Question 1

Suppose the price of a phone increases from $$200 to 210$$, and the quantity demanded decreases from 10 to 9.9 units. Using the midpoint formula, what is the price elasticity of demand?

Accepted Answer

$$\frac{(9.9-10)}{(10+9.9)/2} \div \frac{(210-200)}{(200+210)/2} = \frac{-0.1}{9.95} \div \frac{10}{205} = -0.01005 \div 0.04878 \approx -0.21$$

Question 2

If the cross-price elasticity of demand between potato chips and soda is calculated as $$-0.8$$, what does this imply about the relationship between the two goods?

Accepted Answer

They are complements.

Question 3

Nabeel’s income increases from $$20,000 to 25$$,000, and his badminton games increase from 15 to 20. What is the income elasticity of demand for badminton using the midpoint formula?

Accepted Answer

$$\frac{(20-15)}{(20+15)/2} \div \frac{(25,000-20,000)}{(25,000+20,000)/2} = \frac{5}{17.5} \div \frac{5,000}{22,500} = 0.286 \div 0.222 = 1.29$$

Question 4

A lamp manufacturer increases production from 30 to 50 units when the price rises from $$35 to 40. $$What is the price elasticity of supply using the midpoint formula?

Accepted Answer

$$\frac{(50-30)}{(50+30)/2} \div \frac{(40-35)}{(40+35)/2} = \frac{20}{40} \div \frac{5}{37.5} = 0.5 \div 0.133 = 3.75$$

Question 5

Which of the following is NOT a factor that determines the price elasticity of demand for a good?

Accepted Answer

The cost of production for the good

Question 6

If a good is a necessity with few substitutes, what can you infer about its price elasticity of demand?

Accepted Answer

It is likely to be inelastic.

Question 7

Refer to the demand curve for used textbooks (see image 3). If the market price is $35, what is the total consumer surplus?

Accepted Answer

$$(59-35)+(45-35)+(35-35)=24+10+0=34$$

Question 8

Which of the following is a source of market failure?

Accepted Answer

High transaction costs

Question 9

If the price of a good increases and total revenue decreases, what can you infer about the price elasticity of demand for that good?

Accepted Answer

Demand is elastic.

Question 10

Which resource allocation method is most likely used when a government distributes scarce medical supplies during a pandemic?

Accepted Answer

Command

Question 11

If a tax is imposed on a good, what is the likely effect on consumer surplus, producer surplus, and deadweight loss?

Accepted Answer

Consumer surplus and producer surplus both decrease; deadweight loss increases.

Question 12

Which of the following best describes producer surplus?

Accepted Answer

The difference between the market price and the minimum price at which a producer is willing to sell.

Question 13

If the price elasticity of supply for a good is less than 1, what does this indicate?

Accepted Answer

Supply is inelastic.

Question 14

Which of the following is NOT a method of resource allocation?

Accepted Answer

Marginal cost pricing

Question 15

If a market is at equilibrium, what is true about total surplus?

Accepted Answer

Total surplus is maximized.

Question 16

Which of the following would cause a deadweight loss in a market?

Accepted Answer

A price ceiling set below equilibrium

Question 17

If the price of natural gas is $5 per BTU and the Gonzalez family demands 30 BTUs while the Murray family demands 20 BTUs, what is the market demand at this price?

Accepted Answer

$$50$$

Question 18

Which of the following best explains why the supply curve is typically upward sloping?

Accepted Answer

As price increases, producers are willing to supply more due to higher potential profits.

Question 19

If a good has a positive income elasticity of demand greater than 1, what type of good is it?

Accepted Answer

Normal good (luxury)

Question 20

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

Accepted Answer

A life-saving medication with no substitutes

Elasticity, Efficiency, and Surplus in Microeconomics

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