Question

QUESTION 1

1. Suppose the short-run elasticity of demand for gasoline in the US retail market is -0.5, and the long-run elasticity of demand in the same market is -0.8. What is the impact of an increase in the US federal gasoline tax?

   	A.	Increase tax revenue in the short run and decrease tax revenue in the long run
   	B.	Decrease tax revenue in both short run and long run
   	C.	Increase tax revenue in both short run and long run
   	D.	Decrease tax revenue in the short run and increase tax revenue in the long run

2 points   

QUESTION 2

1. Jim recently graduated from college, and his annual income increased from $8,000 to $35,000. Shortly after starting the new job, he dropped his Netflix account and paid for Amazon Prime so he could view Prime Videos in his leisure time. What does this decision imply about his demand for online video services?

   	A.	Netflix is an inferior good for Jim
   	B.	Amazon Prime is an inferior good for Jim
   	C.	Netflix is a normal good for Jim
   	D.	None of the above

2 points   

QUESTION 3

1. Based on USDA estimates, the cross-price elasticity for peanut butter consumption with respect to grape jelly prices is 1.5.  What does this information imply about the relationship between these two goods?

   	A.	Peanut butter and grape jelly are normal goods
   	B.	Peanut butter and grape jelly are complements in consumption
   	C.	Peanut butter and grape jelly are substitutes in consumption
   	D.	Peanut butter and grape jelly have elastic demand curves

2 points   

QUESTION 4

1. You have a downward sloping demand curve for pizza, and you eat two slices of pizza for lunch. Which portion of your lunch would you be willing to pay more to consume?

   	A.	First slice of pizza
   	B.	Second slice of pizza
   	C.	Equal willingness to pay for both slices of pizza
   	D.	We do not have enough information to answer this question

2 points   

QUESTION 5

1. Your elasticity of demand for milk is -0.25. If the price of milk drops by 10% due to recent changes in dairy policy, what is the expected impact on your milk consumption?

   	A.	Quantity demanded increases by 25%
   	B.	Quantity demanded increases by 2.5%
   	C.	Quantity demanded declines by 25%
   	D.	Quantity demanded declines by 2.5%

Answer 1

Ans

1 C because elasticity is less than 1 meaning demand is inelastic. This means demand will fall less than increase in price so that revenue rises

2 A because inferior goods always decrease in consumption as income rises

3 substitutes because in case of substitutes cross elasticity is positivr

4 A because it gives more utility as shown by downward sloping demand curve

5 increases by 10(0.25)=2.5. Note as price falls demand rises