Question 1

Suppose the price of a product decreases from $$5.00 to 3.00$$, and the quantity demanded increases from 116,250 units to 123,750 units. What is the price elasticity of demand using the midpoint formula?

Accepted Answer

$$\frac{7500}{120\ 000} \div \frac{2.0}{4.0} = 0.0625 \div 0.5 = 0.125$$

Question 2

Which of the following statements best describes a product with perfectly inelastic demand?

Accepted Answer

Quantity demanded does not change regardless of price changes ($$\eta = 0)$$

Question 3

If a good has many close substitutes, what can you say about its price elasticity of demand?

Accepted Answer

It is likely to be elastic because consumers can easily switch to alternatives.

Question 4

A 10% increase in the price of a luxury car leads to a 20% decrease in quantity demanded. What is the price elasticity of demand, and how would you classify the demand?

Accepted Answer

$$\eta = \frac{20\%}{10\%} = 2$$; demand is elastic.

Question 5

If the price elasticity of demand for a product is less than 1, what does this imply about total expenditure when price increases?

Accepted Answer

Total expenditure increases because demand is inelastic.

Question 6

Which of the following factors does NOT increase the price elasticity of demand for a product?

Accepted Answer

The product is a necessity for consumers.

Question 7

A government imposes an excise tax on gasoline. If the demand for gasoline is inelastic and supply is elastic, who bears most of the tax burden?

Accepted Answer

Consumers bear most of the tax burden.

Question 8

Which formula correctly represents the price elasticity of supply?

Accepted Answer

$$\eta_s = \frac{\Delta Q_s}{\overline{Q_s}} \div \frac{\Delta P}{\overline{P}}$$

Question 9

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

Accepted Answer

Inferior good

Question 10

A 5% increase in income leads to a 2% increase in quantity demanded for bread. What is the income elasticity of demand, and how is bread classified?

Accepted Answer

$$\eta_I = \frac{2\%}{5\%} = 0.4$$; bread is a necessity.

Question 11

If the cross price elasticity of demand between tea and coffee is positive, what does this indicate?

Accepted Answer

Tea and coffee are substitutes.

Question 12

Which of the following scenarios would result in a more elastic supply curve in the long run compared to the short run?

Accepted Answer

Producers have time to adjust their productive capacity.

Question 13

If a product’s price increases and total expenditure on the product decreases, what can you infer about the price elasticity of demand?

Accepted Answer

Demand is elastic.

Question 14

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

Accepted Answer

Slope is constant, but elasticity varies along the curve.

Question 15

A payroll tax is imposed on labour income. If the supply of labour is more inelastic than the demand for labour, who bears most of the tax burden?

Accepted Answer

Workers bear most of the tax burden.

Question 16

If the cross price elasticity of demand between peanut butter and jelly is negative, what does this mean?

Accepted Answer

Peanut butter and jelly are complements.

Question 17

Which of the following goods is most likely to have a high price elasticity of demand?

Accepted Answer

A narrowly defined brand of breakfast cereal

Question 18

If the price elasticity of supply for a product is greater than 1, what does this imply?

Accepted Answer

Supply is elastic; quantity supplied responds strongly to price changes.

Question 19

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

Accepted Answer

$$\eta_{XY} = \frac{-5\%}{10\%} = -0.5$$; X and Y are complements.

Elasticity in Microeconomics: Chapter 4 Study Notes

Study Guide - Practice Questions

Study Guide - Flashcards