Test Prep Test Prep Certifications BUSINESS-ENVIRONMENT-AND-CONCEPTS Questions & Answers

• Question 291:

  The Waymand family typically ate hamburger as a regular staple in their diet. In the last few years, the family income has doubled, and they have now replaced hamburger with steak as a regular staple in their diet. This is an example where the demand for hamburger:

  A. Is relatively elastic.

  B. Is perfectly elastic.

  C. Responds as an inferior good.

  D. Is perfectly inelastic.

  Correct Answer: C

  Choice "c" is correct. An inferior good is one for which the demand declines as income increases. A normal good would experience an increase in demand in response to an increase in income. Because the demand for hamburger went down as income increased, it is an inferior good. Choices "a", "b", and "d" are incorrect. The elasticity of demand for a good is calculated by measuring the change in quantity demanded over the change in price (not income). The question does not have sufficient information to calculate the elasticity of the demand for hamburger.

• Question 292:

  If the demand for a normal good is inelastic, then the sales price of the product would increase following a (n):

  A. Decrease in the price of a substitute good.

  B. Increase in the supply of the product.

  C. Decrease in the supply of the product.

  D. Increase in the number of suppliers of the product.

  Correct Answer: C

  Choice "c" is correct. If demand is perfectly inelastic (or not price sensitive), there will be no change in quantity demanded for a change in price. This means that consumers of the product will demand a constant quantity, regardless of the price. If the quantity supplied is reduced (presumably below an equilibrium point where supply equals demand), there will be excess demand for the product and sales price will go up. The increase in sales price will have no impact on demand (because demand is assumed to be perfectly price inelastic). Choices "a", "b", and "d" are incorrect, per the above Explanation.

• Question 293:

  If the elasticity of demand for a normal good is estimated to be 1.5, then a 10% reduction in its price would cause:

  A. Total revenue to fall by 10%.

  B. Total revenue to fall by 15%.

  C. Quantity demanded to rise by 15%.

  D. Demand to decrease by 10%.

  Correct Answer: C

  Choice "c" is correct. The elasticity of demand is calculated as:

  % Change in demand

  % Change in price

  If the elasticity of demand is 1.5 (assumed to be the absolute value, as the elasticity of demand for a

  normal good is always negative), then a 10% price reduction would cause an increase in the quantity

  demanded by 15% (a ratio of 15 to 10 or 1.5).

  Choices "a", "b", and "d" are incorrect, per above.

• Question 294:

  A basic determinant of the elasticity of demand for a normal good is the:

  A. Length of time producers have to respond to market changes.

  B. Number of substitutes available for the product.

  C. Number of sellers of the product.

  D. Number of complements available for the product.

  Correct Answer: B

  Choice "b" is correct. The change in demand for a product, based upon a given change in that product's

  price, is dependent on whether or not other (presumably cheaper) goods can be substituted for the

  product. Choice "a" is incorrect. The elasticity of supply (not demand) would take into account the

  response time producers might have to market changes.

  Choice "c" is incorrect. The number of sellers is irrelevant when calculating the elasticity of demand.

  Choice "d" is incorrect. A complement good's demand is the same as the primary good. For example, an

  increase in the demand for a given food would cause the demand for its complement to also increase.

  The increased demand of the complement is irrelevant when calculating the elasticity of demand.

• Question 295:

  When the supply of and demand for a good both increase:

  A. Equilibrium price will increase.

  B. Equilibrium price will decrease.

  C. Equilibrium price may increase, decrease, or remain unchanged.

  D. Equilibrium quantity may increase, decrease, or remain unchanged.

  Correct Answer: C

  

  Choice "c" is correct. When the supply of and demand for a good both increase, equilibrium quantity

  increases. However, the impact on price is indeterminate. If demand and supply increase by the same

  amount, price will remain unchanged (as illustrated above). However, if demand increases by more than

  supply, price will increase. Conversely, if supply increases by more than demand, price will decrease.

  Choices "a" and "b" are incorrect, since the impact on price is indeterminate.

  Choice "d" is incorrect, since equilibrium quantity will increase.

• Question 296:

  An increase in the price of crude oil will have what affect on the equilibrium price and quantity of gasoline?

