Q: Which formula correctly calculates the income elasticity of demand?

$$\frac{\text{Percentage change in quantity demanded}}{\text{Percentage change in income}}$$

Question 1

Suppose the price of a pizza falls from $$20.50 to 19.50 $$and the quantity demanded increases from 9 to 11 pizzas per hour. What is the price elasticity of demand for pizza using the midpoint (average) method?

Accepted Answer

$$\frac{20\%}{5\%} = 4$$

Question 2

Which of the following statements best describes a perfectly inelastic demand curve?

Accepted Answer

It is vertical and the price elasticity of demand is zero.

Question 3

If a 1 percent decrease in price leads to a 2 percent increase in quantity demanded, what is the price elasticity of demand and how would you classify the demand?

Accepted Answer

Elasticity is $$2$$; demand is elastic.

Question 4

Which factor does NOT increase the elasticity of demand for a good?

Accepted Answer

A lack of close substitutes.

Question 5

If the price of a burger (a substitute for pizza) rises, what happens to the quantity of pizza demanded and what is the sign of the cross elasticity of demand?

Accepted Answer

Quantity demanded of pizza increases; cross elasticity is positive.

Question 6

A good has an income elasticity of demand less than zero. What type of good is it?

Accepted Answer

Inferior good

Question 7

If the price elasticity of supply is infinite, what does the supply curve look like?

Accepted Answer

It is horizontal.

Question 8

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

Accepted Answer

If a price cut increases total revenue, demand is elastic.

Question 9

A firm finds that after a price increase, its total revenue decreases. What does this indicate about the price elasticity of demand for its product?

Accepted Answer

Demand is elastic.

Question 10

If the price of a pizza falls from $$25 to 15 $$and the quantity demanded increases from 0 to 20 pizzas an hour, what is the price elasticity of demand using the midpoint method?

Accepted Answer

$$\frac{20/10}{10/20} = 4$$

Question 11

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

Accepted Answer

Greater resource substitution possibilities.

Question 12

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

Accepted Answer

The goods are complements.

Question 13

A consumer spends a large proportion of their income on a good. How does this affect the price elasticity of demand for that good?

Accepted Answer

Elasticity increases.

Question 14

Which formula correctly calculates the income elasticity of demand?

Accepted Answer

$$\frac{	ext{Percentage change in quantity demanded}}{	ext{Percentage change in income}}$$

Question 15

If the supply curve is linear and passes through the origin, what is the elasticity of supply?

Accepted Answer

Unit elastic

Question 16

Which of the following is NOT a factor that influences the elasticity of supply?

Accepted Answer

Closeness of substitutes for the good.

Question 17

If a good has a price elasticity of demand less than 1, what does this mean?

Accepted Answer

Demand is inelastic.

Question 18

A 1 percent price cut increases the quantity sold by exactly 1 percent. What happens to total revenue?

Accepted Answer

Total revenue remains unchanged.

Question 19

Which of the following best describes the relationship between elasticity and total revenue for a firm facing elastic demand?

Accepted Answer

A price decrease increases total revenue.

Question 20

Which time frame is associated with the most elastic supply?

Accepted Answer

Long-run supply

Elasticity in Microeconomics: Price, Income, and Cross Elasticities

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