Question 1

Suppose the price of a product increases from $10 to $12, and as a result, the quantity demanded decreases from 100 units to 80 units. Using the midpoint formula, what is the price elasticity of demand?

Accepted Answer

$\frac{(80-100)}{(80+100)/2} \div \frac{(12-10)}{(12+10)/2} = \frac{-20}{90} \div \frac{2}{11} = -0.222 \div 0.182 = -1.22$

Question 2

If the absolute value of the price elasticity of demand for a good is 0.5, which of the following statements is true?

Accepted Answer

Demand is inelastic, so a price increase will increase total revenue.

Question 3

Which of the following factors would make the demand for a product more elastic?

Accepted Answer

The product has many close substitutes.

Question 4

A firm faces the following demand curve: $P = 100 - 2Q$. What is the price elasticity of demand when price decreases from $80 to $76$?

Accepted Answer

Elasticity is $-2.14$ (demand is elastic in this range).

Question 5

If a 10% increase in income leads to a 15% increase in the quantity demanded of a good, what is the income elasticity of demand, and how is the good classified?

Accepted Answer

Income elasticity is $1.5$; the good is a luxury.

Question 6

Which of the following best describes the cross-price elasticity of demand between two goods that are complements?

Accepted Answer

The cross-price elasticity is negative.

Question 7

Suppose the price of tea increases by 20%, and the quantity demanded of coffee increases by 10%. What is the cross-price elasticity of demand, and what does it indicate?

Accepted Answer

Cross-price elasticity is $0.5$; tea and coffee are substitutes.

Question 8

Which of the following scenarios would most likely result in a perfectly inelastic demand curve?

Accepted Answer

A life-saving medication for which there are no substitutes.

Question 9

If the price elasticity of supply is greater than 1, which of the following statements is true?

Accepted Answer

Supply is elastic; a 1% increase in price leads to a greater than 1% increase in quantity supplied.

Question 10

Which of the following would make the supply of a product more elastic in the long run?

Accepted Answer

Firms can easily hire and train new workers and find substitute materials.

Question 11

A 5% increase in the price of a good leads to a 2% increase in quantity supplied. What is the price elasticity of supply, and how is supply classified?

Accepted Answer

Elasticity is $0.4$; supply is inelastic.

Question 12

If a firm wants to maximize its total revenue, at what point on the demand curve should it operate?

Accepted Answer

Where demand is unit elastic ($|E_d| = 1$).

Question 13

Which of the following is true about the price elasticity of demand along a straight-line (linear) demand curve?

Accepted Answer

Elasticity varies along the curve, being elastic at high prices and inelastic at low prices.

Question 14

A 10% increase in the price of gasoline leads to a 2% decrease in quantity demanded. What is the price elasticity of demand, and what does this imply about consumer behavior?

Accepted Answer

Elasticity is $-0.2$; demand is inelastic, so consumers are not very responsive to price changes.

Question 15

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

Accepted Answer

The goods are unrelated; a change in the price of one does not affect the demand for the other.

Question 16

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

Accepted Answer

The cost of inputs used in production.

Question 17

If a good has an income elasticity of demand less than zero, which of the following is true?

Accepted Answer

It is an inferior good.

Question 18

A firm is considering raising the price of its product. If demand is elastic, what will happen to total revenue?

Accepted Answer

Total revenue will decrease.

Question 19

Which of the following best explains why the supply of agricultural products is typically more elastic in the long run than in the short run?

Accepted Answer

Farmers can adjust the amount of land cultivated and adopt new technologies over time.

Unit 5: Elasticity – Microeconomics Study Notes

Study Guide - Practice Questions

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