firms.
ANS: D PTS: 1 DIF: 2 REF: 6-2
TOP: FICA taxes MSC: Interpretive
179. Although lawmakers legislated a fifty-fifty division in the payment of the FICA tax,
a. the same outcome, in terms of tax incidence, would occur even if the entire tax had been levied on only the workers or only on the firms.
b. the employer now is required by law to pay more than 50 percent of the tax.
c. the employee now is required by law to pay more than 50 percent of the tax.
d. employers are no longer required by law to pay any portion of the tax.
ANS: A PTS: 1 DIF: 2 REF: 6-2
TOP: FICA taxes MSC: Interpretive
180. A key lesson from the payroll tax is that the
a. tax amounts to a tax solely on workers.
b. tax amounts to a tax solely on firms that hire workers.
c. eliminates any wedge that might exist between the wage that firms pay and the wage that workers receive.
d. true burden of a tax cannot be legislated.
ANS: D PTS: 1 DIF: 2 REF: 6-2
TOP: Payroll taxes MSC: Interpretive
181. When a payroll tax is enacted,
a. the wage received by workers falls and the wage paid by firms rises.
b. the wage received by workers falls and the wage paid by firms falls.
c. the wage received by workers rises and the wage paid by firms falls.
d. the wage received by workers rises and the wage paid by firms rises.
ANS: A PTS: 1 DIF: 2 REF: 6-2
TOP: Payroll taxes Wages MSC: Interpretive
182. Most labor economists believe that the supply of labor is
a. less elastic than demand and, therefore, firms bear most of the burden of the payroll tax.
b. less elastic than demand and, therefore, workers bear most of the burden of the payroll tax.
c. more elastic than demand and, therefore, workers bear most of the burden of the payroll tax.
d. more elastic than demand and, therefore, firms bear most of the burden of the payroll tax.
ANS: B PTS: 1 DIF: 2 REF: 6-2
TOP: Labor supply Payroll tax MSC: Applicative
183. Lawmakers designed the burden of the FICA payroll tax to be split evenly between workers and firms. Labor economists believe that
a. lawmakers may have actually achieved their goal, since statistics show that the tax burden is currently equally divided.
b. the tax raises too little revenue for the government and so it should be eliminated.
c. firms bear most of the burden of the tax.
d. workers bear most of the burden of the tax.
ANS: D PTS: 1 DIF: 2 REF: 6-2
TOP: FICA taxes MSC: Interpretive
184. In the final analysis, tax incidence
a. depends on the legislated burden.
b. is entirely random.
c. depends on the forces of supply and demand.
d. falls entirely on buyers or entirely on sellers.
ANS: C PTS: 1 DIF: 2 REF: 6-2
TOP: Tax incidence MSC: Interpretive
Figure 6-12
185. Refer to Figure 6-12. In which market will the majority of the tax burden fall on the buyer?
a. market (a)
b. market (b)
c. market (c)
d. All of the above are correct.
ANS: B PTS: 1 DIF: 2 REF: 6-2
TOP: Tax burden MSC: Applicative
186. Refer to Figure 6-12. In which market will the majority of the tax burden fall on the seller?
a. market (a)
b. market (b)
c. market (c)
d. All of the above are correct.
ANS: A PTS: 1 DIF: 2 REF: 6-2
TOP: Tax burden MSC: Applicative
187. Refer to Figure 6-12. In which market will the tax burden be most equally divided between the buyer and the seller?
a. market (a)
b. market (b)
c. market (c)
d. All of the above are correct.
ANS: C PTS: 1 DIF: 2 REF: 6-2
TOP: Tax burden MSC: Applicative
Figure 6-13
188. Refer to Figure 6-13. The equilibrium price before the tax is imposed is
a. P0.
b. P1.
c. P2.
d. None of the above is correct.
ANS: B PTS: 1 DIF: 1 REF: 6-2
TOP: Tax Equilibrium price MSC: Applicative
189. Refer to Figure 6-13. The effective price that will be paid by buyers after the tax is
a. P0.
b. P1.
c. P2.
d. impossible to determine.
ANS: C PTS: 1 DIF: 2 REF: 6-2
TOP: Tax Equilibrium price MSC: Applicative
190. Refer to Figure 6-13. The effective price that sellers receive after the tax is imposed is
a. P0.
b. P1.
c. P2.
d. impossible to determine.
