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

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

Question 2

If the absolute value of the price elasticity of demand for a good is less than 1, which of the following best describes the demand for that good?

Accepted Answer

Inelastic

Question 3

Which of the following would most likely have the most elastic demand?

Accepted Answer

A specific brand of breakfast cereal

Question 4

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

Accepted Answer

They are substitutes

Question 5

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 what type of good is it?

Accepted Answer

Income elasticity = $$\frac{15\%}{10\%} = 1.5$$, normal good (luxury)

Question 6

If the price elasticity of supply is greater than 1, what does this imply about the responsiveness of quantity supplied to price changes?

Accepted Answer

Supply is elastic

Question 7

Which of the following is most likely to have an inelastic supply in the short run?

Accepted Answer

Fresh strawberries during harvest season

Question 8

If a firm raises the price of its product and total revenue increases, what can be said about the price elasticity of demand for the product?

Accepted Answer

Demand is inelastic

Question 9

Which formula correctly represents the midpoint method for calculating price elasticity of demand?

Accepted Answer

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

Question 10

A government is considering a tax on a good with highly elastic demand. Who will bear most of the tax burden?

Accepted Answer

Producers

Question 11

Which of the following is an example of a regressive tax?

Accepted Answer

Payroll tax

Question 12

If the cross-price elasticity of demand between two goods is -0.8, what does this indicate?

Accepted Answer

The goods are complements

Question 13

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

Accepted Answer

The cost of production

Question 14

A perfectly inelastic demand curve is represented by which of the following?

Accepted Answer

A vertical line

Question 15

If a 5% increase in the price of good A leads to a 10% decrease in the quantity demanded of good B, what is the cross-price elasticity of demand?

Accepted Answer

$$\frac{-10\%}{5\%} = -2$$

Question 16

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

Accepted Answer

If demand is elastic, a price decrease will increase total revenue.

Question 17

Which of the following is a characteristic of a typical corporation?

Accepted Answer

Separation of ownership and management

Question 18

Which of the following is a method firms use to raise funds?

Accepted Answer

Issuing bonds

Question 19

Which principle states that those with a greater ability to pay taxes should pay more?

Accepted Answer

Ability-to-pay principle

Question 20

If the price elasticity of supply for a product is 0.5, what does this imply?

Accepted Answer

Supply is inelastic

Elasticity: The Responsiveness of Demand and Supply & Firm Funds, Taxation, and Income Distribution

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