Q: Which equation represents the cross-price elasticity of demand?

$$ \frac{\text{percentage change in quantity demanded of good A}}{\text{percentage change in price of good B}} $$

Question 1

A city enacts a soda tax to reduce sugar consumption and raise funds for public projects. If the demand for soda is highly elastic, what is the likely outcome for tax revenue?

Accepted Answer

Tax revenue will decrease because people will buy much less soda.

Question 2

Which formula correctly calculates the price elasticity of demand using the midpoint method?

Accepted Answer

$$ \frac{Q_2$ - Q_1$}{(Q_1$ + Q_2$)/2} \div \frac{P_2$ - P_1$}{(P_1$ + P_2$)/2} $$

Question 3

If the price of Coca-Cola drops from $$1.50 to 1.30 $$and sales increase from 2,000 to 2,500 gallons per day, what is the price elasticity of demand?

Accepted Answer

$$ \frac{(2500 - 2000)}{(2500 + 2000)/2} \div \frac{(1.30 - 1.50)}{(1.30 + 1.50)/2} $$

Question 4

Which of the following best describes perfectly inelastic demand?

Accepted Answer

Quantity demanded does not change as price changes.

Question 5

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.

Question 6

Which scenario illustrates the effect of time on price elasticity of demand?

Accepted Answer

Consumers gradually adjust their consumption habits, making demand more elastic in the long run.

Question 7

A decrease in price results in the same percentage increase in quantity demanded. What is the price elasticity of demand?

Accepted Answer

Equal to 1 (unit elastic)

Question 8

If the demand for gasoline is described as inelastic, what does this mean?

Accepted Answer

Quantity demanded changes little as price changes.

Question 9

Tesla cuts the price of its Model 3 by 14%. If demand is elastic due to more substitutes, what happens to Tesla's total revenue?

Accepted Answer

Total revenue increases.

Question 10

Which equation represents the cross-price elasticity of demand?

Accepted Answer

$$ \frac{	ext{percentage change in quantity demanded of good A}}{	ext{percentage change in price of good B}} $$

Question 11

If beer and wine are complements, what is the sign of their cross-price elasticity of demand?

Accepted Answer

Negative

Question 12

Which of the following is true about income elasticity of demand for inferior goods?

Accepted Answer

Income elasticity is negative.

Question 13

If the supply curve for parking spaces at a beach resort is vertical, what is the price elasticity of supply?

Accepted Answer

Equal to zero

Question 14

Why are oil prices so unstable in the short run?

Accepted Answer

Oil producers cannot change output quickly, so supply is inelastic.

Question 15

If the price elasticity of supply is greater than 1, what does this indicate?

Accepted Answer

Supply is elastic.

Question 16

Suppose the price of grapes doubles overnight. Why is the price elasticity of supply close to zero in the short run?

Accepted Answer

Farmers cannot quickly increase the quantity supplied.

Question 17

If a decrease in price generates enough extra customers to offset revenue loss, what is the demand elasticity?

Accepted Answer

Elastic

Question 18

Which determinant would make the demand for table salt very inelastic?

Accepted Answer

Table salt is a necessity and a small share of the consumer's budget.

Question 19

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

Accepted Answer

A horizontal line

Question 20

A manager wants to maximize total revenue. If the price elasticity of demand for their product is less than 1, what should they do?

Accepted Answer

Increase the price to raise total revenue.

Elasticity: The Responsiveness of Demand and Supply

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