The income elasticity of demand for education is 3.5. thus, a 4% increase in income will

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• What happens to income elasticity when income increases?
• How do you calculate income elasticity of demand?
• What does 0.5 income elasticity of demand mean?
• What does an income elasticity of demand of 2 mean?

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Skill: 
 Fact 
14) 
 When demand is inelastic, a decrease in price will result in an increase in 
total revenue. 
Answer: 
 F ALSE 
Diff: 1 
Topic: 
C alculating Elasticities 
Skill: 
 Fact 
15) 
 When demand is unit elastic, an increase in price will result in an increase in 
total revenue. 
Answer: 
 F ALSE 
Diff: 1 
Topic: 
C alculating Elasticities 
Skill: 
 Fact 
16) 
 When demand is unit elastic, a decrease in price will result in no change in 
total revenue. 
Answer: 
 T RUE 
Diff: 1 
Topic: 
C alculating Elasticities 
Skill: 
 Fact 
5.3 
 T he Determinants of Demand Elasticity 
1 
 M ultiple Choice 
1) 
 When there are more substitutes for a product, the ________ for the product is 
________. 
A) 
 demand; less price elastic 
B) 
 demand; more price elastic 
C) 
 income elasticity; greater 
D) 
income elasticity; smaller 
Answer: 
 B 
Diff: 1 
Topic: 
D eterminants of Demand Elasticity 
Skill: 
 Fact 
2) 
 The more time that elapses, the 
A) 
 less price elastic is the demand for the product. 
B) 
 more price elastic is the demand for the product. 
C) 
 greater the income elasticity of demand for a product. 
D) 
smaller the income elasticity of demand for the product. 
Answer: 
 B 
Diff: 1 
Topic: 
D eterminants of Demand Elasticity 
Skill: 
 Fact 
3) 
 The determinants of elasticity include 
A) 
availability of substitutes. 
B) 
price relative to income. 
C) 
time. 
D) 
all of the above 
Answer: 
 D 
Diff: 2 
Topic: 
D eterminants of Demand Elasticity 
Skill: 
 Definition 
5.4 
 O ther Important Elasticities 
1 
 M ultiple Choice 
1) 
 The income elasticity of demand 
A) 
measures the change in income necessary for a given change in quantity demanded. 
B) 
measures the responsiveness of income to changes in quantity demanded. 
C) 
measures the responsiveness of quantity demanded to changes in income. 
D) 
is the ratio of the percentage change in income to the percentage change in 
quantity 
demanded. 
Answer: 
 C 
Diff: 1 
Topic: 
O ther Important Elasticities 
Skill: 
 Definition 
2) 
 If income increases by 10% and, in response, the quantity of housing demanded 
increases by 
7%, then the income elasticity of demand for housing is 
A) 
-0.7 
B) 
-1 
C) 
0.7 
D) 
1.43 
Answer: 
 C 
Diff: 2 
Topic: 
O ther Important Elasticities 
Skill: 
 Analytic 
3) 
 The income elasticity of demand for education is 3.5. Thus, a 4% increase in 
income will 
A) 
decrease the quantity of education demanded by 3.5%. 
B) 
decrease the quantity of education demanded by 14%. 
C) 
increase the quantity of education demanded by 4%. 
D) 
increase the quantity of education demanded by 14%. 
Answer: 
 D 
Diff: 2 
Topic: 
O ther Important Elasticities 
Skill: 
 Analytic 
4) 
 The income elasticity of demand for low-quality beef is -2. Thus, an 8% 
decrease in the 
quantity of low-quality beef demanded 
A) 
 is the result of a decrease in income of 4%. 
B) 
is the result of an increase in income of 0.25%. 
C) 
is the result of an increase in income of 4%. 
D) 
 is unrelated to any change in income. 
Answer: 
 C 
Diff: 2 
Topic: 
O ther Important Elasticities 
Skill: 
 Analytic 
5) 
 Assume you earn $20,000 a year and your favorite sports magazine costs you $100 
a year. 
Your demand for the sports magazine is likely to be 
A) 
 elastic. 
B) 
 inelastic. 
C) 
 perfectly elastic. 
D) 
 perfectly inelastic. 
Answer: 
 A 
Diff: 1 
Topic: 
O ther Important Elasticities 
Skill: 
 Fact 
6) 
 Assume you earn $75,000 a year and your favorite entertainment magazine costs 
you $25 a 
year. Your demand for the entertainment magazine is likely to be 
A) 
 elastic. 
B) 
 inelastic. 
C) 
 perfectly elastic. 
D) 
 perfectly inelastic. 
Answer: 
 B 
Diff: 1 
Topic: 
O ther Important Elasticities 
Skill: 
 Fact 
7) 
