Question 1

Suppose the price of a product increases by 10%, and as a result, the quantity demanded decreases by 15%. Using the price elasticity of demand formula, what is the price elasticity of demand, and how would you classify the demand for this product?

Accepted Answer

The price elasticity of demand is $$-1.5$$, and demand is elastic.

Question 2

A city government imposes a tax on soda to reduce consumption and raise revenue. If the demand for soda is highly elastic, what is the likely outcome for tax revenue?

Accepted Answer

Tax revenue will decrease because the quantity demanded will fall sharply.

Question 3

Which of the following goods is most likely to have an inelastic demand?

Accepted Answer

Gasoline

Question 4

If a firm wants to increase its total revenue and knows that the demand for its product is elastic, what should it do to the price?

Accepted Answer

Decrease the price

Question 5

Using the midpoint formula, calculate the price elasticity of demand if the price of a good falls from $$5 to$$ $$4$$, and the quantity demanded rises from $$100 to$$ $$140.$$

Accepted Answer

Price elasticity of demand $$= \frac{(140-100)/120}{(4-5)/4.5} = -1.33$$

Question 6

Which determinant would make the demand for a product more elastic?

Accepted Answer

There are many close substitutes available.

Question 7

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

Accepted Answer

The goods are substitutes.

Question 8

A decrease in the price of jeans leads to a 20% increase in quantity demanded. If the price elasticity of demand is $$-2$$, what was the percentage change in price?

Accepted Answer

$$-10\%$$

Question 9

Which scenario best illustrates perfectly inelastic demand?

Accepted Answer

A vertical demand curve for a life-saving medication.

Question 10

If the income elasticity of demand for caviar is $$2.5$$, what type of good is caviar?

Accepted Answer

Normal good and a luxury

Question 11

Tesla cuts the price of its Model 3 by 14% and sees a large increase in quantity sold. What does this suggest about the price elasticity of demand for the Model 3?

Accepted Answer

Demand is elastic.

Question 12

If the price elasticity of supply for grapes is close to zero in the short run, what does this imply about grape farmers' ability to respond to price changes?

Accepted Answer

Farmers cannot change supply much in the short run.

Question 13

Which of the following is true about the relationship between price elasticity of demand and total revenue?

Accepted Answer

If demand is elastic, a price decrease will increase total revenue.

Question 14

Which formula correctly represents the midpoint method for calculating price elasticity of demand?

Accepted Answer

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

Question 15

If the supply of parking spaces at a ski resort is perfectly inelastic, what happens to the equilibrium price when demand increases on a holiday weekend?

Accepted Answer

The equilibrium price rises sharply.

Question 16

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

Accepted Answer

The cost of production

Question 17

If the cross-price elasticity of demand between beer and wine is $$-0.83$$, what does this indicate?

Accepted Answer

Beer and wine are complements.

Question 18

A technological improvement increases farm productivity, shifting the supply curve for wheat to the right. If the demand for wheat is highly inelastic, what is the likely effect on the price and quantity of wheat?

Accepted Answer

Price falls sharply, quantity increases slightly.

Question 19

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

Accepted Answer

A horizontal line; quantity supplied is infinitely responsive to price.

Elasticity: The Responsiveness of Demand and Supply (Microeconomics Chapter 6 Study Notes)

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