# Practice Test-3 on Elasticity and its Application

Question 1: Demand is said to be inelastic if ............................
1. demand shifts only slightly when the price of the good increases.
2. buyers respond substantially to changes in the price of the good.
3. the price of the good responds only slightly to changes in demand and supply.
4. the quantity demanded changes only slightly when the price of the good changes.
Question 2: For a good that is a luxury, demand .......................
1. has unit elasticity.
2. tends to be inelastic.
3. tends to be elastic.
4. cannot be represented by a demand curve in the usual way.
5. non of the above
Question 3: Holding all other forces constant, when the price of gasoline increases, the number of gallons of gasoline demanded would decrease substantially over a ten-year period because .................................
1. buyers tend to be much less sensitive to a change in price when given more time to react.
2. buyers tend to be much more sensitive to a change in price when given more time to react.
3. buyers will have substantially more income over a ten-year period.
4. the quantity supplied of gasoline increases very little in response to an increase in the price of gasoline.
Question 4: When the price of bubble gum is \$0.50, the quantity demanded is 100 packs per day. When the price falls to \$0.40, the quantity demanded increases to 300.
Given this information and using the midpoint method, we know that the demand for bubble gum is ................
1. unit elastic.
2. inelastic.
3. elastic.
4. perfectly inelastic.
Question 5: Suppose the price of chocolate cake decreases from \$5.00 to \$4.00 and, as a result, the quantity of chocolate cake demanded increases from 3,000 to 4,000. Using the midpoint method, the price elasticity of demand for chocolate cake in the given price range is ......
1. 1.34
2. 1.28
3. 1.30
4. 1.29
Question 6: If the price elasticity of demand for a good is 5.0, then a 25 percent increase in price results in a ..................
1. 20 percent decrease in the quantity demanded.
2. 0.2 percent decrease in the quantity demanded.
3. 2.0 percent decrease in the quantity demanded.
4. 3.5 percent decrease in the quantity demanded.
Question 6: Consider airfares on flights between New York and Austin. When the airfare is \$300, the quantity demanded of tickets is 2,500 per week. When the airfare increased to \$330, the quantity demanded of tickets dropped to 1,500 per week. Using the midpoint method,
1. the price elasticity of demand is about 10.34 and an increase in the airfare will cause airlines’ total revenue to increase.
2. the price elasticity of demand is about 10.5 and an increase in the airfare will cause airlines’ total revenue to decrease.
3. the price elasticity of demand is about 10.2 and an increase in the airfare will cause airlines’ total revenue to decrease.
4. the price elasticity of demand is about 0.1 and an increase in the airfare will cause airlines’ total revenue to increase.
Question 7: For a particular good, a 2 percent increase in price causes a 15 percent decrease in quantity demanded. Which of the following statements is most likely applicable to this good?
1. The relevant time horizon is short.
2. The good is a necessity.
3. There are many close substitutes for this good.
4. The market for the good is broadly defined.
Question 8: The section of the demand curve shown below labeled A represents the.....................

1. inelastic section of the demand curve.
2. unit elastic section of the demand curve.
3. perfectly elastic section of the demand curve.
4. elastic section of the demand curve.
Question 9: When a society cannot produce all the goods and services people wish to have, it is said that the economy is experiencing ........
1. inefficiencies
2. scarcity
3. surpluses
4. inequalities
Question 10: Causes of market failure include .......................
1. incorrect forecasts of consumer demand and foreign competition
2. externalities and market power
3. market power and incorrect forecasts of consumer demand
4. externalities and foreign competition
Question 11: The income of a typical worker in a country is most closely linked to which of the following .........
1. market power
2. population
3. innovation
4. productivity
5. government policies
6. all of the above
7. none of the above
Question 12: The supply of a good or services is determined by .......................
1. government policies
2. those who buy the good or service
3. those who sell the good or services
4. all of the above
5. none of the above
Question 13: The term price takers refers to buyers and sellers in ................
1. monopolistic markets
2. markets that are regulated by the government
3. perfectly competitive markets
4. all of the above
5. none of the above
Question 14: Equilibrium is a situation in which forces ....................
1. clash
2. are the same
3. don't change
4. are in balance