 The ABC Computer Company spends a lot of money for advertising designed to 
convince 
you that their personal computers are superior to all other personal computers. 
If the ABC 
Company is successful, the demand for ABC personal computers 
A) 
and the demand for other firms' personal computers will become less price 
elastic. 
B) 
and the demand for other firms' personal computers will become more price 
elastic. 
C) 
will become more price elastic but the demand for other firms' personal 
computers will 
become less price elastic. 
D) 
will become less price elastic but the demand for other firms' personal 
computers will 
become more price elastic. 
Answer: 
 D 
Diff: 3 
Topic: 
O ther Important Elasticities 
Skill: 
 Conceptual 
8) 
 A government is considering levying an alcohol tax to raise revenue to finance 
health care 
benefits. People for the tax argue that alcohol demand is price inelastic. Which 
of the 
following statements is TRUE? 
A) 
 The alcohol tax may not raise as much revenue as anticipated in the years to 
come 
because alcohol demand is likely to become more elastic over time. 
B) 
This is a very good way to raise revenue both in the short term and in the long 
term 
because there are no close substitutes for alcohol. 
C) 
This tax will not raise much revenue either in the short term or the long term 
because 
demand is price inelastic. 
D) 
 No tax revenue can be raised in this way because alcohol sellers will just 
lower their 
price by the amount of the tax and therefore the consumer price of alcohol will 
not 
change. 
Answer: 
 A 
Diff: 3 
Topic: 
O ther Important Elasticities 
Skill: 
 Conceptual 
9) 
 In order to discourage consumers from eating unhealthy fast food, the 
government is 
considering placing a tax on all fast food sales. Which of the following 
statements is TRUE? 
A) 
 Given the numerous alternatives, consumers' demand for fast food is relatively 
elastic 
and the tax will likely work to discourage fast food consumption. 
B) 
 The tax on fast food will likely raise considerable revenue, but will be 
unlikely to 
reduce the consumption of fast food by consumers. 
C) 
 The tax on fast food will likely increase the demand for homecooked meals. 
D) 
 Both (A) and (C) are true. 
Answer: 
 D 
Diff: 3 
Topic: 
O ther Important Elasticities 
Skill: 
 Conceptual 
10) 
 Suppose an increase of 10% in the price of steak reduces the consumption of 
steak by 30%. 
Such a price rise will induce households to spend 
A) 
 less of their income on steak. 
B) 
 more of their income on steak. 
C) 
 the same amount on steak as before. 
D) 
 more on products that are complementary with steak. 
Answer: 
 A 
Diff: 2 
Topic: 
O ther Important Elasticities 
Skill: 
 Definition 
11) 
 Cross-price elasticity of demand measures the response in the 
A) 
price of a good to a change in the quantity of another good demanded. 
B) 
income of consumers to the change in the price of goods. 
C) 
quantity of one good demanded when the quantity demanded of another good 
changes. 
D) 
quantity of one good demanded to a change in the price of another good. 
Answer: 
 D 
Diff: 2 
Topic: 
O ther Important Elasticities 
Skill: 
 Definition 
12) 
 If the quantity demanded of tea increases by 2% when the price of coffee 
increases by 6%, 
the cross-price elasticity of demand between tea and coffee is 
A) 
 -3. 
B) 
 0.33. 
C) 
 3. 
D) 
 12. 
Answer: 
 B 
Diff: 2 
Topic: 
O ther Important Elasticities 
Skill: 
 Analytic 
13) 
 If the quantity demanded of bagels decreases by 8% when the price of croissants 
decreases 
by 16%, the cross-price elasticity of demand between bagels and croissants is 
A) 
 0.5. 
B) 
 -5. 
C) 
 -2. 
D) 
 2. 
Answer: 
 A 
Diff: 2 
Topic: 
O ther Important Elasticities 
Skill: 
 Analytic 
14) 
 If the quantity demanded of peanut butter increases by 4% when the price of 
jelly decreases 
by 2%, the cross-price elasticity of demand between peanut butter and jelly is

What happens to income elasticity when income increases?

How do you calculate income elasticity of demand?

What does 0.5 income elasticity of demand mean?

What does an income elasticity of demand of 2 mean?