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

The price elasticity of demand is $$E_p = 2$$, and demand is elastic.

Question 2

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

Accepted Answer

Table salt purchased once a year

Question 3

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 4

A cell phone company increases its price per minute by 10%, and the quantity demanded decreases by 5%. What happens to the company's total revenue?

Accepted Answer

Total revenue increases because demand is inelastic.

Question 5

Which formula correctly calculates the price elasticity of demand using average values?

Accepted Answer

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

Question 6

If the income elasticity of demand for a good is negative, what type of good is it?

Accepted Answer

Inferior good

Question 7

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

Accepted Answer

The product has many close substitutes.

Question 8

A government removes subsidies for electric vehicles, causing the price to rise from $$75,000 to 130$$,000 and monthly sales to fall from 500 to 30 units. What is the price elasticity of demand for electric vehicles in this scenario?

Accepted Answer

$$E_p = \frac{(30 - 500) / [(30 + 500)/2]}{(130,000 - 75,000) / [(130,000 + 75,000)/2]} \approx -3.3$$

Question 9

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

Accepted Answer

A vertical line; quantity demanded does not change regardless of price.

Question 10

If the price elasticity of supply is greater than 1, how is supply classified?

Accepted Answer

Elastic

Question 11

Which scenario would likely result in a more elastic supply curve for a product?

Accepted Answer

Producers have large inventories and flexible production capacity.

Question 12

If the price of gasoline increases significantly, why is the short-run price elasticity of demand for gasoline likely to be low?

Accepted Answer

Consumers have limited ability to adjust their consumption patterns immediately.

Question 13

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

Accepted Answer

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

Question 14

A restaurant increases the price of its meals by 5%, and the quantity demanded falls by 5%. What is the price elasticity of demand, and what happens to total revenue?

Accepted Answer

Price elasticity is $$E_p = 1 ($$unit-elastic), and total revenue does not change.

Question 15

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

Accepted Answer

The cost of raw materials used in production

Question 16

If the cross-price elasticity of demand between peanut butter and jelly is negative, what does this imply?

Accepted Answer

Peanut butter and jelly are complements.

Question 17

A consumer's income rises from $$4,000 to 6$$,000 per month, and the quantity of digital apps demanded increases from 6 to 8 per month. What is the income elasticity of demand for digital apps?

Accepted Answer

$$E_I = \frac{(8 - 6) / [(8 + 6)/2]}{(6,000 - 4,000) / [(6,000 + 4,000)/2]} \approx 0.71$$

Question 18

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

Accepted Answer

A horizontal line; quantity supplied falls to zero with any decrease in price.

Question 19

Why does the price elasticity of supply tend to be greater in the long run than in the short run?

Accepted Answer

Producers have more time to adjust production and enter or exit the market.

Microeconomics Study Notes: Chapter 6 – Demand and Supply Elasticity

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