ANS: A PTS: 1 DIF: 2 REF: 6-2
TOP: Tax Equilibrium price MSC: Applicative
191. Refer to Figure 6-13. The per-unit burden of the tax on buyers is
a. P2 minus P0.
b. P2 minus P1.
c. P1 minus P0.
d. Q1 minus Q0.
ANS: B PTS: 1 DIF: 2 REF: 6-2
TOP: Tax burden MSC: Applicative
192. Refer to Figure 6-13 The per-unit burden of the tax on sellers is
a. P2 minus P0.
b. P2 minus P1.
c. P1 minus P0.
d. Q1 minus Q0.
ANS: C PTS: 1 DIF: 2 REF: 6-2
TOP: Tax burden MSC: Applicative
193. Refer to Figure 6-13 The amount of the tax per unit is
a. P2 minus P0.
b. P2 minus P1.
c. P1 minus P0.
d. Q1 minus Q0.
ANS: A PTS: 1 DIF: 2 REF: 6-2
TOP: Tax MSC: Applicative
Figure 6-14.
194. Refer to Figure 6-14. Before the tax is imposed, the equilibrium price is
a. $24.
b. $16.
c. $10.
d. $8.
ANS: B PTS: 1 DIF: 1 REF: 6-2
TOP: Equilibrium price MSC: Applicative
195. Refer to Figure 6-14. The effective price that buyers will pay after the tax is imposed is
a. $24.
b. $16.
c. $10.
d. $8.
ANS: A PTS: 1 DIF: 2 REF: 6-2
TOP: Tax Equilibrium price MSC: Applicative
196. Refer to Figure 6-14. The effective price that sellers receive after the tax is imposed is
a. $24.
b. $14.
c. $10.
d. $8.
ANS: C PTS: 1 DIF: 2 REF: 6-2
TOP: Tax Equilibrium price MSC: Applicative
197. Refer to Figure 6-14. The per-unit burden of the tax on buyers is
a. $16.
b. $14.
c. $8.
d. $6.
ANS: C PTS: 1 DIF: 2 REF: 6-2
TOP: Tax burden MSC: Applicative
198. Refer to Figure 6-14. The per-unit burden of the tax on sellers is
a. $16.
b. $14.
c. $8.
d. $6.
ANS: D PTS: 1 DIF: 2 REF: 6-2
TOP: Tax burden MSC: Applicative
199. Refer to Figure 6-14. The amount of the tax per unit is
a. $16.
b. $14.
c. $8.
d. $6.
ANS: B PTS: 1 DIF: 2 REF: 6-2
TOP: Tax MSC: Applicative
200. Refer to Figure 6-14. As the figure is drawn, who directly pays the tax to the government?
a. The buyers pay the full tax to the government.
b. The sellers pay the full tax to the government.
c. A portion of the tax is paid to the government by buyers and the remaining portion is paid to the government by sellers.
d. As the figure is drawn, any of the above is possible.
ANS: D PTS: 1 DIF: 3 REF: 6-2
TOP: Tax MSC: Applicative
201. If a tax is imposed on a market with inelastic demand and elastic supply,
a. buyers will bear most of the burden of the tax.
b. sellers will bear most of the burden of the tax.
c. the burden of the tax will be shared equally between buyers and sellers.
d. it is impossible to determine how the burden of the tax will be shared.
ANS: A PTS: 1 DIF: 3 REF: 6-2
TOP: Inelastic demand Elastic supply Tax incidence MSC: Applicative
202. Buyers of a good bear the larger share of the tax burden when a tax is placed on a product for which
a. the supply is more elastic than the demand.
b. the demand in more elastic than the supply.
c. the tax is placed on the sellers of the product.
d. the tax is placed on the buyers of the product.
ANS: A PTS: 1 DIF: 3 REF: 6-2
TOP: Elasticity Tax incidence MSC: Applicative
203. If a tax is imposed on a market with elastic demand and inelastic supply,
a. buyers will bear most of the burden of the tax.
b. sellers will bear most of the burden of the tax.
c. the burden of the tax will be shared equally between buyers and sellers.
d. it is impossible to determine how the burden of the tax will be shared.
