Q: A city imposes a $$1.00 per unit excise tax on avocados. Before the tax, 1,000 avocados are sold daily at 2.00 $$each. After the tax, only 500 avocados are sold daily. How much tax revenue does the city collect per year?

$$1.00 \times 500 \times 365 = 182$$,500$

Question 1

Suppose the price of a cup of coffee increases from $$2 to 2.20$$, and as a result, the quantity demanded falls from 100 cups to 90 cups per day. Using the midpoint formula, what is the price elasticity of demand?

Accepted Answer

$$\frac{(90-100)}{(90+100)/2} \div \frac{(2.20-2.00)}{(2.20+2.00)/2} = \frac{-10}{95} \div \frac{0.20}{2.10} = -0.105 \div 0.095 = -1.11$$

Question 2

Which of the following best explains why elasticity is a better measure of responsiveness than slope?

Accepted Answer

Elasticity is unit-free and allows for comparison across different goods and markets.

Question 3

If the demand for a product is perfectly inelastic, what will happen to the quantity demanded if the price increases by 50%?

Accepted Answer

The quantity demanded will remain unchanged.

Question 4

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 describe the demand for gasoline?

Accepted Answer

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

Question 5

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

Accepted Answer

A specific brand of breakfast cereal with many substitutes.

Question 6

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

Accepted Answer

Demand is inelastic ($$|E_d| \u003c 1).$$

Question 7

Which of the following formulas correctly represents the midpoint formula for price elasticity of demand?

Accepted Answer

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

Question 8

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

Accepted Answer

The cost of producing the good.

Question 9

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

Accepted Answer

They are substitutes.

Question 10

A city imposes a $$1.00 per unit excise tax on avocados. Before the tax, 1,000 avocados are sold daily at 2.00 $$each. After the tax, only 500 avocados are sold daily. How much tax revenue does the city collect per year?

Accepted Answer

$$1.00 	imes 500 	imes 365 = 182$$,500$

Question 11

Which of the following statements about the elasticity of supply is correct?

Accepted Answer

Elasticity of supply is usually positive because higher prices typically increase quantity supplied.

Question 12

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

Accepted Answer

An inferior good.

Question 13

Suppose the price elasticity of demand for a product is $$-1.5. If $$the firm decreases the price by 10%, what will happen to total revenue?

Accepted Answer

Total revenue will increase.

Question 14

Which of the following best describes unitary elasticity?

Accepted Answer

The percentage change in quantity demanded equals the percentage change in price ($$|E_d| = 1).$$

Question 15

If a 5% increase in income leads to a 10% increase in the quantity demanded of a good, what is the income elasticity of demand, and what type of good is it?

Accepted Answer

$$\frac{10\%}{5\%} = 2$$, which is a luxury good.

Question 16

Which of the following scenarios would likely result in a more elastic demand in the long run than in the short run?

Accepted Answer

Consumers have more time to find substitutes for a good after a price increase.

Question 17

If the cross-price elasticity of demand between peanut butter and jelly is $$-0.8$$, what does this imply?

Accepted Answer

Peanut butter and jelly are complements.

Question 18

A firm faces a downward-sloping straight-line demand curve. As it moves down the curve, what happens to the price elasticity of demand?

Accepted Answer

Elasticity decreases (demand becomes less elastic) as price falls and quantity increases.

Question 19

Which of the following best describes the effect of a price cut on total revenue when demand is inelastic?

Accepted Answer

Total revenue decreases.

Elasticity in Microeconomics: Concepts, Measurement, and Applications

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