Q: A linear demand curve has a slope of $$-2. At a $$price of $$P = 10$$ and quantity $$Q = 20$$, what is the price elasticity of demand?

$$E_d = \frac{dQ}{dP} \times \frac{P}{Q} = -2 \times \frac{10}{20} = -1$$

Question 1

Suppose the price of a product increases from $$10 to 12$$, and as a result, the quantity demanded decreases from 100 units to 80 units. Using the midpoint formula, what is the price elasticity of demand?

Accepted Answer

$$\frac{(80-100)}{(80+100)/2} \div \frac{(12-10)}{(12+10)/2} = \frac{-20}{90} \div \frac{2}{11} = -1.22$$

Question 2

If the price elasticity of demand for a good is $$|E_d| = 0.5$$, which of the following statements is true?

Accepted Answer

Demand is inelastic; total revenue will increase if price increases.

Question 3

A linear demand curve has a slope of $$-2. At a $$price of $$P = 10$$ and quantity $$Q = 20$$, what is the price elasticity of demand?

Accepted Answer

$$E_d = \frac{dQ}{dP} 	imes \frac{P}{Q} = -2 	imes \frac{10}{20} = -1$$

Question 4

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

Accepted Answer

Producers can easily switch production to this good from other goods.

Question 5

A government imposes a binding price ceiling below the equilibrium price. What is the most likely immediate effect?

Accepted Answer

A shortage will occur because quantity demanded exceeds quantity supplied.

Question 6

If a $5 per unit tax is imposed on sellers, and the supply curve is perfectly elastic, who bears the entire burden of the tax?

Accepted Answer

Buyers bear the entire burden of the tax.

Question 7

Which of the following best describes deadweight loss resulting from a tax?

Accepted Answer

It is the reduction in total surplus that results because the tax discourages mutually beneficial trades.

Question 8

Suppose the government sets a minimum wage above the equilibrium wage. What is a likely consequence in the labor market?

Accepted Answer

A surplus of labor (unemployment) will result.

Question 9

If the government provides a per-unit subsidy to buyers, what happens to the price buyers pay and the price sellers receive?

Accepted Answer

Buyers pay a lower price, and sellers receive a higher price than before the subsidy.

Question 10

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

Accepted Answer

The cost of inputs used in production.

Question 11

A $$2 per unit tax is imposed on a good. The price buyers pay increases by 1.50$$, and the price sellers receive falls by $0.50. What does this imply about the relative elasticities of demand and supply?

Accepted Answer

Demand is less elastic than supply.

Question 12

If a rent control law sets a maximum rent below the equilibrium, which of the following is a likely long-term effect?

Accepted Answer

A reduction in the quality and quantity of rental housing.

Question 13

Which formula correctly calculates the percent change using the midpoint method?

Accepted Answer

$$\frac{	ext{New Value} - 	ext{Old Value}}{(	ext{New Value} + 	ext{Old Value})/2} 	imes 100$$

Question 14

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

Accepted Answer

The goods are substitutes.

Question 15

A tax on a good causes the equilibrium quantity to fall from 500 to 400 units. If the tax is $3 per unit, what is the deadweight loss from the tax?

Accepted Answer

$$\frac{1}{2} 	imes (500 - 400) 	imes 3 = 150$$

Question 16

Which of the following best explains why a binding price floor creates a surplus?

Accepted Answer

The price floor is set above equilibrium, so quantity supplied exceeds quantity demanded.

Question 17

If the government wants to maximize tax revenue from a good, it should tax goods with which characteristic?

Accepted Answer

Inelastic demand.

Question 18

Suppose a $4 per unit subsidy is given to sellers. If the demand is perfectly inelastic, who receives the full benefit of the subsidy?

Accepted Answer

Buyers receive the full benefit.

Question 19

Which of the following is true about the relationship between the slope of a linear demand curve and its price elasticity?

Accepted Answer

Elasticity varies along the curve even though the slope is constant.

Question 20

A city government imposes a $2 per unit tax on apartment rentals. If the supply of apartments is more elastic than demand, who bears a greater share of the tax burden?

Accepted Answer

Renters (buyers) bear a greater share of the tax burden.

Microeconomics Study Guide: Elasticity, Price Controls, Taxes, and Subsidies

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