Question 1

Suppose the price of a bottle of soda increases from $$1.50 to 1.70$$, and as a result, the quantity demanded decreases from 2,000 to 1,800 bottles per day. Using the midpoint formula, what is the price elasticity of demand?

Accepted Answer

$$\frac{(1800-2000)}{(1800+2000)/2} \div \frac{(1.70-1.50)}{(1.70+1.50)/2} = -0.21/0.12 = -1.75$$

Question 2

Which of the following goods is most likely to have an inelastic demand?

Accepted Answer

Insulin for diabetics

Question 3

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

Accepted Answer

Demand is inelastic

Question 4

A city imposes a tax on soda to reduce consumption and raise revenue. If the demand for soda is highly elastic, what is the most likely outcome?

Accepted Answer

Soda consumption will decrease significantly, but tax revenue will be lower than expected.

Question 5

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

Accepted Answer

The cost of production

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

A decrease in the price of jeans leads to a larger percentage increase in quantity demanded for Levi’s jeans than for jeans in general. What does this suggest about the elasticity of demand for Levi’s jeans compared to jeans as a category?

Accepted Answer

Demand for Levi’s jeans is more elastic than for jeans as a category

Question 8

If a 10% increase in income leads to a 15% increase in the quantity demanded for a good, what is the income elasticity of demand, and how is the good classified?

Accepted Answer

$$\frac{15\%}{10\%} = 1.5$$, and the good is a normal good (luxury)

Question 9

Which of the following best describes a perfectly inelastic supply curve?

Accepted Answer

A vertical line; quantity supplied does not change as price changes

Question 10

Suppose the price elasticity of supply for wheat is 0.2 in the short run and 1.5 in the long run. What does this imply about farmers’ ability to respond to price changes?

Accepted Answer

Farmers can increase supply much more in the long run than in the short run

Question 11

If the price elasticity of demand for a product is exactly 1, what happens to total revenue when the price changes?

Accepted Answer

Total revenue remains unchanged

Question 12

A business owner observes that lowering the price of her product increases total revenue. What can she conclude about the price elasticity of demand for her product?

Accepted Answer

Demand is elastic

Question 13

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

Accepted Answer

A farmer can sell as much wheat as he wants at the market price, but if he raises his price even slightly, he sells nothing.

Question 14

If the cross-price elasticity of demand between beer and wine is negative, what does this imply?

Accepted Answer

Beer and wine are complements

Question 15

Which of the following would make the demand for gasoline more elastic over time?

Accepted Answer

Consumers switch to electric cars as gasoline prices rise

Question 16

If a good is a necessity and takes up a small share of a consumer’s budget, what can you say about its price elasticity of demand?

Accepted Answer

It is likely to be inelastic

Question 17

Suppose the price of oil rises sharply due to a sudden increase in demand, but oil producers cannot increase output quickly. What does this illustrate about the price elasticity of supply for oil in the short run?

Accepted Answer

Supply is inelastic in the short run

Question 18

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

Accepted Answer

A horizontal line

Question 19

A 10% increase in the price of a good leads to a 5% increase in quantity supplied. What is the price elasticity of supply?

Accepted Answer

$$\frac{5\%}{10\%} = 0.5$$

Elasticity: The Responsiveness of Demand and Supply

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