Question 1

Suppose the price of a Tesla vehicle in Hong Kong increases from $$75,000 to 130$$,000, and the quantity demanded falls from 500 to 30 per month. Using the midpoint (average) formula, what is the price elasticity of demand for Tesla vehicles in this scenario? (Ignore the negative sign.)

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

Accepted Answer

3.30

Question 2

If the price elasticity of demand for a product is $$E_p = 0.5$$, which of the following statements is true about the demand for this product?

Accepted Answer

Demand is inelastic; consumers are relatively unresponsive to price changes.

Question 3

A cell phone company increases its price per minute by 5%, and the quantity demanded decreases by 10%. What happens to the company's total revenue?

Accepted Answer

Total revenue decreases because demand is elastic.

Question 4

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

Accepted Answer

Insulin for a diabetic patient

Question 5

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

Accepted Answer

The cost of production for the good

Question 6

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

Accepted Answer

They are substitutes.

Question 7

A 10% increase in income leads to a 15% increase in the quantity demanded for digital apps. What is the income elasticity of demand for digital apps?

$$E_i = \frac{\%\ 	ext{change in quantity demanded}}{\%\ 	ext{change in income}}$$

Accepted Answer

1.5

Question 8

Which scenario best illustrates the effect of time on the price elasticity of demand for gasoline?

Accepted Answer

Over several years, consumers switch to public transit, carpool, or buy electric vehicles, making demand more elastic.

Question 9

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

Accepted Answer

A specific brand of bacon

Question 10

Suppose the price of a good increases by 20%, and the quantity demanded decreases by 20%. What is the price elasticity of demand, and what happens to total revenue?

$$E_p = \frac{\%\ 	ext{change in quantity demanded}}{\%\ 	ext{change in price}}$$

Accepted Answer

Elasticity is 1 (unit-elastic); total revenue remains unchanged.

Question 11

Which of the following best describes perfectly elastic supply?

Accepted Answer

The supply curve is horizontal; any decrease in price reduces quantity supplied to zero.

Question 12

A firm faces a price elasticity of supply of $$E_s = 2.0. $$What does this indicate about the firm's supply?

Accepted Answer

Supply is elastic.

Question 13

Which of the following factors would make the supply of a good more elastic in the long run?

Accepted Answer

More time for firms to adjust production and enter the market

Question 14

If a 20% increase in the price of a good leads to a 5% increase in quantity supplied, what is the price elasticity of supply?

$$E_s = \frac{\%\ 	ext{change in quantity supplied}}{\%\ 	ext{change in price}}$$

Accepted Answer

0.25

Question 15

Which of the following best explains why the demand for a 45-cent box of salt is likely to be inelastic?

Accepted Answer

Salt represents a small share of the consumer's budget.

Question 16

If the price elasticity of demand for a product is $$E_p = \infty$$, what does this imply about the demand curve?

Accepted Answer

The demand curve is horizontal.

Question 17

A 10% increase in the price of Good X causes the quantity demanded of Good Y to decrease by 5%. What is the cross-price elasticity of demand, and what does it indicate about the relationship between X and Y?

$$E_{xy} = \frac{\%\ 	ext{change in quantity demanded of Y}}{\%\ 	ext{change in price of X}}$$

Accepted Answer

$$E_{xy} = -0.5$$; X and Y are complements.

Question 18

Which of the following scenarios would most likely result in an increase in total revenue for a firm?

Accepted Answer

The firm raises the price of a good with inelastic demand.

Question 19

Which of the following best describes the effect of excess capacity on the price elasticity of supply?

Accepted Answer

Excess capacity makes supply more elastic.

Question 20

If the price of a product increases by 15% and the quantity demanded decreases by 5%, what is the price elasticity of demand, and how would you classify the demand?

$$E_p = \frac{\%\ 	ext{change in quantity demanded}}{\%\ 	ext{change in price}}$$

Accepted Answer

Elasticity is 0.33; demand is inelastic.

Chapter 6: Demand and Supply Elasticity – Microeconomics Study Notes

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