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Free CPA-Business Exam Braindumps (page: 62)

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PDF with 530 Questions

A perfectly inelastic supply curve in a competitive market:

  1. Means the equilibrium price must be zero.
  2. Implies a vertical demand curve.
  3. Exists when firms cannot vary input usage.
  4. Says the market supply curve is horizontal.

Answer(s): C

Explanation:

Choice "c" is correct. Price elasticity of supply is calculated the same way as demand except that quantity supplied is measured:


Perfectly inelastic supply curves are also vertical representing that supply is insensitive to changes in price; i.e., the quantity supplied will not change as price changes.
Perfectly inelastic supply curves would exist if firms cannot vary input usage. Regardless of price, the firm has to use all inputs if it produces at all.
Choices "a", "b", and "d" are incorrect, as they are far-out distractors.



In the pharmaceutical industry where a diabetic must have insulin no matter what the cost and where there is no substitute, the diabetic's demand curve is best described as:

  1. Perfectly elastic.
  2. Perfectly inelastic.
  3. Elastic.
  4. Indifferent.

Answer(s): B

Explanation:

Choice "b" is correct. When a good is demanded, no matter what the price, demand is described as perfectly inelastic. The demand "curve" is a vertical line at the quantity demanded with price making no difference.
Choices "a" and "c" are incorrect. There is no such thing as perfect elasticity. However, the more elastic demand is, the greater the change in quantity demanded for price changes.
Choice "d" is incorrect. Diabetics are indifferent to changes in the price of insulin, and to economists, this is perfectly inelastic demand.



Demand for a product tends to be price inelastic if:

  1. The product is considered a luxury item.
  2. Few good complements for the product are available.
  3. People spend a large share of their income on the product.
  4. Few good substitutes are available for the product.

Answer(s): D

Explanation:

Choice "d" is correct. Demand for a product tends to be price inelastic if few good substitutes are available for the product. Even if price increases, consumers are then unable to switch to substitute goods, because there aren't any.
Choice "a" is incorrect. Luxury items may have good substitutes available.
Choice "b" is incorrect. Complementary goods are those whose demand fluctuates in unison; substitute goods are more relevant here.
Choice "c" is incorrect. If consumers spend a large share of their income on the product, they will be very sensitive to any price changes and hence product demand would be more "elastic."



ABC Golf Course has raised green fees to a nine-hole game due to an increase in demand.

Which of the following is correct?

  1. The regular weekday and weekend demand is inelastic.
  2. The regular weekday and weekend demand is elastic.
  3. The senior citizen and weekend demand is inelastic.
  4. The senior citizen demand is elastic and weekend demand is inelastic.

Answer(s): D

Explanation:

Choice "d" is correct. Demand is elastic if a decline in price (P) results in an increase in total revenue (TR); or if an increase in P results in a decline in TR. On the other hand, if demand is inelastic, a decline in P will result in a decline in TR or an increase in P will result in an increase in TR.
First, the total revenues at both the new and the previous rate must be computed. The (new or previous) rate* average games played (AGP) = the total revenue. As a result, TR at the previous rate (PR) is 800 for regular weekday (RW), 900 for senior citizen (SC), and 3315 for the weekend (WE). TR at the new rate (NR) is 770 for RW, 656 for SC, and 4460 for WE.
So, demand for RW and SC is elastic because the increase in P results in a decline in total revenue. The demand for WE is inelastic because the increase in P results in an increase in TR.
As a result, choices "a", "b", and "c" are incorrect.
Note: if TR remains constant after a change in P, the demand is unit elastic.






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