Q: Calculate the own price elasticity of demand at equilibrium if $$dQD/dP = -2$$, $$P = 25$$, and $$QD = 86.7.$$

$$OPE = (-2) \times \frac{25}{86.7} = -0.577$$

Q: Given the demand equation $$QD = 100 + 0.3I + 0.4P_{nc} - 0.008P_{ins} - 2P$$, calculate the income elasticity of demand when $$I = 85$$, $$QD = 86.7$$, and $$dQD/dI = 0.3.$$

$$IE = 0.3 \times \frac{85}{86.7} = 0.294$$

Q: Suppose $$Qd_{gas} = 0.02 - 1.8P_{gas} + 0.69P_{oil}. $$Calculate the cross price elasticity of demand for gas with respect to oil when $$P_{oil} = 50$$, $$P_{gas} = 3$$, and $$Qd_{gas} = 0.02 - 1.8(3) + 0.69(50) = 0.02 - 5.4 + 34.5 = 29.12.$$

$$CPE = 0.69 \times \frac{50}{29.12} = 1.185$$

Q: Suppose the supply elasticity is calculated as $$SE = (dQS/dP) \times (P/QS). If$$ $$dQS/dP = 3$$, $$P = 10$$, and $$QS = 55$$, what is the supply elasticity?

$$SE = 3 \times \frac{10}{55} = 0.545$$

Question 1

Which of the following best defines the law of demand?

Accepted Answer

As the price of a good increases, the quantity demanded decreases, ceteris paribus.

Question 2

Given the demand equation for used cars: $$QD = 100 + 0.3I + 0.4P_{nc} - 0.008P_{ins} - 2P$$, what is the predicted quantity demanded when $$I = 85$$, $$P_{nc} = 40$$, $$P_{ins} = 600$$, and $$P = 25$$?

Accepted Answer

$$QD = 100 + 0.3(85) + 0.4(40) - 0.008(600) - 2(25) = 100 + 25.5 + 16 - 4.8 - 50 = 86.7$$

Question 3

If the coefficient on income in a demand equation is positive, what type of good is it?

Accepted Answer

A normal good

Question 4

Given the supply equation $$QS = 25 + 3P - 0.1W$$, what is the quantity supplied when $$W = 50$$ and $$P = 25$$?

Accepted Answer

$$QS = 25 + 3(25) - 0.1(50) = 25 + 75 - 5 = 95$$

Question 5

What happens to equilibrium price and quantity if demand increases while supply remains constant?

Accepted Answer

Equilibrium price increases and equilibrium quantity increases.

Question 6

Calculate the own price elasticity of demand at equilibrium if $$dQD/dP = -2$$, $$P = 25$$, and $$QD = 86.7.$$

Accepted Answer

$$OPE = (-2) 	imes \frac{25}{86.7} = -0.577$$

Question 7

If the own price elasticity of demand is less than 1 in absolute value, what does this imply about total revenue when price increases?

Accepted Answer

Total revenue increases.

Question 8

Given the demand equation $$QD = 100 + 0.3I + 0.4P_{nc} - 0.008P_{ins} - 2P$$, calculate the income elasticity of demand when $$I = 85$$, $$QD = 86.7$$, and $$dQD/dI = 0.3.$$

Accepted Answer

$$IE = 0.3 	imes \frac{85}{86.7} = 0.294$$

Question 9

If the cross price elasticity of demand between gas and oil is positive, what does this indicate?

Accepted Answer

Gas and oil are substitutes.

Question 10

Suppose $$Qd_{gas} = 0.02 - 1.8P_{gas} + 0.69P_{oil}. $$Calculate the cross price elasticity of demand for gas with respect to oil when $$P_{oil} = 50$$, $$P_{gas} = 3$$, and $$Qd_{gas} = 0.02 - 1.8(3) + 0.69(50) = 0.02 - 5.4 + 34.5 = 29.12.$$

Accepted Answer

$$CPE = 0.69 	imes \frac{50}{29.12} = 1.185$$

Question 11

Which of the following best describes producer surplus?

Accepted Answer

The difference between the price received and the minimum price a producer is willing to accept.

Question 12

If a price floor is imposed above the equilibrium price, what is the likely effect on consumer surplus?

Accepted Answer

Consumer surplus decreases.

Question 13

Suppose the supply elasticity is calculated as $$SE = (dQS/dP) 	imes (P/QS). If$$ $$dQS/dP = 3$$, $$P = 10$$, and $$QS = 55$$, what is the supply elasticity?

Accepted Answer

$$SE = 3 	imes \frac{10}{55} = 0.545$$

Question 14

If demand is more inelastic than supply, who bears more of the burden of a tax imposed on a good?

Accepted Answer

Consumers

Question 15

What is the effect on overall economic welfare (OEW) when a tax is imposed on a competitive market?

Accepted Answer

OEW decreases due to the creation of deadweight loss.

Question 16

Which of the following is true about the area representing consumer surplus on a standard supply and demand graph?

Accepted Answer

It is the area above the price and below the demand curve.

Question 17

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

Accepted Answer

A luxury good

Question 18

If the government imposes a tax on luxury boats and the demand for luxury boats is highly elastic, who will bear most of the tax burden?

Accepted Answer

Producers

Question 19

Which of the following scenarios would most likely result in a deadweight loss?

Accepted Answer

The imposition of a price ceiling below equilibrium price.

Supply, Demand, and Elasticity: Core Microeconomics Concepts

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