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

$$\frac{-15\%}{10\%} = -1.5$$, which means demand is elastic.

Question 2

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

Accepted Answer

Tax revenue will decrease because quantity demanded will fall significantly.

Question 3

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

Accepted Answer

Insulin for diabetics

Question 4

If the price elasticity of demand for a product is zero, what does this imply about the demand curve and consumer behavior?

Accepted Answer

The demand curve is vertical, and quantity demanded does not change as price changes.

Question 5

Tesla cuts the price of its Model 3 by 14% in response to increased competition. What determinant of price elasticity of demand is most relevant in this scenario?

Accepted Answer

Availability of close substitutes

Question 6

Using the midpoint formula, calculate the price elasticity of demand if the price of a product falls from $$2.00 to 1.80 $$and quantity demanded rises from 500 to 600 units.

Accepted Answer

$$\frac{(600-500)}{(600+500)/2} \div \frac{(1.80-2.00)}{(1.80+2.00)/2} = \frac{100}{550} \div \frac{-0.20}{1.90} \approx 0.182 \div -0.105 \approx -1.73$$

Question 7

Which of the following scenarios best illustrates the concept of perfectly elastic supply?

Accepted Answer

Farmers can supply any amount of wheat at a fixed market price in the long run.

Question 8

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 9

A 1% increase in the probability of detection leads to a 2% decrease in crime in Denmark. What is the elasticity of crime with respect to detection probability, and what does it mean?

Accepted Answer

$$\frac{-2\%}{1\%} = -2$$, meaning crime is highly responsive to detection probability.

Question 10

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

Accepted Answer

The cost of production for the good

Question 11

If a decrease in price leads to a proportionally larger increase in quantity demanded, what happens to total revenue?

Accepted Answer

Total revenue increases.

Question 12

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

Accepted Answer

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

Question 13

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

Accepted Answer

A luxury good

Question 14

Which of the following statements about the price elasticity of supply is correct?

Accepted Answer

It measures the responsiveness of quantity supplied to a change in price.

Question 15

A farmer can only increase grape production several years after a price increase. What does this imply about the price elasticity of supply for grapes in the short run?

Accepted Answer

Supply is inelastic in the short run.

Question 16

If the supply curve for parking spaces in a lot is vertical, what is the price elasticity of supply?

Accepted Answer

Zero (perfectly inelastic)

Question 17

Which of the following would likely have the most elastic demand?

Accepted Answer

Nike shoes

Question 18

If the price elasticity of demand for wheat is very low and supply increases dramatically, what is the likely effect on the price and quantity of wheat?

Accepted Answer

Price will fall significantly, but quantity demanded will increase only slightly.

Question 19

If beer and wine are complements, what is the expected sign of the cross-price elasticity of demand between beer and wine?

Accepted Answer

Negative

Elasticity: The Responsiveness of Demand and Supply

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