  A. Price will fall and quantity will rise.

  B. Price will rise and quantity will fall.

  C. Price will fall and quantity will fall.

  D. Price will rise and quantity will rise.

  Correct Answer: B

  Choice "b" is correct. Crude oil is an input to the production of gasoline. When the price of an input

  increases, supply shifts left, causing equilibrium price to rise and equilibrium quantity to fall.

  Choice "a" is incorrect, since price will rise and quantity will fall.

  Choice "c" is incorrect, since price will rise.

  Choice "d" is incorrect, since quantity will fall.

• Question 297:

  The local video store's business increased by 12 percent after the movie theater raised its prices from $6.50 to $7.00. This is an example of:

  A. Substitute goods.

  B. Superior goods.

  C. Complementary goods.

  D. Independent goods.

  Correct Answer: A

  Choice "a" is correct. For substitute goods, as the price of one good goes up, the demand for another,

  substitute good increases as consumers desire the lower-priced substitute good. Choice "b" is incorrect.

  Superior goods. Just as the demand for inferior goods declines with an increase in the income level of a

  consumer, superior goods will experience a spurt in demand as prices are raised. Choice "c" is incorrect.

  The demands for mutually "complementary goods" fluctuate together (e.g., more cereal purchases are

  accompanied by an increase in the demand for milk).

  Choice "d" is incorrect. Independent goods have unrelated demand functions (e.g., bread and vacuum

  cleaners).

• Question 298:

  Which one of the following statements about supply and demand is true?

  A. If supply increases and demand remains constant, equilibrium price will rise.

  B. If demand increases and supply increases, equilibrium quantity will fall.

  C. If demand increases and supply decreases, equilibrium price will increase.

  D. If demand increases and supply remains constant, equilibrium price will fall.

  Correct Answer: C

  Choice "c" is correct. If quantity demanded for a product goes up, this drives price up. Additionally, if

  supply decreases, this will also drive prices up. Therefore, it is a certainty that price will be driven up, given

  an increase in demand and a decrease in supply.

  Choice "a" is incorrect. Increased supply will reduce (not increase) prices, assuming demand remains

  constant.

  Choice "b" is incorrect. Increased demand will increase price, and increased supply will reduce price.

  The net impact on price cannot be determined without more facts.

  Choice "d" is incorrect. Increased demand will increase (not reduce) price, assuming supply remains

  constant.

• Question 299:

  In competitive markets, an increase in demand for a product causes a(n):

  A. Increase in product supply.

  B. Reduction in purchases by consumers.

  C. Reduction in the number of buyers of the product.

  D. Increase in the price of the product.

  Correct Answer: D

  Rule of economic reasoning: "Draw the graph!"

  

  Choice "d" is correct. When demand increases and supply has not increased (as implied by the question),

  suppliers will raise the price of the product and more product will be bought (but the supply curve does not change). Because consumers are demanding more product than is available, they are "willing" to pay a higher price. Choice "a" is incorrect. Although buyers would pay higher prices and purchase more products, the supply "curve" has not changed. Therefore, the quantity supplied remains the same. Choice "b" is incorrect. Because consumer demand has increased (not decreased). Choice "c" is incorrect. An increase in demand has an indeterminate (and irrelevant) impact on the number of buyers. For example, there could be the same number of buyers in the market, but that each demands a higher quality.

• Question 300:

  An increase in the market supply of beef would result in a(n):

  A. Decrease in the quantity of beef demanded.

  B. Increase in the price of beef.

  C. Decrease in the demand for beef.

  D. Increase in the quantity of beef demanded.

  Correct Answer: D

  

  Choice "d" is correct. As illustrated above, a shift outward (increase) in supply, increases quantity demanded (Q2) at equilibrium, accompanied by a decline in price. Thus, an increase in the market supply of beef would result in an increase in the quantity of beef demanded. Choices "a" and "b" are incorrect, as seen in the graph above. There is an increase in the quantity of beef demanded and a decrease in the price of beef. Choice "c" is incorrect, because there is no information in the question pertaining to any "shift" in the beef demand curve or in the demand for any complimentary products (e.g., pork).