ANS: B PTS: 1 DIF: 3 REF: 6-2
TOP: Elastic demand Inelastic supply Tax incidence MSC: Applicative
204. Which of the following is the most correct statement about tax burdens?
a. A tax burden falls most heavily on the side of the market that is more elastic.
b. A tax burden falls most heavily on the side of the market that is less elastic.
c. A tax burden falls most heavily on the side of the market that is closer to unit elastic.
d. A tax burden is distributed independently of relative elasticities of supply and demand.
ANS: B PTS: 1 DIF: 2 REF: 6-2
TOP: Elasticity Tax incidence MSC: Applicative
205. In general, a tax burden falls more heavily on the side of the market that
a. has a fewer number of participants.
b. is more elastic.
c. is unit elastic.
d. is less elastic.
ANS: D PTS: 1 DIF: 2 REF: 6-2
TOP: Elasticity Tax incidence MSC: Applicative
206. Suppose that a tax is placed on DVDs. If the sellers end up bearing most of the tax burden, we know that the
a. demand is more inelastic than supply.
b. supply is more inelastic than demand.
c. government has required that buyers remit the tax payments.
d. government has required that sellers remit the tax payments.
ANS: B PTS: 1 DIF: 2 REF: 6-2
TOP: Tax Elasticity MSC: Applicative
207. Suppose that a tax is placed on books. If the buyers pay the majority of the tax, we know that the
a. demand is more inelastic than the supply.
b. supply is more inelastic than the demand.
c. government has required that buyers remit the tax payments.
d. government has required that buyers remit the tax payments.
ANS: A PTS: 1 DIF: 2 REF: 6-2
TOP: Tax Elasticity MSC: Applicative
208. In 1990, Congress passed a new luxury tax on items such as yachts, private airplanes, furs, jewelry, and expensive cars. The goal of the tax was to
a. raise revenue from the wealthy.
b. prevent wealthy people from buying luxuries.
c. force producers of luxury goods to reduce employment.
d. limit exports of luxury goods to other countries.
ANS: A PTS: 1 DIF: 1 REF: 6-2
TOP: Luxury tax MSC: Definitional
209. Which of the following was not a result of the luxury tax imposed by Congress in 1990?
a. The larger part of the tax burden fell on sellers.
b. The larger part of the tax burden fell more on the middle class than on the rich.
c. Even the wealthy demanded fewer luxury goods.
d. The tax was never repealed or even modified.
ANS: D PTS: 1 DIF: 2 REF: 6-2
TOP: Luxury tax MSC: Interpretive
210. The burden of a luxury tax falls
a. more on the rich than on the middle class.
b. more on the poor than on the middle class.
c. more on the middle class than on the rich.
d. equally on the rich, the middle class, and the poor.
ANS: C PTS: 1 DIF: 2 REF: 6-2
TOP: Luxury tax Tax incidence MSC: Interpretive
211. Which of the following statements is true?
a. A tax levied on buyers will never be even partially paid by sellers.
b. Who actually pays a tax depends on the price elasticities of supply and demand.
c. Government can decide who actually pays a tax.
d. A tax levied on sellers always will be passed on completely to buyers.
ANS: B PTS: 1 DIF: 2 REF: 6-2
TOP: Tax Elasticity MSC: Interpretive
212. Suppose the demand for picture frames is inelastic and the supply of picture frames is elastic. A tax of $1 per frame levied on buyers of picture frames will increase the equilibrium price paid by buyers of picture frames by
a. $1.
b. more than $0.50 but less than $1.00.
c. a positive amount but less than $0.50.
d. It is impossible to say without more information.
ANS: B PTS: 1 DIF: 3 REF: 6-2
TOP: Tax Inelastic demand Elastic supply MSC: Applicative
213. Suppose the demand curve for a good is very flat and the supply curve for the good is very steep. If the government taxes this good,
a. buyers and sellers will each share 50 percent of the burden, regardless of the slopes of the demand and supply curves.
b. sellers will bear a larger share of the tax burden and buyers will bear a smaller share of the burden.
c. the distribution of the burden will depend upon whether the buyers or the sellers are required to send the tax to the government.
d. the amount of tax revenue collected by the government will depend upon whether the buyers or the sellers are required to send the tax to the government.
