Q: Suppose the price of a product increases by 10% and the quantity demanded decreases by 20%. What is the price elasticity of demand, and how would you classify the demand for this product?

$$\text{Price elasticity of demand} = \frac{20\%}{10\%} = 2$$, which means demand is elastic.

Question 1

Suppose the price of a product increases by 10% and the quantity demanded decreases by 20%. What is the price elasticity of demand, and how would you classify the demand for this product?

Accepted Answer

$$	ext{Price elasticity of demand} = \frac{20\%}{10\%} = 2$$, which means demand is elastic.

Question 2

If the cross elasticity of demand between two goods is $$+1.5$$, what does this indicate about the relationship between the two goods?

Accepted Answer

They are substitute goods.

Question 3

Which of the following best describes a perfectly inelastic demand curve?

Accepted Answer

A vertical line, indicating quantity demanded does not change as price changes.

Question 4

If the income elasticity of demand for a good is $$-0.8$$, what type of good is it?

Accepted Answer

Inferior good

Question 5

A 5% increase in the price of coffee leads to a 2% increase in the quantity demanded of tea. What is the cross elasticity of demand, and what does it imply?

Accepted Answer

$$\frac{2\%}{5\%} = 0.4$$, indicating tea and coffee are substitutes.

Question 6

Which of the following factors does NOT increase the price elasticity of demand for a good?

Accepted Answer

The good has fewer substitutes.

Question 7

If the price elasticity of supply is $$0$$, what does this mean about the supply curve?

Accepted Answer

The supply curve is perfectly inelastic (vertical).

Question 8

Suppose the price of a good rises from $$10 to 12$, and the quantity demanded falls from 100$ 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 9

Which of the following statements about total revenue and elasticity is correct?

Accepted Answer

When demand is elastic, a price decrease increases total revenue.

Question 10

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

Accepted Answer

Insulin for diabetics

Question 11

If the price elasticity of demand for a good is $$0.8$$, what happens to total revenue if the price increases?

Accepted Answer

Total revenue increases because demand is inelastic.

Question 12

Which of the following best explains why the demand for gasoline is more elastic in the long run than in the short run?

Accepted Answer

Consumers have more time to find alternatives and adjust their behavior.

Question 13

If the income elasticity of demand for a good is $$1.5$$, what type of good is it?

Accepted Answer

A luxury good

Question 14

Which of the following would make the supply of a good more elastic?

Accepted Answer

The good can be produced quickly at constant cost.

Question 15

Suppose the cross elasticity of demand between peanut butter and jelly is $$-0.6. $$What does this indicate?

Accepted Answer

They are complements.

Question 16

If the price elasticity of supply is greater than 1, supply is considered:

Accepted Answer

Elastic

Question 17

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

Accepted Answer

Elasticity decreases as you move down the demand curve.

Question 18

If a 10% increase in income leads to a 5% decrease in the quantity demanded of a good, what is the income elasticity of demand and what type of good is it?

Accepted Answer

$$\frac{-5\%}{10\%} = -0.5$$, indicating an inferior good.

Question 19

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

Accepted Answer

The cost of inputs used in production.

Question 20

If the price elasticity of demand for a good is exactly 1, what happens to total revenue when the price changes?

Accepted Answer

Total revenue remains unchanged.

Elasticity in Microeconomics: Price, Income, and Cross Elasticities of Demand and Supply

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