Question 1

Suppose the price of a product increases by 10%, and as a result, the quantity demanded decreases by 20%. What is the price elasticity of demand, and how would you classify the demand for this product?

Accepted Answer

The price elasticity of demand is $$e = \frac{-20\%}{10\%} = -2$$, which is elastic.

Question 2

A furniture store observes that when it raises prices by 5%, the quantity sold falls by 6.3%. Using the midpoint method, calculate the price elasticity of demand and determine if demand is elastic or inelastic.

Accepted Answer

Elasticity $$e = \frac{-6.3\%}{5\%} = -1.26$$, which is elastic.

Question 3

If the price elasticity of demand for cigarettes is $$e = -0.4$$, what will happen to total revenue if the government increases the price of cigarettes by imposing a tax?

Accepted Answer

Total revenue will increase because demand is inelastic ($$|e| \u003c 1).$$

Question 4

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

Accepted Answer

Motor vehicles, because there are many substitutes and it is a large part of expenditure.

Question 5

A company sells a product with a demand curve $$Q = 60 - 6P. If $$the price increases from $$P = 5 to$$ $$P = 6$$, what is the percentage change in quantity demanded using the midpoint method?

Accepted Answer

Quantity at $$P=5 is$$ $$Q=30$$, at $$P=6 is$$ $$Q=24. $$Percentage change: $$\frac{24-30}{(24+30)/2} 	imes 100 = -22.22\%$$

Question 6

If the cross-price elasticity of demand between tea and coffee is $$+0.8$$, what does this imply?

Accepted Answer

Tea and coffee are substitutes; an increase in the price of coffee increases demand for tea.

Question 7

A bakery finds that when consumer incomes rise by 10%, the quantity of bread sold increases by 2%. What is the income elasticity of demand for bread, and how is bread classified?

Accepted Answer

Income elasticity $$e = \frac{2\%}{10\%} = 0.2$$, so bread is a normal, income-inelastic good.

Question 8

Which of the following scenarios best illustrates perfectly inelastic demand?

Accepted Answer

A patient needs a life-saving medication and will buy the same amount regardless of price.

Question 9

If the price elasticity of supply for a product is $$e = 0$$, what does this mean for the supply curve?

Accepted Answer

The supply curve is perfectly inelastic; quantity supplied does not change with price.

Question 10

A government wants to increase tax revenue from a product. Should it target goods with elastic or inelastic demand, and why?

Accepted Answer

Inelastic demand, because quantity demanded will not decrease much when price rises.

Question 11

Which factor is most likely to make the supply of a product more elastic in the long run?

Accepted Answer

Producers have more time to adjust production and adopt new technologies.

Question 12

If a demand curve is $$Q = 10 - P$$, what is the price elasticity of demand at $$P = 5$$ using the point elasticity formula $$e = \frac{dQ}{dP} 	imes \frac{P}{Q}$$?

Accepted Answer

At $$P=5$$, $$Q=5$$, $$\frac{dQ}{dP} = -1$$, so $$e = -1 	imes \frac{5}{5} = -1 ($$unit elastic).

Question 13

A new technology makes it easier to produce electric cars. What is the likely effect on the price elasticity of supply for electric cars?

Accepted Answer

Supply becomes more elastic because producers can respond more easily to price changes.

Question 14

If the cross-price elasticity of demand between peanut butter and jelly is $$-0.6$$, what does this indicate?

Accepted Answer

Peanut butter and jelly are complements; an increase in the price of jelly decreases demand for peanut butter.

Question 15

A city increases the price of public transit by 15%. If the price elasticity of demand is $$-0.2$$, what is the expected percentage change in quantity demanded?

Accepted Answer

Percentage change in quantity demanded: $$-0.2 	imes 15\% = -3\%$$

Question 16

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

Accepted Answer

Number of producers in the market.

Question 17

If a good has a price elasticity of demand of $$e = -1$$, what happens to total revenue when the price increases?

Accepted Answer

Total revenue remains unchanged because the percentage change in quantity equals the percentage change in price.

Question 18

A family-owned restaurant faces a sudden increase in ingredient prices. Which factor would make its supply curve more inelastic compared to a large international chain?

Accepted Answer

Lack of financial insurance and fewer production substitutes.

Question 19

Which of the following statements about elasticity and revenue is correct?

Accepted Answer

If demand is elastic, increasing price decreases total revenue.

Elasticity in Microeconomics: Concepts, Measurement, and Applications

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