Q: Which formula represents the cross-price elasticity of demand?

$$\frac{\%\,\text{change in QD of good x}}{\%\,\text{change in P of good y}}$$

Question 1

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

Accepted Answer

It measures the responsiveness of quantity demanded to a change in price, using percentage changes.

Question 2

Given the following data: P1 = $$4.00, Q1 = 1,000; P2 = 3.70$$, Q2 = 1,200. Calculate the price elasticity of demand using the midpoint formula.

Accepted Answer

$$\frac{(1,200-1,000)/((1,200+1,000)/2)}{(3.70-4.00)/((3.70+4.00)/2)} = -2.3$$

Question 3

If the price elasticity of demand for a product is calculated as -0.23, what does this indicate about the demand for the product?

Accepted Answer

Demand is inelastic; quantity demanded is not very responsive to price changes.

Question 4

Which determinant is considered the most important for the price elasticity of demand?

Accepted Answer

The availability of close substitutes

Question 5

Suppose the price of gasoline increases from $$3.70 to 4.00 $$and the quantity demanded decreases from 1,200 to 1,000 gallons per day. What happens to total revenue if demand is inelastic?

Accepted Answer

Total revenue increases.

Question 6

Which formula should be used to calculate the price elasticity of demand to avoid issues with units of measurement?

Accepted Answer

Midpoint formula: $$\frac{(Q_2$-Q_1$)/((Q_2$+Q_1$)/2)}{(P_2$-P_1$)/((P_2$+P_1$)/2)}$$

Question 7

If the cross-price elasticity of demand between beer and wine is 0.31, what does this imply?

Accepted Answer

Beer and wine are substitutes.

Question 8

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

Accepted Answer

Insulin

Question 9

If a good takes up a large share of a consumer’s budget, what can be said about its price elasticity of demand?

Accepted Answer

The demand is more elastic.

Question 10

Which of the following statements is true regarding the relationship between price elasticity of demand and total revenue?

Accepted Answer

When demand is inelastic, an increase in price increases total revenue.

Question 11

If the income elasticity of demand for wine is 5.03, what type of good is wine?

Accepted Answer

Luxury

Question 12

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

Accepted Answer

Number of suppliers in the market

Question 13

If the price elasticity of supply is calculated as 0.5, what does this indicate?

Accepted Answer

Supply is inelastic.

Question 14

Which formula represents the cross-price elasticity of demand?

Accepted Answer

$$\frac{\%\,	ext{change in QD of good x}}{\%\,	ext{change in P of good y}}$$

Question 15

A pizza shop can only supply a fixed number of pizzas per day, but over time it can increase its supply by acquiring more ovens and ingredients. What does this illustrate about the price elasticity of supply?

Accepted Answer

Supply is more elastic in the long run.

Question 16

If the demand curve for a good is steeper, what can be inferred about its price elasticity?

Accepted Answer

The good is more inelastic.

Question 17

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

Accepted Answer

The goods are complements.

Question 18

Which of the following scenarios would result in a perfectly elastic demand curve?

Accepted Answer

Quantity demanded is infinitely responsive to price changes.

Question 19

If the income elasticity of demand for beer is -0.09, what type of good is beer?

Accepted Answer

Inferior good

Question 20

A firm observes that after a price cut, its total revenue decreases. What does this imply about the price elasticity of demand for its product?

Accepted Answer

Demand is inelastic.

Chapter 6

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