Elasticity: Sample Quiz

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1. Cross-price elasticity measures whether:

goods are normal or inferior.
 two goods are substitutes or complements.
 demand is elastic or inelastic.
 supply is steeper than demand or vice versa.

2. Aabced, Inc. finds that no matter how much it sells, its marginal revenue is always $7.50. This constant marginal revenue tells us that the elasticity of its demand curve is:

infinity.
 7.5
 1.
 zero.

3. Connie Mix is a consultant to Vidget Corp. He tells them that their product, Vidgets, is an inferior good. He would make this claim if he believed that the product had:

an income elasticity greater than zero.
 an income elasticity less than zero.
 a price elasticity of supply greater than one.
 a price elasticity of supply less than one.

4. The Vidget company sells 9 Vidgets for $10 each. To sell the tenth Vidget, it must lower price on all items to $9.90. The marginal revenue of the tenth Vidget is:

$99.00.
 $10.00.
 $9.90.
 $9.00.

5. In January of 1999 the U.S. Post Office raised the price of mailing a first class letter from 32 to 33 cents, an increase of about 3%. If the Post Office faces a section of its demand curve that is elastic, one can predict that revenues will:

increase by more than 3%.
 increase by 3%.
 increase, but by less than 3%
 decrease.

The following table gives information about the costs and benefits of an activity. Answer the questions 6 and 7 using this table.

Amount
Total Cost
Marginal Benefit
1 (first)
$8
$18
2 (second)
16
14
3 (third)
25
8
4 (fourth)
36
7
5 (fifth)
50
3

6. The total benefit of three units is:

$9.
 $24.
 $30.
 $40.

7. The marginal cost of the fourth unit is:

$7.
 $9.
 $11.
 $36.

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Copyright Robert Schenk