Question

QUESTION 1

Elastic supply occurs if the change in quantity supplied is ________ to a change in price.

	a.	relatively responsive
	b.	the same
	c.	relatively unresponsive

10 points   

QUESTION 2

Suppose you are in charge of sales at a pharmaceutical company, and your firm has a new drug that causes bald men to grow hair. Assume that the company wants to earn as much revenue as possible from this drug. If the elasticity of demand for your company’s product at the current price is 1.4, what would you advise the company to do?

	a.	keep the price the same
	b.	raise the price
	c.	lower the price

10 points   

QUESTION 3

Using the midpoints method, calculate the price elasticity of demand of Good Z using the following information: When the price of good Z is $10, the quantity demanded of good Z is 85 units. When the price of good Z rises to $15, the quantity demanded of good Z falls to 60 units.

	a.	The price elasticity of demand for good Z = 1.90.
	b.	The price elasticity of demand for good Z = 0.98.
	c.	The price elasticity of demand for good Z = 0.52.

10 points   

QUESTION 4

Determining the price elasticity of demand involves all of the following factors, but NOT

	a.	slope of the supply curve.
	b.	luxuries versus necessities.
	c.	availability of substitutes.

10 points   

QUESTION 5

You are the manager of a restaurant and would like to increase revenue. The host staff suggests that you should increase the price of drinks and food, but the servers suggest decreasing the price of drinks and food. You are unsure if you should increase or decrease price, but you know that

	a.	the servers thinks demand for drinks and food is elastic.
	b.	the servers think demand for drinks and food is inelastic.
	c.	the host staff thinks demand for drinks and food is elastic.

10 points   

QUESTION 6

Suppose the price of apples increase by 20%, resulting in consumers to purchase 15% more pears. Given this information, it appears that

	a.	price elasticity of demand of pears is 0.75.
	b.	price elasticity of demand of apples is 1.33.
	c.	cross-price elasticity of pears is 0.75.

Answer 1

Solution:

1. Elastic supply occurs if the change in quantity supplied is __RELATIVELY RESPONSIVE______ to a change in price.

We say supply is elastic only if the change in quantity supply is more than the change in price.

2.Since the elasticity is greater than 1 ,this means that the demand is elastic. So a decrease in price will definetely increase the demand and increase the total revenue.

3.Solution : Mid point elasticity = ( Xnew - Xold / X average )/ (Pnew -Pold / Paverage)

Average X = (85 +60 )/ 2 = 145 /2 =72.5

Average P =(10+25) / 2= 12.5

Numerator =( 60-85)/72.5 = -0.34

denominator = (15-10) / 12.5= 0.4

Now using the formula = - 0.34 / 0.4 = - 0.86.

4. Slope of the supply curve .

5.the servers thinks demand for drinks and food is elastic.

6.

cross-price elasticity of pears is 0.75.