Q: Which formula correctly expresses the income elasticity of demand?

$$\text{Income elasticity of demand} = \frac{\%\,\text{change in quantity demanded}}{\%\,\text{change in income}}$$

Question 1

Which of the following best describes the price elasticity of demand?

Accepted Answer

The ratio of the percentage change in quantity demanded to the percentage change in price.

Question 2

Suppose the price of a product increases from $$2 to 3 $$and the quantity demanded decreases from 10 units to 5 units. Using the midpoint formula, what is the price elasticity of demand?

Accepted Answer

$$\frac{(10-5)}{(10+5)/2} \div \frac{(2-3)}{(2+3)/2} = \frac{5}{7.5} \div \frac{-1}{2.5} = 0.67 \div -0.4 = -1.68$$

Question 3

Which of the following demand curves represents perfectly inelastic demand?

Accepted Answer

A vertical demand curve.

Question 4

If the price elasticity of demand for a good is 0, what does this imply about consumer behavior?

Accepted Answer

Consumers will buy the same amount regardless of price changes.

Question 5

A 10% increase in the price of gasoline leads to a 2% decrease in quantity demanded. What is the price elasticity of demand, and how would you classify it?

Accepted Answer

$$\frac{-2\%}{10\%} = -0.2$$, which is inelastic.

Question 6

Which of the following factors is most likely to make the demand for a good more elastic?

Accepted Answer

There are many close substitutes available.

Question 7

If a firm raises the price of its product and finds that total revenue increases, what can be concluded about the price elasticity of demand for its product?

Accepted Answer

Demand is inelastic.

Question 8

Which formula correctly expresses the income elasticity of demand?

Accepted Answer

$$	ext{Income elasticity of demand} = \frac{\%\,	ext{change in quantity demanded}}{\%\,	ext{change in income}}$$

Question 9

A city imposes a $$1.00 per unit excise tax on avocados, shifting the supply curve upward by 1.00. If $$the equilibrium quantity falls from 1,000 to 500 avocados per day, what is the most likely explanation for this large decrease in quantity?

Accepted Answer

Demand for avocados is elastic.

Question 10

Which of the following best describes the cross-price elasticity of demand?

Accepted Answer

The responsiveness of demand for one good to changes in the price of another good.

Question 11

If the demand for a product is unitary elastic, what happens to total revenue when the price changes?

Accepted Answer

Total revenue remains unchanged.

Question 12

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

Accepted Answer

Changing the units of measurement changes the numerical value of the slope but not elasticity.

Question 13

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

Accepted Answer

Insulin for diabetics

Question 14

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

Accepted Answer

The goods are substitutes.

Question 15

Which of the following scenarios best illustrates the time dimension of elasticity?

Accepted Answer

A sudden increase in gasoline prices causes only a small decrease in quantity demanded in the first month, but a much larger decrease after a year.

Question 16

If the price elasticity of supply is positive, what does this indicate?

Accepted Answer

As price increases, quantity supplied increases.

Question 17

A sandwich shop finds that the long-run demand for its sandwiches is more elastic than the short-run demand. Which of the following best explains this observation?

Accepted Answer

Consumers have more time to find substitutes in the long run.

Question 18

Which of the following is the correct formula for point elasticity of demand?

Accepted Answer

$$	ext{Elasticity} = \frac{\Delta Q}{\Delta P} 	imes \frac{P_1$}{Q_1$}$$

Question 19

If a 5% increase in the wage rate leads to a 10% increase in the quantity of labor supplied, what is the elasticity of labor supply?

Accepted Answer

$$\frac{10\%}{5\%} = 2$$

Elasticity in Microeconomics: Concepts, Calculation, and Applications

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