Question 1

Suppose the price of a product increases from $$400 to 600$$, and the quantity demanded decreases from 10,600 units to 8,400 units. Using the midpoint method, what is the price elasticity of demand?

Accepted Answer

$$\frac{23.16}{40} = 0.58$$

Question 2

Which of the following goods is likely to have the highest price elasticity of demand?

Accepted Answer

Mountain Dew (a narrowly defined soda brand)

Question 3

If the price elasticity of demand for a good is 1.8, and you increase the price, what will happen to total revenue?

Accepted Answer

Total revenue will decrease because demand is elastic

Question 4

Which of the following statements about perfectly inelastic demand is correct?

Accepted Answer

The demand curve is vertical and elasticity equals zero

Question 5

A 10% increase in the price of insulin leads to only a 1% decrease in quantity demanded. What does this imply about the price elasticity of demand for insulin?

Accepted Answer

Demand for insulin is inelastic

Question 6

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

Accepted Answer

The goods are substitutes

Question 7

Suppose the price of pizza increases from $$12 to 14$$, and the quantity supplied increases from 150 to 170 pies per day. Using the midpoint method, what is the price elasticity of supply?

Accepted Answer

$$\frac{(170-150)/160}{(14-12)/13} = \frac{20/160}{2/13} = \frac{0.125}{0.1538} \approx 0.81$$

Question 8

Which determinant is most likely to make the price elasticity of supply higher?

Accepted Answer

Producers have more time to adjust production

Question 9

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

Accepted Answer

Inferior good

Question 10

A government imposes a $2 per pack tax on cigarettes, and the quantity demanded falls only slightly. What does this suggest about the price elasticity of demand for cigarettes in the short run?

Accepted Answer

Demand is inelastic in the short run

Question 11

If the supply of parking spots is perfectly inelastic and demand doubles, what will happen to the equilibrium price and quantity?

Accepted Answer

Price will increase significantly, but quantity will remain unchanged

Question 12

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

Accepted Answer

A factory can quickly ramp up production when prices rise

Question 13

If the price elasticity of demand for a good is less than 1, what does this imply about the demand for the good?

Accepted Answer

Demand is inelastic

Question 14

Suppose OPEC reduces oil supply in the short run when both supply and demand are inelastic. What is the likely effect on oil prices?

Accepted Answer

Oil prices will increase sharply

Question 15

If a luxury cruise company lowers its prices during a fare war and demand is elastic, what happens to total revenue?

Accepted Answer

Total revenue increases because quantity demanded rises more than price falls

Question 16

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

Accepted Answer

The cost of production

Question 17

If the supply of wheat is elastic and demand doubles, what will happen to equilibrium quantity and price?

Accepted Answer

Quantity will increase significantly, but price will rise only slightly

Question 18

Which formula correctly represents the price elasticity of supply using the midpoint method?

Accepted Answer

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

Question 19

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

Accepted Answer

The goods are complements

Question 20

A policy increases the number of federal agents fighting illegal drugs, shifting the supply curve left. If demand for drugs is inelastic, what is the likely effect on drug-related crime?

Accepted Answer

Drug-related crime will increase due to higher prices and total revenue

Elasticity and Its Applications – Microeconomics Study Notes

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