Question

1. Carlos enjoys hazelnut coffee every morning. He also have a slice of banana bread every once in a while. Assuming that there is an increase in the price of coffee and as a result Carols, made a small change in his consumption for coffee. On the other hand when the price of banana bread increases, Carlos decreases the consumption of bread by a significant amount. This example signifies the importance of

	a.	a necessity versus a luxury in figuring the price elasticity of demand.
	b.	the definition of a market in figuring the price elasticity of demand.
	c.	having close substitutes in figuring the price elasticity of demand.
	d.	the time horizon in figuring the price elasticity of demand.

2.

In the case of perfectly inelastic demand, the price elasticity of demand

	a.	approaches infinity, and the demand curve is horizontal parallel to X axis.
	b.	is zero, and the demand curve is vertical parallel to Y axis.
	c.	is zero, and the demand curve is horizontal parallel to X axis.
	d.	approaches infinity, and the demand curve is vertical parallel to Y axis.

3. When the initial price of cafe latte in a coffee shop is $5 per cup the quantity demanded was 120 cups and when the price was $7 per cup then 100 cups were demanded. Using the mid-point method, the price elasticity of demand is about

	a.	2.5.
	b.	0.1.
	c.	0.55.
	d.	1.82.

4. A perfectly inelastic demand

	a.	implies that buyers respond substantially to an increase in price.
	b.	implies that buyers decrease their purchases when the price rises.
	c.	implies that buyers purchase the same amount as before when the price rises or falls.
	d.	implies that buyers increase their purchases only slightly when the price falls.

Answer 1

1. Option A

Explanation: Since coffee is consumed daily, It is a necessity for Carol and for Carlos the demand for coffee is relatively inelastic. On the other hand, the demand for banana bread is relatively elastic because it is a luxury and is consumed once in a while.

2. Option B

Explanation: In the case of perfectly inelastic demand, the quantity demanded does not change for any change in the price.