Q: Which formula correctly calculates the 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 for insulin for diabetics?

Accepted Answer

Inelastic, because quantity demanded changes very little when price changes.

Question 2

Suppose the price of blue earbuds increases by 10% and the quantity demanded decreases by 15%. What is the price elasticity of demand, and how would you classify the demand?

Accepted Answer

Elasticity $= \frac{15\%}{10\%} = 1.5$; demand is elastic.

Question 3

A vertical demand curve represents which type of price elasticity of demand?

Accepted Answer

Perfectly inelastic demand

Question 4

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

Accepted Answer

Smaller proportion of income spent on the product

Question 5

If a business faces elastic demand ($E_d > 1$), what should it do to increase total revenue?

Accepted Answer

Cut prices

Question 6

As you move down a straight-line demand curve, what happens to the price elasticity of demand?

Accepted Answer

It decreases as you move down, going from elastic to inelastic.

Question 7

Which of the following is true about perfectly elastic supply?

Accepted Answer

Elasticity of supply is infinity and supply curve is horizontal.

Question 8

A snow-shoveling service can easily hire more workers and buy more shovels when demand rises. What does this imply about the price elasticity of supply?

Accepted Answer

Supply is elastic because it is easy and inexpensive to increase production.

Question 9

If the cross elasticity of demand between Coke and Pepsi is $+0.8$, what does this indicate?

Accepted Answer

They are substitutes.

Question 10

Which formula correctly calculates the income elasticity of demand?

Accepted Answer

$\frac{\%\ 	ext{change in quantity demanded}}{\%\ 	ext{change in income}}$

Question 11

A government wants to maximize tax revenue. Which type of goods should it tax?

Accepted Answer

Goods with inelastic demand and supply

Question 12

If the income elasticity of demand for luxury vacations is $1.5$, what does this mean?

Accepted Answer

Vacations are normal goods and luxuries; demand increases more than income.

Question 13

If the cross elasticity of demand between burgers and fries is $-0.6$, what does this indicate?

Accepted Answer

Burgers and fries are complements.

Question 14

Which of the following scenarios would result in buyers paying all of a tax imposed on a good?

Accepted Answer

Supply is perfectly inelastic.

Question 15

A restaurant charges high prices for refreshments and still sells a lot. What does this suggest about the price elasticity of demand for refreshments?

Accepted Answer

Demand is inelastic.

Question 16

If the price of a necessity rises and consumers do not reduce their purchases much, what is the likely price elasticity of demand?

Accepted Answer

Elasticity is less than 1.

Question 17

Which of the following will make the supply of a product more elastic?

Accepted Answer

Production can be increased quickly and easily.

Question 18

If a government imposes a tax on a good with perfectly inelastic demand, who bears the burden of the tax?

Accepted Answer

Buyers bear all of the tax.

Question 19

Which equation correctly expresses the price elasticity of supply?

Accepted Answer

$\frac{\%\ 	ext{change in quantity supplied}}{\%\ 	ext{change in price}}$

Question 20

A normal good has an income elasticity of demand between 0 and 1. What does this mean?

Accepted Answer

It is a necessity; demand increases less than income.

Elasticity: Measuring Responsiveness in Microeconomics

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