Q: Suppose the income elasticity of demand for restaurant meals is $$1.5. If $$consumer incomes rise by $$10\%$$, what is the expected percentage change in the quantity of restaurant meals demanded?

$$1.5 \times 10\% = 15\%$$ increase

Question 1

Suppose the price of a cup of coffee increases from $$2 to 2.20$$, and as a result, the quantity demanded falls from 100 cups to 90 cups per day. Using the midpoint formula, what is the price elasticity of demand?

Accepted Answer

$$\frac{(90-100)}{(90+100)/2} \div \frac{(2.20-2.00)}{(2.20+2.00)/2} = \frac{-10}{95} \div \frac{0.20}{2.10} = -0.105 \div 0.095 = -1.11$$

Question 2

Which of the following best describes a good with perfectly inelastic demand?

Accepted Answer

The quantity demanded does not change regardless of the price.

Question 3

If the price elasticity of demand for a product is $$|E_d| = 0.5$$, what will happen to total revenue if the price increases?

Accepted Answer

Total revenue will increase because demand is inelastic.

Question 4

Which of the following is most likely to have elastic demand?

Accepted Answer

A luxury car, because it has many substitutes and is not a necessity.

Question 5

A city imposes a $$1.00$$ per-unit tax on avocados. Before the tax, 1,000 avocados are sold daily at $$2.00$$ each. After the tax, only 500 avocados are sold at a price of $$2.50 to $$consumers, and sellers receive $$1.50$$ per avocado. How much tax revenue does the city collect per day?

Accepted Answer

$$1.00 	imes 500 = \500$

Question 6

Which of the following statements about the slope of a demand curve and elasticity is correct?

Accepted Answer

Elasticity is a better measure of responsiveness than slope because it is unit-free.

Question 7

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

Accepted Answer

The goods are substitutes.

Question 8

Suppose the income elasticity of demand for restaurant meals is $$1.5. If $$consumer incomes rise by $$10\%$$, what is the expected percentage change in the quantity of restaurant meals demanded?

Accepted Answer

$$1.5 	imes 10\% = 15\%$$ increase

Question 9

Which of the following factors is most likely to make the demand for a good more elastic?

Accepted Answer

The availability of many close substitutes.

Question 10

If the price elasticity of supply is $$0.8$$, what does this indicate about the responsiveness of quantity supplied to price changes?

Accepted Answer

Supply is inelastic; quantity supplied responds less than proportionally to price changes.

Question 11

A 5% increase in the price of Good X leads to a 10% decrease in the quantity demanded of Good Y. What is the cross-price elasticity of demand, and what does it indicate?

Accepted Answer

$$\frac{-10\%}{5\%} = -2$$, indicating the goods are complements.

Question 12

Which of the following best describes unit elastic demand?

Accepted Answer

The percentage change in quantity demanded equals the percentage change in price in absolute value.

Question 13

If a firm wants to increase its total revenue and knows that the demand for its product is elastic, what should it do?

Accepted Answer

Lower the price, because the percentage increase in quantity demanded will be greater than the percentage decrease in price.

Question 14

Which of the following is an example of a perfectly elastic demand curve?

Accepted Answer

A wheat farmer who can sell all he wants at the market price but nothing at a higher price.

Question 15

Why does the price elasticity of demand tend to increase (become more elastic) over time?

Accepted Answer

Consumers and producers have more time to adjust their behavior and find substitutes.

Question 16

If the price of a necessity such as insulin increases, what is the likely effect on the quantity demanded?

Accepted Answer

There will be little or no change in quantity demanded because demand is perfectly inelastic.

Question 17

Which of the following formulas correctly represents the midpoint (arc) 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 18

A 20% increase in the price of cigarettes leads to a 10% decrease in quantity demanded. What is the price elasticity of demand, and what does it indicate?

Accepted Answer

$$\frac{-10\%}{20\%} = -0.5$$, indicating inelastic demand.

Question 19

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

Accepted Answer

The cost of producing the good.

Elasticity in Microeconomics: Chapter 5 Study Notes

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