Q: Which formula correctly represents the income elasticity of demand?

$$\frac{\text{Percentage change in quantity demanded}}{\text{Percentage change in income}}$$

Question 1

Suppose the price of a product decreases from $$5.00 to 3.00$$, and as a result, the quantity demanded increases from 116,250 units to 123,750 units. Using the midpoint formula, what is the price elasticity of demand?

Accepted Answer

$$\frac{(123\ 750 - 116\ 250)/120\ 000}{(5.00 - 3.00)/4.00} = \frac{7\ 500/120\ 000}{2.00/4.00} = \frac{0.0625}{0.5} = 0.125$$

Question 2

Which of the following best describes a good with a price elasticity of demand greater than 1?

Accepted Answer

The good is a luxury and demand is elastic.

Question 3

If the price of gasoline increases and total expenditure on gasoline rises, what can you conclude about the price elasticity of demand for gasoline?

Accepted Answer

Demand is inelastic.

Question 4

Which of the following factors would make the demand for a product more elastic?

Accepted Answer

The product is narrowly defined and there are many substitutes.

Question 5

A 10% increase in the price of good Y causes the quantity demanded of good X to increase by 5%. What is the cross-price elasticity of demand, and what does it indicate about the relationship between X and Y?

Accepted Answer

$$\frac{5\%}{10\%} = 0.5$$, indicating X and Y are substitutes.

Question 6

Which of the following statements about the price elasticity of supply is correct?

Accepted Answer

Supply is more elastic when producers can easily shift resources from other products.

Question 7

If a government imposes an excise tax on a product and the demand for the product is much more inelastic than the supply, who will bear most of the tax burden?

Accepted Answer

Consumers will bear most of the tax burden.

Question 8

Which formula correctly represents the income elasticity of demand?

Accepted Answer

$$\frac{	ext{Percentage change in quantity demanded}}{	ext{Percentage change in income}}$$

Question 9

A product has an income elasticity of demand of -0.3. What type of good is it, and what does this mean for its demand as income rises?

Accepted Answer

It is an inferior good; demand decreases as income rises.

Question 10

Which of the following best explains why the long-run price elasticity of demand is usually greater than the short-run elasticity?

Accepted Answer

Consumers can find more substitutes and change consumption habits over time.

Question 11

If the price elasticity of demand for a product is 0.8, what will happen to total expenditure if the price increases?

Accepted Answer

Total expenditure will increase.

Question 12

A firm faces a perfectly elastic demand curve. What is the value of the price elasticity of demand for its product?

Accepted Answer

Infinity

Question 13

Which of the following is true about the slope and elasticity of a linear demand curve?

Accepted Answer

The slope is constant, but elasticity varies along the curve.

Question 14

If the cross-price elasticity of demand between two goods is negative, what does this imply?

Accepted Answer

The goods are complements.

Question 15

A 15% increase in income leads to a 10% increase in the quantity demanded of a good. What is the income elasticity of demand, and how would you classify the good?

Accepted Answer

$$\frac{10\%}{15\%} = 0.67$$, the good is a necessity (normal, income inelastic).

Question 16

Which of the following scenarios would likely result in a highly elastic supply for a product?

Accepted Answer

The production process can be quickly adjusted and resources can be easily shifted from other uses.

Question 17

If a payroll tax is imposed and the supply of labor is more inelastic than the demand for labor, who bears most of the tax burden?

Accepted Answer

Workers bear most of the burden.

Question 18

Which of the following is NOT a determinant of the price elasticity of demand?

Accepted Answer

The cost of production for the good.

Question 19

A 20% increase in the price of a product leads to a 30% increase in quantity supplied. What is the price elasticity of supply?

Accepted Answer

$$\frac{30\%}{20\%} = 1.5$$

Elasticity in Microeconomics: Concepts, Measurement, and Applications

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