Q: Suppose the price of a Starbucks latte increases from $$4 to 6$$, and as a result, the quantity demanded decreases from 20 to 10 cups per day. Using the midpoint method, what is the price elasticity of demand?

$$\frac{(10 - 20)}{(10 + 20)/2} \times 100 = -66.67\%$$; $$\frac{(6 - 4)}{(6 + 4)/2} \times 100 = 28.57\%$$; Elasticity $$= \frac{66.67}{28.57} = 2.33$$

Question 1

Suppose the price of a Starbucks latte increases from $$4 to 6$$, and as a result, the quantity demanded decreases from 20 to 10 cups per day. Using the midpoint method, what is the price elasticity of demand?

Accepted Answer

$$\frac{(10 - 20)}{(10 + 20)/2} 	imes 100 = -66.67\%$$; $$\frac{(6 - 4)}{(6 + 4)/2} 	imes 100 = 28.57\%$$; Elasticity $$= \frac{66.67}{28.57} = 2.33$$

Question 2

Which of the following best explains why the demand for insulin is perfectly inelastic?

Accepted Answer

Insulin is a necessity with no close substitutes, so quantity demanded does not change as price changes.

Question 3

If the price elasticity of demand for oranges is 0.4 and a frost reduces the orange harvest by 10%, what is the expected percentage change in price, assuming demand does not change?

Accepted Answer

A 10% decrease in quantity leads to a $$\frac{10\%}{0.4} = 25\%$$ increase in price.

Question 4

Which of the following scenarios describes a good with elastic demand?

Accepted Answer

A 10% increase in the price of PlayStations leads to a 20% decrease in quantity demanded.

Question 5

If the price of a good rises and total revenue increases, what can you conclude about the price elasticity of demand for that good?

Accepted Answer

Demand is inelastic.

Question 6

Which factor would make the demand for a good more elastic?

Accepted Answer

The good has many close substitutes.

Question 7

Suppose the price of a burger falls by 10% and the quantity of pizza demanded decreases by 5%. What is the cross elasticity of demand, and what does it indicate?

Accepted Answer

$$\frac{-5\%}{-10\%} = 0.5$$; the goods are substitutes.

Question 8

Which of the following best describes the relationship between the slope of a linear demand curve and elasticity?

Accepted Answer

The slope is constant, but elasticity varies along the curve.

Question 9

A 10% increase in the price of fish leads to a 10% increase in the quantity supplied. What is the price elasticity of supply, and how is the supply classified?

Accepted Answer

Elasticity is $$\frac{10\%}{10\%} = 1$$; supply is unit elastic.

Question 10

Which of the following goods is most likely to have a perfectly inelastic supply?

Accepted Answer

Beachfront land in a specific city.

Question 11

If the price of a good rises by 20% and the quantity supplied increases by 10%, what is the price elasticity of supply, and how is the supply classified?

Accepted Answer

Elasticity is $$\frac{10\%}{20\%} = 0.5$$; supply is inelastic.

Question 12

Which of the following statements about the income elasticity of demand is correct?

Accepted Answer

It measures the responsiveness of quantity demanded to changes in income.

Question 13

Which of the following would make the supply of a good more elastic?

Accepted Answer

The good can be stored easily and cheaply.

Question 14

If the price of a Starbucks latte rises and you switch to Dunkin’ lattes, what does this behavior indicate about the price elasticity of demand for Starbucks lattes?

Accepted Answer

Demand is elastic because close substitutes are available.

Question 15

Which of the following is true about the total revenue test for elasticity?

Accepted Answer

If price and total revenue move in opposite directions, demand is elastic.

Question 16

Which of the following best describes the effect of high taxes on cigarettes and alcohol, according to elasticity concepts?

Accepted Answer

High taxes reduce the number of new users but have little effect on established users’ consumption.

Question 17

Which of the following is an example of a good with a positive cross elasticity of demand?

Accepted Answer

Pizza and burgers, because they are substitutes.

Question 18

If the demand for a good is unit elastic, what happens to total revenue when the price changes?

Accepted Answer

Total revenue remains unchanged.

Question 19

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

Accepted Answer

A broadly defined necessity, such as food.

Question 20

Which of the following statements about the time elapsed since a price change is correct?

Accepted Answer

The longer the time since a price change, the more elastic both demand and supply become.

Elasticities of Demand and Supply: Microeconomics Study Guide

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