Q: Which formula correctly represents the price elasticity of supply?

$$\text{Price elasticity of supply} = \frac{\% \text{ change in quantity supplied}}{\% \text{ change in price}}$$

Question 1

Suppose the price of Fanta rises by 20%. Based on the concept of price elasticity of demand, for which product will the quantity demanded drop more: Fanta or all soft drinks? Why?

Accepted Answer

The quantity demanded will drop more for Fanta because it is a narrowly defined good with many substitutes.

Question 2

Which of the following best describes the price elasticity of demand for insulin for diabetics?

Accepted Answer

Perfectly inelastic, because it is a necessity with no close substitutes.

Question 3

If the price of gasoline rises by 20%, does the quantity demanded drop more in the short run or the long run? Why?

Accepted Answer

Long run, because consumers have more time to find alternatives and adjust their behavior.

Question 4

Using the midpoint method, calculate the price elasticity of demand if the price of iPhones increases from $$400 to 600 $$and quantity demanded falls from 10,600 to 8,400.

Accepted Answer

$$e_p = \frac{(8400-10600)/((8400+10600)/2)}{(600-400)/((600+400)/2)} = -1.0$$

Question 5

Which of the following goods is most likely to have an income elasticity of demand greater than 1?

Accepted Answer

Airline travel

Question 6

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

Accepted Answer

The goods are complements.

Question 7

A local transit authority charges $10 for a bus ride. If demand is inelastic, what should the authority do to increase revenue?

Accepted Answer

Raise the fare.

Question 8

Suppose the supply of beachfront property is inelastic and the supply of new cars is elastic. If demand for both doubles, for which product will price change the most?

Accepted Answer

Beachfront property

Question 9

Which of the following is a determinant of the price elasticity of demand?

Accepted Answer

The time horizon considered

Question 10

If pasta is an inferior good, then the demand curve shifts to the ______ when ______ rises.

Accepted Answer

left; consumers’ income

Question 11

Which of the following best describes a perfectly elastic demand curve?

Accepted Answer

A horizontal line

Question 12

If the price elasticity of demand for heating oil is 0.2 in the short run and 0.7 in the long run, what does this imply?

Accepted Answer

Consumers are more responsive to price changes in the long run.

Question 13

Which of the following statements is true about total revenue and elasticity?

Accepted Answer

If demand is inelastic, an increase in price increases total revenue.

Question 14

Suppose the price of bagels falls due to a decrease in the price of flour. What is the likely effect on the market for cream cheese, a complement to bagels?

Accepted Answer

The demand for cream cheese increases, raising its price.

Question 15

Which of the following goods is most likely to have a price elasticity of demand less than 1?

Accepted Answer

Eggs

Question 16

If the price of a burger (a substitute for pizza) rises, what happens to the demand for pizza?

Accepted Answer

The demand for pizza increases.

Question 17

Which formula correctly represents the price elasticity of supply?

Accepted Answer

$$	ext{Price elasticity of supply} = \frac{\% 	ext{ change in quantity supplied}}{\% 	ext{ change in price}}$$

Question 18

Which of the following is NOT a factor that influences the price elasticity of demand?

Accepted Answer

The cost of inputs used in production

Question 19

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

Accepted Answer

The goods are substitutes.

Question 20

A vertical supply curve for basketball tickets at your college most likely reflects:

Accepted Answer

A fixed number of seats in the arena, regardless of price.

4. Elasticity in Microeconomics: Price, Income, and Cross Elasticities of Demand and Supply

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