Question

1. 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 result in identical 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. Suppose that gasoline prices increase dramatically this month. Lola commutes 100 miles to work each weekday. Over the next few months, Lola drives less on the weekends to try to save money. Within the year, she sells her home and purchases one only 10 miles from her place of employment. These examples illustrate the importance of a) the availability of substitutes in determining the price elasticity of demand. b) a necessity versus a luxury in determining the price elasticity of demand. c) the definition of a market in determining the price elasticity of demand. d) the time horizon in determining the price elasticity of demand. than the 3. For durable goods, the short-run income elasticity of demand will be much long-run elasticity? a) larger b) smaller c) equal to d) it depends 4. Lee spends his entertainment budget on video games and movies. Video games cost $60 each and movies cost $20. If Lee bought an extra video game (keeping movies constant) he would gain 30 utils (i.e. unit of utilities), if he watched an extra movie (keeping video games constant) he would gain 15 utils. From this information we can conclude that Lee: a) should buy fewer video games and go see more movies b) should buy more video games and go see fewer movies. c) should buy more video games and see more movies d) should not change anything

Answer 1

Answer-1 The correct option is A.) Demand is more elastic on the lower part of the demand curve than on the upper part.

It is not correct because, Demand is inelastic on the lower part of the demand curve and elastic on the upper part of the demand curve.

Answer-2 The correct option is D.) the time horizon in determining the price elasticity of demand.

With time, there is a change in the demand, it demonstrates, time horizon in determining the price elasticity of demand.

Answer-3 The correct option is A.) larger

For a durable good, the short-run income elasticity of demand will be much larger than the long-run elasticity.

Answer-4 The correct option is A.) should buy fewer video games and go see more movies

Marginal utility per dollar spent on video game (30/60 ) is less than marginal utility per dollar spent on movies(15/20). Thus, Lee should buy fewer video games and go see more movies.