Question 1

Suppose the price of wheat increases from $$5 to 10 $$per unit, and as a result, the quantity demanded decreases from 100 to 80 units. Using the arc elasticity of demand formula, what is the price elasticity of demand?

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

Accepted Answer

$$E_d = -0.36$$

Question 2

Which of the following best describes the concept of price elasticity of demand?

Accepted Answer

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

Question 3

If the price elasticity of demand for a product is $$|E_d| \u003e 1$$, what does this imply about the demand for the product?

Accepted Answer

Demand is elastic.

Question 4

A firm notices that when it raises the price of its product, total revenue decreases. What can be inferred about the price elasticity of demand for this product?

Accepted Answer

Demand is elastic.

Question 5

Given the following data for a product:

Initial price $$P_1 = 20$, new price P_2$ = 25$$, initial quantity $$Q_1 = 50$, new quantity Q_2$ = 40. $$Calculate the arc elasticity of demand.

Accepted Answer

$$E_d = -1.67$$

Question 6

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

Accepted Answer

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

Question 7

If a good has a price elasticity of demand equal to zero, what does this imply about the demand curve?

Accepted Answer

The demand curve is perfectly inelastic (vertical).

Question 8

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

Accepted Answer

They are substitutes.

Question 9

A government imposes a tax on a good with highly inelastic demand. Who will bear most of the tax burden?

Accepted Answer

Consumers will bear most of the tax burden.

Question 10

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

Accepted Answer

Inferior good

Question 11

A company observes that when the price of its product falls from $$10 to 8$$, the quantity demanded rises from 200 to 260 units. Using the midpoint (arc) method, what is the price elasticity of demand?

Accepted Answer

$$E_d = -1.8$$

Question 12

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

Accepted Answer

Cost of production

Question 13

If the demand for a product is perfectly elastic, what will happen to quantity demanded if the price increases by any amount?

Accepted Answer

Quantity demanded will decrease to zero.

Question 14

Which formula correctly represents the arc elasticity of demand?

Accepted Answer

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

Question 15

A product has a price elasticity of demand of $$-0.2. If $$the firm increases the price, what will happen to total revenue?

Accepted Answer

Total revenue will increase.

Question 16

Which of the following scenarios best illustrates the concept of unit elastic demand?

Accepted Answer

A 10% increase in price leads to a 10% decrease in quantity demanded.

Question 17

If the demand for a good is highly elastic, which of the following is most likely true?

Accepted Answer

The good has many close substitutes.

Question 18

Suppose a government wants to maximize tax revenue from a product. Should it tax a product with elastic or inelastic demand, and why?

Accepted Answer

Tax a product with inelastic demand because quantity demanded will not fall much.

Question 19

Which of the following best explains why the arc elasticity formula is preferred over the simple percentage change formula for large price changes?

Accepted Answer

It averages the starting and ending values, reducing bias.

Elasticity of Demand and Demand Curves

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