Figure 55 100 30 10 0 50 100 150 200 250 300 350 400 450 500

Figure 5-5 100 30 10 0 50 100 150 200 250 300 350 400 450 500 Quant 14. Refer to Figure 5-5. When price falls from $40 to $30, what do we know about demand? It must be elastic since total revenue increases from $8000 to $9000. a. b. It must be inelastic since total revenue increases from $8000 to $9000. c. It must be inelastic since total revenue decreases from $9000 to $8000. d. It must be elastic since total revenue decreases from $9000 to $8000. The local pizza restaurant makes such great bread sticks that consumers do not respond much to a change in the price. If the owner is interested only in increasing revenue, what should he do? a. He should lower the price of the bread sticks. b. He should leave the price of the bread sticks alone. c. He should raise the price of the bread sticks d. He should reduce costs. 15. When a supply curve is relatively flat, what do we know? a. The supply is relatively elastic. b. The supply is relatively inelastic. c. Quantity supplied changes in the same proportion that price changes. d. Quantity supplied changes slightly when the price changes 16. 17. What happens as elasticity of supply rises? a. b. c. d. The supply curve gets flatter The supply curve gets steeper. Quantity supplied falls. Quantity supplied increases. 18. Generally, over which time period will firm be able to respond most to a change in price? a. in one month b. in six months in one year in five years c. d. What are the most basic tools of economics? a. b. c. d. 19. demand and supply price and quantity monetary and fiscal policy elasticity of demand and supply

Solution

14 a) When demand is elastic price and revenue move in the opposite direction direction. When the demand is inelastic, price and revenue move in same direction.

In this case, price decreases from $40 to $30, revenue increases from $8000 to $9000.

15) C. Raise the price of breadsticks. Since the demand is inelastic, raising the price will increase the revenue.

16) A. Relatively elastic. A small change in price will lead to a bigger change in quantity supplied, other things remaining the same.

17) A. The supply curve gets flatter.