Q: Suppose the price of a product increases by 10%, and as a result, the quantity demanded decreases by 20%. What is the price elasticity of demand, and how would you classify the demand for this product?

$$\text{Price elasticity of demand} = \frac{20\%}{10\%} = 2$$, which is elastic$

Q: A company lowers the price of its product from $$2.00 to 1.80$$, and the quantity demanded increases from 1,000 to 1,300 units. Using the midpoint formula, what is the price elasticity of demand?

$$\text{Elasticity} = \frac{(1300-1000)/((1300+1000)/2)}{(1.80-2.00)/((1.80+2.00)/2)} = \frac{300/1150}{-0.20/1.90} = \frac{0.2609}{-0.1053} = -2.48$$

Q: A 5% increase in income leads to a 10% increase in the quantity demanded of a good. What is the income elasticity of demand, and how is the good classified?

$$\text{Income elasticity} = \frac{10\%}{5\%} = 2$$, which is a luxury good$

Question 1

Suppose the price of a product increases by 10%, and as a result, the quantity demanded decreases by 20%. What is the price elasticity of demand, and how would you classify the demand for this product?

Accepted Answer

$$	ext{Price elasticity of demand} = \frac{20\%}{10\%} = 2$$, which is elastic$

Question 2

Which of the following goods is most likely to have a perfectly inelastic demand curve?

Accepted Answer

A life-saving medication with no substitutes

Question 3

A company lowers the price of its product from $$2.00 to 1.80$$, and the quantity demanded increases from 1,000 to 1,300 units. Using the midpoint formula, what is the price elasticity of demand?

Accepted Answer

$$	ext{Elasticity} = \frac{(1300-1000)/((1300+1000)/2)}{(1.80-2.00)/((1.80+2.00)/2)} = \frac{300/1150}{-0.20/1.90} = \frac{0.2609}{-0.1053} = -2.48$$

Question 4

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

Accepted Answer

The cost of inputs used to produce the good

Question 5

If the cross-price elasticity of demand between two goods is positive, what does this indicate about the relationship between the goods?

Accepted Answer

They are substitutes

Question 6

A 5% increase in income leads to a 10% increase in the quantity demanded of a good. What is the income elasticity of demand, and how is the good classified?

Accepted Answer

$$	ext{Income elasticity} = \frac{10\%}{5\%} = 2$$, which is a luxury good$

Question 7

If a firm faces a perfectly elastic demand curve, what will happen to the quantity demanded if the firm raises its price even slightly?

Accepted Answer

The quantity demanded will fall to zero

Question 8

Which of the following scenarios best illustrates the effect of time on the price elasticity of supply?

Accepted Answer

A farmer can plant more wheat next season if prices rise, but cannot increase output immediately

Question 9

Suppose the price elasticity of demand for gasoline is -0.2 in the short run and -0.8 in the long run. What does this imply about consumer behavior?

Accepted Answer

Consumers are more responsive to price changes in the long run than in the short run

Question 10

A tax is imposed on a good with perfectly inelastic demand. Who bears the burden of the tax?

Accepted Answer

Consumers bear the entire burden

Question 11

If the price elasticity of supply is 0, what does the supply curve look like and what does this mean for quantity supplied when price changes?

Accepted Answer

The supply curve is vertical and quantity supplied does not change when price changes

Question 12

A firm wants to increase its total revenue. If the demand for its product is inelastic, what should the firm do?

Accepted Answer

Increase the price

Question 13

Which of the following best explains why the price elasticity of demand for a specific brand of cereal is higher than for cereal in general?

Accepted Answer

There are more close substitutes for a specific brand than for cereal in general

Question 14

If the cross-price elasticity of demand between tablets and tablet applications is negative, what does this indicate?

Accepted Answer

They are complements

Question 15

A 10% increase in the price of salt leads to a 1% decrease in quantity demanded. What does this imply about the price elasticity of demand for salt?

Accepted Answer

$$	ext{Elasticity} = \frac{1\%}{10\%} = 0.1$$, which is inelastic$

Question 16

Which of the following statements about the relationship between the slope of the demand curve and price elasticity of demand is correct?

Accepted Answer

A flatter demand curve at a given point is more price elastic than a steeper one

Question 17

If the price of grapes doubles overnight and grape farmers cannot increase production in the short run, what is the price elasticity of supply in the short run?

Accepted Answer

Perfectly inelastic

Question 18

A 15% increase in the price of good X leads to a 15% increase in quantity supplied. What is the price elasticity of supply, and how is supply classified?

Accepted Answer

$$	ext{Elasticity} = \frac{15\%}{15\%} = 1$$, which is unit elastic$

Question 19

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

Accepted Answer

The product has many close substitutes

Question 20

If a 10% increase in the price of tea leads to a 5% increase in the quantity demanded of coffee, what is the cross-price elasticity of demand, and what does it indicate?

Accepted Answer

$$	ext{Cross-price elasticity} = \frac{5\%}{10\%} = 0.5$$, indicating tea and coffee are substitutes$

Elasticity in Microeconomics: Demand, Supply, and Applications

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