Q: A 10% increase in the price of product Y causes the quantity demanded of product X to increase by 5%. What is the cross price elasticity of demand ($E_{XY}$) and what does it indicate?

$E_{XY} = \frac{5\%}{10\%} = 0.5$, indicating X and Y are substitutes.

Q: Which factor does NOT affect the price elasticity of demand for a product?

The cost of production for suppliers

Q: Suppose the price elasticity of supply for a product is $E_s = 0.2$. What does this indicate about the supply curve?

Supply is inelastic; quantity supplied changes less than proportionally to price.

Q: A decrease in interest rates causes the demand curve for houses to shift to the right. What is the most likely effect on equilibrium price and quantity?

Both equilibrium price and quantity increase.

Question 1

If the price of pens decreases from $6 to $5 and the quantity demanded increases from 100 to 200, what is the price elasticity of demand using the arc elasticity (midpoint) formula?

Accepted Answer

E = \frac{100}{150} \div \frac{-1}{5.5} = -3.67

Question 2

Which of the following best describes a good with an income elasticity of demand less than zero ($E_Y < 0$)?

Accepted Answer

Inferior good

Question 3

A 10% increase in the price of product Y causes the quantity demanded of product X to increase by 5%. What is the cross price elasticity of demand ($E_{XY}$) and what does it indicate?

Accepted Answer

$E_{XY} = \frac{5\%}{10\%} = 0.5$, indicating X and Y are substitutes.

Question 4

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

Accepted Answer

The cost of production for suppliers

Question 5

If a sales tax is imposed and the demand for the taxed good is highly inelastic, who bears most of the tax burden?

Accepted Answer

Consumers

Question 6

Suppose the price elasticity of supply for a product is $E_s = 0.2$. What does this indicate about the supply curve?

Accepted Answer

Supply is inelastic; quantity supplied changes less than proportionally to price.

Question 7

A decrease in interest rates causes the demand curve for houses to shift to the right. What is the most likely effect on equilibrium price and quantity?

Accepted Answer

Both equilibrium price and quantity increase.

Question 8

If the price elasticity of demand for a product is $E > 1$, what happens to total revenue when the price decreases?

Accepted Answer

Total revenue increases.

Question 9

Which scenario best illustrates a market failure?

Accepted Answer

A factory pollutes a river, causing harm to nearby residents without compensation.

Question 10

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

Accepted Answer

The goods are complements.

Question 11

A product has unit elastic demand ($E = 1$). If the price decreases by 10%, what happens to total revenue?

Accepted Answer

Total revenue remains unchanged.

Question 12

Which of the following is an example of allocative efficiency in a market?

Accepted Answer

Resources are distributed so that the goods produced match consumer preferences.

Question 13

If the government imposes a 10% sales tax on televisions, and the supply curve shifts upward, what happens to the equilibrium price and quantity?

Accepted Answer

Equilibrium price increases and equilibrium quantity decreases.

Question 14

Which of the following best describes productive efficiency?

Accepted Answer

Producing goods at the lowest possible cost.

Question 15

A firm faces a price elasticity of demand of $E = 0.5$. If it increases the price of its product, what happens to its total revenue?

Accepted Answer

Total revenue increases.

Question 16

Which of the following is NOT a reason for market failure?

Accepted Answer

Perfect information

Question 17

If the supply of a product is perfectly elastic, what does the supply curve look like?

Accepted Answer

A horizontal line

Question 18

Which government policy is most likely to correct a negative externality?

Accepted Answer

Imposing a tax on the activity causing the externality

Question 19

If a product has many close substitutes, what can be said about its price elasticity of demand?

Accepted Answer

It is likely to be elastic.

Equilibrium and Elasticity: Microeconomics Study Notes

Study Guide - Practice Questions

Study Guide - Flashcards