ANS: B PTS: 1 DIF: 2 REF: 6-2
TOP: Tax burden Tax revenue MSC: Applicative
214. Suppose the demand for picture frames is elastic and the supply of picture frames is inelastic. A tax of $1 per frame levied on buyers of picture frames will increase the equilibrium price paid by buyers of picture frames by
a. $1.
b. more than $0.50 but less than $1.00.
c. a positive amount but less than $0.50.
d. It is impossible to say without more information.
ANS: C PTS: 1 DIF: 3 REF: 6-2
TOP: Tax Elastic demand Inelastic supply MSC: Applicative
215. The demand for salt is inelastic and the supply of salt is elastic. The demand for caviar is elastic and the supply of caviar is inelastic. Suppose that a tax of $1 per pound is levied on the sellers of salt and a tax of $1 per pound is levied on the buyers of caviar. We would expect that most of the burden of these taxes will fall on
a. sellers of salt and the buyers of caviar.
b. sellers of salt and the sellers of caviar.
c. buyers of salt and the sellers of caviar.
d. buyers of salt and the buyers of caviar.
ANS: C PTS: 1 DIF: 3 REF: 6-2
TOP: Elasticity Tax incidence MSC: Applicative
216. Suppose the demand for macaroni is inelastic and the supply of macaroni is elastic, and the demand for cigarettes is inelastic and the supply of cigarettes is elastic. If a tax were levied on the sellers of both of these commodities, we would expect that the
a. burden of both taxes would fall more heavily on the buyers than on the sellers.
b. burden of the macaroni tax would fall more heavily on the sellers than on the buyers, and the burden of the cigarette tax would fall more heavily on the buyers than on the sellers.
c. burden of the macaroni tax would fall more heavily on the buyers than on the sellers, and the burden of the cigarette tax would fall more heavily on the sellers than on the buyers.
d. burden of both taxes would fall more heavily on the sellers than on the buyers.
ANS: A PTS: 1 DIF: 3 REF: 6-2
TOP: Elasticity Tax incidence MSC: Applicative
217. When the government passes a law requiring buyers of a good to send one dollar to the government for every unit of the good they buy,
a. the supply curve for the good shifts to the right.
b. the demand curve for the good shifts to the left.
c. more than 50 percent of the burden of the tax falls on buyers.
d. the government collects less tax revenue than it would collect if the sellers of the good were required to send one dollar to the government for every unit of the good they sell.
ANS: B PTS: 1 DIF: 2 REF: 6-2
TOP: Tax burden MSC: Interpretive
218. The federal government uses the revenue from the FICA (Federal Insurance Contribution Act) tax to pay for
a. unemployment compensation.
b. flood insurance.
c. Social Security and Medicare.
d. housing subsidies for low-income people.
ANS: C PTS: 1 DIF: 1 REF: 6-2
TOP: Federal Insurance Contribution Act (FICA) taxes MSC: Definitional
219. The term tax incidence refers to
a. the matter of whether buyers or sellers of a good are required to send tax payments to the government.
b. the matter of whether the demand curve or the supply curve shifts when the tax is imposed.
c. the distribution of the tax burden between buyers and sellers.
d. All of the above are correct.
ANS: C PTS: 1 DIF: 2 REF: 6-2
TOP: Tax incidence Tax burden MSC: Definitional
220. Suppose sellers of liquor are required to send $1.00 to the government for every bottle of liquor they sell. Further, suppose this tax causes the price paid by buyers of liquor to rise by $0.80 per bottle. Which of the following statements is correct?
a. This tax causes the demand curve for liquor to shift downward by $0.80 at each quantity of liquor.
b. The incidence of the tax is summarized by the fact that sellers send the tax payments to the government.
c. Eighty percent of the burden of the tax falls on buyers.
d. All of the above are correct.
ANS: C PTS: 1 DIF: 2 REF: 6-2
TOP: Tax incidence Tax burden MSC: Interpretive
221. In which of these cases will the tax burden fall most heavily on buyers of the good?
a. The demand curve is relatively steep and the supply curve is relatively flat.
b. The demand curve is relatively flat and the supply curve is relatively steep.
c. The demand curve and the supply curve are both relatively flat.
d. The demand curve and the supply curve are both relatively steep.
ANS: A PTS: 1 DIF: 2 REF: 6-2