Question 1

Suppose the price of a product decreases from $$3.00 to 2.70 $$and the quantity demanded increases from 1,000 to 1,200 units. Using the midpoint formula, what is the price elasticity of demand?

Accepted Answer

$$\frac{(1200-1000)}{(1200+1000)/2} \div \frac{(2.70-3.00)}{(2.70+3.00)/2} = 2.0$$

Question 2

If a firm lowers the price of its product and finds that total revenue does not change, what is the price elasticity of demand for its product?

Accepted Answer

Unit elastic

Question 3

A business owner notices that when she decreases the price of her product, her total revenue increases. What does this imply about the price elasticity of demand for her product?

Accepted Answer

Demand is elastic

Question 4

Given the following scenario: The price of CD players falls from $$30 to 20$$, and the quantity demanded increases from 95 to 105 units. Calculate the price elasticity of demand using the midpoint formula.

Accepted Answer

$$\frac{(105-95)}{(105+95)/2} \div \frac{(20-30)}{(20+30)/2} = 0.25$$

Question 5

If the price elasticity of demand for a good is less than 1 in absolute value, what happens to total revenue if the price decreases?

Accepted Answer

Total revenue decreases

Question 6

Which panel in the supply curve diagrams shows a perfectly elastic supply curve?

Accepted Answer

Panel B

Question 7

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

Accepted Answer

They are complements

Question 8

Last year, Sefton purchased 60 pounds of potatoes when his income was $$30,000. This year, his income fell to 20$$,000 and he purchased 80 pounds. What is the sign of the income elasticity of demand for potatoes, and what type of good are potatoes for Sefton?

Accepted Answer

Negative; inferior good

Question 9

Economists estimate the price elasticity of beer is -0.30 and the income elasticity is 0.09. What does this imply?

Accepted Answer

An increase in the price of beer will lead to an increase in revenue for beer sellers and beer is a normal good.

Question 10

When the price of tortilla chips rises by 10%, the quantity of chips sold falls by 4%, and the sale of dips falls by 8%. What is the cross-price elasticity between chips and dips, and what does it indicate?

Accepted Answer

-0.8; complements

Question 11

If the income elasticity of demand for a good is positive and greater than 1, what type of good is it?

Accepted Answer

Normal and luxury

Question 12

Suppose the price elasticity of supply for a product is equal to infinity. What does the supply curve look like?

Accepted Answer

Horizontal

Question 13

If the price elasticity of supply is less than 1, how is the supply described?

Accepted Answer

Inelastic

Question 14

A good has an income elasticity of demand of -0.5. What does this mean?

Accepted Answer

It is an inferior good

Question 15

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

Accepted Answer

The goods are unrelated

Question 16

A firm observes that when it raises the price of its product, total revenue rises. What does this suggest about the price elasticity of demand?

Accepted Answer

Demand is inelastic

Question 17

Which of the following is the correct formula for the midpoint method for price elasticity of demand?

Accepted Answer

$$\frac{Q_2$ - Q_1$}{(Q_2$ + Q_1$)/2} \div \frac{P_2$ - P_1$}{(P_2$ + P_1$)/2}$$

Question 18

If a good is a necessity, what is the likely range for its income elasticity of demand?

Accepted Answer

Positive but less than 1

Question 19

If the price elasticity of supply is exactly 1, how is the supply described?

Accepted Answer

Unit elastic

Question 20

A firm sells 1,000 units at $$3.00 each (point A), and after a price cut to 2.70$$, sells 1,200 units (point B). What is the total revenue before and after the price cut?

Accepted Answer

Before: $$3,000; After: 3$$,240

Elasticity: The Responsiveness of Demand and Supply

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