Q: If a demand curve is given by $$Q = 60 - 6P$$, what is the price elasticity of demand at $$P = 5$$?

$$e = \frac{dQ}{dP} \times \frac{P}{Q} = -6 \times \frac{5}{60 - 6 \times 5} = -6 \times \frac{5}{30} = -1$$

Question 1

Suppose the price of a product increases from $$100 to 200$$, and the quantity demanded decreases from 180 to 100 units. What is the price elasticity of demand using the midpoint (arc elasticity) formula?

Accepted Answer

$$e = \frac{(100 - 180)}{(100 + 180)/2} \div \frac{(200 - 100)}{(200 + 100)/2} = \frac{-80}{140} \div \frac{100}{150} = -0.571 \div 0.667 = -0.857$$

Question 2

If the price elasticity of demand for cigarettes is $$0.4$$, what does this imply about the demand for cigarettes?

Accepted Answer

Demand for cigarettes is inelastic; a 1% increase in price leads to less than a 1% decrease in quantity demanded.

Question 3

A furniture store finds that when it raises prices by 10%, the quantity sold falls by 12.6%. What is the price elasticity of demand, and how should the store expect its total revenue to change?

Accepted Answer

$$e = \frac{-12.6\%}{10\%} = -1.26. $$Demand is elastic, so total revenue will decrease.

Question 4

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

Accepted Answer

A life-saving medication with no substitutes.

Question 5

If the cross-price elasticity of demand between tea and coffee is $$+0.8$$, what does this indicate?

Accepted Answer

Tea and coffee are substitutes; an increase in the price of coffee increases the demand for tea.

Question 6

A company observes that when consumer incomes rise by 5%, the quantity demanded for its product falls by 2%. What is the income elasticity of demand, and what type of good is this?

Accepted Answer

$$e = \frac{-2\%}{5\%} = -0.4. $$This is an inferior good.

Question 7

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

Accepted Answer

The product can be produced using many close substitutes in production.

Question 8

If a demand curve is given by $$Q = 60 - 6P$$, what is the price elasticity of demand at $$P = 5$$?

Accepted Answer

$$e = \frac{dQ}{dP} 	imes \frac{P}{Q} = -6 	imes \frac{5}{60 - 6 	imes 5} = -6 	imes \frac{5}{30} = -1$$

Question 9

A government is considering increasing the tax on gasoline. If the demand for gasoline is inelastic, what is the likely effect on total revenue from gasoline sales?

Accepted Answer

Total revenue will increase because the percentage decrease in quantity demanded is less than the percentage increase in price.

Question 10

Which of the following scenarios best illustrates a perfectly elastic supply curve?

Accepted Answer

Producers will only sell at a specific price; any lower price results in zero supply.

Question 11

If the price of a substitute good increases, what is the expected effect on the demand for the original good?

Accepted Answer

Demand for the original good will increase.

Question 12

A restaurant chain can quickly adjust its menu and prices in response to market changes. What does this suggest about the price elasticity of supply for its products?

Accepted Answer

The price elasticity of supply is likely to be high (elastic).

Question 13

If a good has an income elasticity of demand greater than 1, what type of good is it?

Accepted Answer

A luxury good.

Question 14

Suppose the price of electricity rises by 10%, and the quantity supplied increases by 15%. What is the price elasticity of supply?

Accepted Answer

$$e = \frac{15\%}{10\%} = 1.5$$

Question 15

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

Accepted Answer

Number of producers in the market.

Question 16

A new technology allows oil refineries to switch production between gasoline and diesel easily. What effect does this have on the price elasticity of supply for gasoline?

Accepted Answer

It increases the price elasticity of supply for gasoline.

Question 17

If the demand for a product is unit elastic, what happens to total revenue when the price changes?

Accepted Answer

Total revenue remains unchanged.

Question 18

Which of the following best describes the relationship between slope and elasticity on a linear demand curve?

Accepted Answer

Elasticity varies along the curve, even though the slope is constant.

Question 19

A city increases the price of public transit by 20%, and ridership falls by 5%. What is the price elasticity of demand, and what does this imply for revenue?

Accepted Answer

$$e = \frac{-5\%}{20\%} = -0.25. $$Demand is inelastic, so revenue will increase.

Elasticity in Microeconomics: Concepts, Measurement, and Applications

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