Free CPA-Business Exam Braindumps (page: 71)

Page 71 of 132

If a product has a price elasticity of demand of 2.0, the demand is said to be:

  1. Perfectly elastic.
  2. Perfectly inelastic.
  3. Relatively elastic.
  4. Relatively inelastic.

Answer(s): C

Explanation:

Choice "c" is correct. A price elasticity of demand of 2.0 means demand will change by 2× (as a percentage) for any change in price. This is called elastic.
Choice "a" is incorrect. Perfectly elastic demand does not exist.
Choice "b" is incorrect. Perfectly inelastic demand means the quantity demanded will not change when price changes.
Choice "d" is incorrect. Inelastic demand responds less than 1× (as a percentage) for a change in price.



In the pharmaceutical industry where a diabetic must have insulin no matter what the cost, the diabetic's demand is considered to be:

  1. Perfectly elastic.
  2. Perfectly inelastic.
  3. Relatively elastic.
  4. Relatively inelastic.

Answer(s): B

Explanation:

Choice "b" is correct. When a good is demanded, no matter the price, demand is described as perfectly inelastic. The demand "curve" is a vertical line at the quantity demand 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 demand for price changes.
Choice "d" is incorrect. Insulin is an example of perfectly inelastic.



If, in a competitive market, a price ceiling is imposed establishing a maximum price below the market equilibrium price, this price ceiling would result in:

  1. Shortages because the quantity demanded would exceed the quantity supplied.
  2. No effect on the quantity supplied or demanded.
  3. Surpluses because the quantity supplied would exceed the quantity demanded.
  4. Surpluses because the supply curve would shift to the right.

Answer(s): A

Explanation:

Choice "a" is correct. Setting a ceiling price below the price dictated by the market (as established by the equilibrium price) would create excess demand and a shortage.
Choices "b", "c", and "d" are incorrect, per above Explanation.



Government price regulations in competitive markets that set maximum or ceiling prices below the equilibrium price will in the short run:

  1. Cause demand to increase.
  2. Cause supply to increase.
  3. Create shortages of that product.
  4. Produce a surplus of the product.

Answer(s): C

Explanation:


Choice "c" is correct. Government price regulations in competitive markets that set maximum or ceiling prices below the equilibrium price will create shortages of that product in the short run because quantity supplied will be less than quantity demanded at that price.
Choice "a" is incorrect. Quantity demand will increase at the lower price. Choice "b" is incorrect. Quantity supplied will decrease at the lower price.
Choice "d" is incorrect. A price set below the market's equilibrium price causes shortages, not surpluses, per the graph above.



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