$$E_d = \frac{(Q_1$ - Q_0$)}{(P_1$ - P_0$)} \times \frac{\text{Average } P}{\text{Average } Q}$$

$$E_d = \frac{\Delta Q}{\Delta P} \times \frac{P}{Q}$$

Question 1

Which of the following best describes price elasticity of demand?

Accepted Answer

It measures the responsiveness of a consumer to a price change.

Question 2

If the price of a good increases by 10% and the quantity demanded decreases by 20%, what is the price elasticity of demand?

Accepted Answer

$$E_d = \frac{-20\%}{10\%} = -2$$

Question 3

Which factor would make the demand for a good more elastic?

Accepted Answer

There are many close substitutes available.

Question 4

A luxury good such as restaurant dining is likely to have which type of price elasticity of demand?

Accepted Answer

Very elastic

Question 5

Which formula correctly calculates the average price elasticity of demand between two points?

Accepted Answer

$$E_d = \frac{(Q_1$ - Q_0$)}{(P_1$ - P_0$)} 	imes \frac{	ext{Average } P}{	ext{Average } Q}$$

Question 6

If a 1% increase in price leads to a 1% decrease in quantity demanded, the demand is:

Accepted Answer

Unit elastic

Question 7

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

Accepted Answer

Insulin for a diabetic

Question 8

If the demand for a good is inelastic, what happens to total revenue when the price increases?

Accepted Answer

Total revenue increases

Question 9

Which of the following is NOT a factor that influences the elasticity of demand?

Accepted Answer

The cost of production

Question 10

A good is defined narrowly. How does this affect its price elasticity of demand?

Accepted Answer

It becomes more elastic

Question 11

Which equation represents total revenue?

Accepted Answer

$$TR = P 	imes Q$$

Question 12

If the price elasticity of demand for a product is $$E_d = 0$$, what does this imply?

Accepted Answer

Demand is perfectly inelastic

Question 13

Which of the following scenarios would likely result in a relatively inelastic demand?

Accepted Answer

A short time to find substitutes

Question 14

If the demand curve is linear, what can be said about its elasticity?

Accepted Answer

Elasticity varies along the curve

Question 15

Which formula is used to calculate the point price elasticity of demand?

Accepted Answer

$$E_d = \frac{\Delta Q}{\Delta P} 	imes \frac{P}{Q}$$

Question 16

If a good has a price elasticity of demand between 0 and 1, it is considered:

Accepted Answer

Inelastic

Question 17

Which of the following is an example of a good with unit elastic demand?

Accepted Answer

Oranges

Question 18

If the percentage change in quantity demanded is infinitely large in response to a price change, the demand is:

Accepted Answer

Perfectly elastic

Question 19

Which of the following statements is TRUE regarding total revenue and elasticity?

Accepted Answer

If demand is inelastic, a price increase will increase total revenue.

Question 20

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

Accepted Answer

Perfectly unitary

Price Elasticity of Demand: Concepts, Calculation, and Applications

Study Guide - Practice Questions