Question 1

Suppose the price of cheese increases from $$3.00 to 5.00$$, and the quantity demanded falls from 123,750 to 116,250 units. Using the midpoint formula, what is the price elasticity of demand for cheese?

Accepted Answer

$$\eta = \frac{7500/120\,000}{2/4} = 0.125$$

Question 2

If the price elasticity of demand for a product is $$\eta = 0.5$$, which of the following statements is true?

Accepted Answer

Demand is inelastic, so a price increase will increase total expenditure.

Question 3

Which of the following best explains why the demand for salt is likely to be inelastic?

Accepted Answer

Salt represents a small fraction of consumers’ budgets.

Question 4

A linear demand curve has a constant slope but does not have constant elasticity. Why?

Accepted Answer

Elasticity depends on the ratio of price to quantity at each point, which changes along the curve.

Question 5

If a product has many close substitutes, what can you say about its price elasticity of demand?

Accepted Answer

It is likely to be elastic because consumers can easily switch to substitutes.

Question 6

Suppose the price of gasoline rises and the quantity demanded falls only slightly. What does this suggest about the price elasticity of demand for gasoline in the short run?

Accepted Answer

Demand is inelastic in the short run.

Question 7

Which of the following is true about the relationship between total expenditure and price elasticity of demand when price falls?

Accepted Answer

If demand is elastic, total expenditure rises.

Question 8

A government imposes an excise tax on gasoline. If the demand for gasoline is more inelastic than the supply, who bears most of the tax burden?

Accepted Answer

Consumers bear most of the tax burden.

Question 9

The price elasticity of supply is calculated as:

Accepted Answer

$$\eta_s = \frac{\Delta Q_s / \overline{Q}_s}{\Delta P / \overline{P}}$$

Question 10

Which of the following factors makes the supply of a product more elastic?

Accepted Answer

Producers can easily shift resources from other products to this product.

Question 11

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

Accepted Answer

An inferior good

Question 12

Suppose the cross-price elasticity of demand between two goods is positive. What does this imply?

Accepted Answer

The goods are substitutes.

Question 13

A payroll tax is imposed on labor. If the supply of labor is more inelastic than the demand for labor, who bears more of the tax burden?

Accepted Answer

Workers bear more of the tax burden.

Question 14

If the income elasticity of demand for restaurant meals is 1.5, what does this indicate?

Accepted Answer

Restaurant meals are a luxury good.

Question 15

Which of the following best describes the effect of a perfectly inelastic demand curve on the incidence of an excise tax?

Accepted Answer

Consumers bear the entire burden of the tax.

Question 16

If the price of public transit rises and the demand for cars increases, what is the cross-price elasticity of demand between public transit and cars?

Accepted Answer

Positive, indicating they are substitutes.

Question 17

A product has an income elasticity of demand of 0.4. Which of the following is true?

Accepted Answer

It is a necessity because the income elasticity is positive but less than 1.

Question 18

Suppose the supply of a product is perfectly elastic. What happens to the price received by producers when an excise tax is imposed?

Accepted Answer

The price received by producers falls by the full amount of the tax.

Question 19

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

Accepted Answer

The cost of production for the good

Question 20

If the price of a good increases by 10% and the quantity supplied increases by 14.2%, what is the price elasticity of supply?

Accepted Answer

$$\eta_s = \frac{14.2\%}{10\%} = 1.42$$

Elasticity in Microeconomics: Price, Supply, and Other Demand Elasticities

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