Question 1

Suppose the price of a six-pack of Corona beer increases from $$10 to 12$$, and as a result, the quantity demanded falls from 20 to 16. Calculate the price elasticity of demand using the midpoint (arc elasticity) formula.

Accepted Answer

$$e = \frac{\frac{16-20}{(16+20)/2}}{\frac{12-10}{(12+10)/2}} = \frac{-4/18}{2/11} = -1.22$$

Question 2

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

Accepted Answer

Milk

Question 3

If the price elasticity of demand for cigarettes is $$0.11$$, what will happen to total revenue if the government increases the tax on cigarettes, raising the price by 10%?

Accepted Answer

Total revenue will increase because demand is inelastic.

Question 4

Which of the following best explains why the demand for food is generally inelastic?

Accepted Answer

Food is a necessity and has few close substitutes.

Question 5

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

Accepted Answer

The goods are substitutes.

Question 6

A 5% increase in income leads to a 10% increase in the quantity demanded of vacations. What is the income elasticity of demand for vacations, and how would you classify this good?

Accepted Answer

$$e_{inc} = \frac{10\%}{5\%} = 2$$, so vacations are a normal, income-elastic good.

Question 7

If the price elasticity of supply for potatoes is $$0.5$$, what does this indicate about the responsiveness of potato farmers to price changes?

Accepted Answer

Supply is inelastic; farmers are not very responsive to price changes.

Question 8

Suppose the government wants to increase total revenue from gasoline taxes. If the demand for gasoline is inelastic, what should the government do?

Accepted Answer

Increase the tax, raising the price.

Question 9

Which of the following scenarios best illustrates the concept of perfectly inelastic demand?

Accepted Answer

A life-saving medication for which there are no substitutes.

Question 10

If the price of milk increases by 10% and the quantity demanded decreases by 2%, what is the price elasticity of demand for milk?

Accepted Answer

$$e = \frac{-2\%}{10\%} = -0.2$$

Question 11

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

Accepted Answer

The number of producers in the market.

Question 12

If a good has an income elasticity of demand less than zero, what type of good is it?

Accepted Answer

Inferior good

Question 13

A government is considering banning a product with highly elastic demand. What is the most likely outcome?

Accepted Answer

The quantity demanded will decrease significantly.

Question 14

If the cross-price elasticity of demand between milk and cereal is negative, what does this imply?

Accepted Answer

Milk and cereal are complements.

Question 15

Suppose the supply of hotel rooms in a tourist city is perfectly elastic. What does this mean for the price of hotel rooms?

Accepted Answer

The price will remain constant regardless of the quantity supplied.

Question 16

A 10% increase in the price of potatoes leads to a 15% increase in the quantity supplied. What is the price elasticity of supply?

Accepted Answer

$$e = \frac{15\%}{10\%} = 1.5$$

Question 17

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

Accepted Answer

Producers have more time to adjust their production processes.

Question 18

If a government wants to reduce the number of unsafe abortions, which economic concept should it consider when designing policy?

Accepted Answer

The price elasticity of demand for abortions.

Question 19

If the demand for a good is unit elastic, what happens to total revenue when the price increases?

Accepted Answer

Total revenue remains unchanged.

Elasticity in Microeconomics: Concepts, Measurement, and Applications

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