**Unformatted text preview: **the price elasticity of supply:
a. is equal to 0.615 and supply is elastic
b. Is equal to 0.615 and supply is inelastic
*c. Is equal to 1.625 and supply is elastic
d. Is equal to 4 and supply is elastic
e. Is equal to 1.625 and supply is inelastic
[Use the point elasticity formula. 1.625 > 1 means that supply is elastic]
16. Assume that in the market for cocoa beans there is a downward sloping demand curve and an
upward sloping supply curve. Suppose that drought occurs in Brazil, the world’s only cocoa beans
growing area resulting in lower crop yields. In Australia, total expenditure on cocoa beans falls. As a
result, we can conclude that over the relevant range of the demand curve:
*a. Demand is elastic
b. Demand is inelastic c. Demand is unitary elastic
d. Supply is inelastic
e. Supply is elastic
[If there are lower crop yields we would expect a decrease in supply --> increase in price. Total
expenditure in Australia fell so demand must be elastic.]
17. The cross price elasticity of demand for potato chips and beer nuts is equal to -5. Based on this
information:
a. Potato chips and beer nuts are substitutes
*b. Potato chips and beer nuts are complements
c. Potato chips are an inferior good
d. Beer nuts are an inferior good
e. Both c and d are correct
[Negative cross-price elasticity indicates that the two goods are complements]
18. Consider a downward sloping linear demand curve. Where on the demand curve will revenue
be maximised?
a. It must be at a point on the demand curve where demand is elastic
b. It must be at...

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