Question 1

Suppose the price of a 2-liter bottle of soda decreases from $$1.50 to 1.35$$, and the quantity demanded increases from 1,000 to 1,200 bottles per day. Using the midpoint formula, what is the price elasticity of demand?

Accepted Answer

$$\frac{(1,200-1,000)}{(1,200+1,000)/2} \div \frac{(1.35-1.50)}{(1.35+1.50)/2} = \frac{200}{1,100} \div \frac{-0.15}{1.425} = 0.182 \div -0.105 = -1.73$$

Question 2

Which of the following best describes a good with perfectly inelastic demand?

Accepted Answer

The quantity demanded does not change as price changes; the price elasticity of demand equals zero.

Question 3

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

Accepted Answer

The goods are complements.

Question 4

A business owner observes that when she lowers the price of her product, total revenue decreases. What can she infer about the price elasticity of demand for her product?

Accepted Answer

Demand is inelastic (absolute value of elasticity is less than 1).

Question 5

Which of the following is most likely to have a high price elasticity of demand?

Accepted Answer

A specific brand of running shoes.

Question 6

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

Accepted Answer

Inferior good.

Question 7

Tesla cuts the price of its Model 3 by 14% and expects to increase total revenue. What must be true about the price elasticity of demand for the Model 3?

Accepted Answer

Demand is elastic (absolute value of elasticity is greater than 1).

Question 8

Which of the following is a determinant of the price elasticity of demand?

Accepted Answer

The availability of close substitutes.

Question 9

Suppose the price of wheat falls dramatically due to a large increase in supply, but the quantity demanded increases only slightly. What does this imply about the price elasticity and income elasticity of demand for wheat?

Accepted Answer

Demand for wheat is inelastic and income elasticity is low.

Question 10

If the price elasticity of supply for a product is zero, what does this mean?

Accepted Answer

The quantity supplied does not change as price changes; supply is perfectly inelastic.

Question 11

A 10% increase in the price of a good leads to a 5% increase in quantity supplied. What is the price elasticity of supply, and how would you classify it?

Accepted Answer

$$\frac{5\%}{10\%} = 0.5$$, so supply is inelastic.

Question 12

Which scenario best illustrates the effect of a tax on a good with highly elastic demand?

Accepted Answer

A large decrease in quantity demanded and a small increase in tax revenue.

Question 13

If the cross-price elasticity of demand between beer and wine is $$-0.83$$, what does this indicate?

Accepted Answer

Beer and wine are complements.

Question 14

Which of the following would make the price elasticity of supply higher for a product?

Accepted Answer

Producers have more time to adjust their production.

Question 15

A 10% increase in income leads to a 15% increase in the quantity demanded for a good. What is the income elasticity of demand, and how is the good classified?

Accepted Answer

$$\frac{15\%}{10\%} = 1.5$$, so the good is a normal good and a luxury.

Question 16

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

Accepted Answer

If demand is elastic, a decrease in price increases total revenue.

Question 17

Which of the following goods is most likely to have a perfectly elastic supply in the long run?

Accepted Answer

Agricultural products at prices above the cost of production.

Question 18

If a 10% increase in the price of smartphones leads to a 12% increase in the quantity demanded of tablets, what is the cross-price elasticity of demand, and what does it indicate?

Accepted Answer

$$\frac{12\%}{10\%} = 1.2$$, indicating that smartphones and tablets are substitutes.

Question 19

Which of the following would NOT increase the price elasticity of demand for a product?

Accepted Answer

The product becomes a necessity.

Elasticity: The Responsiveness of Demand and Supply

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