Question 1

Suppose the price of a 2-liter bottle of soda increases from $$1.35 to 1.50$$, and as a result, the quantity demanded decreases from 1,200 to 1,000 bottles per day. Using the midpoint formula, what is the price elasticity of demand?

Accepted Answer

$$\frac{(1,000-1,200)}{(1,000+1,200)/2} \div \frac{(1.50-1.35)}{(1.50+1.35)/2} = \frac{-200}{1,100} \div \frac{0.15}{1.425} = -0.182 \div 0.105 = -1.73$$

Question 2

If the absolute value of the price elasticity of demand for a product is less than 1, which of the following statements is true?

Accepted Answer

Demand is inelastic, and total revenue increases when price increases.

Question 3

Which of the following goods is most likely to have a price elasticity of demand closest to zero?

Accepted Answer

Insulin for diabetics

Question 4

A 10% decrease in the price of bagels leads to a 20% increase in quantity demanded. What is the price elasticity of demand, and how would you classify demand for bagels?

Accepted Answer

$$\frac{20\%}{-10\%} = -2$$; demand is elastic.

Question 5

Which of the following is the best explanation for why the demand for gasoline is typically inelastic in the short run?

Accepted Answer

There are few close substitutes for gasoline, and consumers need time to adjust their consumption habits.

Question 6

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

Accepted Answer

They are substitutes.

Question 7

Suppose the price elasticity of supply for parking spaces at a beach resort is 0.2. If demand increases sharply on a holiday, what will happen to the equilibrium price and quantity?

Accepted Answer

Price will increase significantly, but quantity supplied will increase only slightly.

Question 8

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

Accepted Answer

The cost of production for the good

Question 9

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

$$\frac{15\%}{10\%} = 1.5$$; the good is a luxury.

Question 10

A firm wants to increase its total revenue. If the demand for its product is elastic, what should the firm do?

Accepted Answer

Lower the price, because total revenue will increase when demand is elastic.

Question 11

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

Accepted Answer

A horizontal line, where any increase in price causes quantity demanded to fall to zero.

Question 12

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

Accepted Answer

Supply is elastic; firms can increase quantity supplied significantly when price rises.

Question 13

Why did the price of wheat fall dramatically in the United States between 1950 and 2022, despite increased productivity?

Accepted Answer

The demand for wheat is price inelastic and income inelastic, so large increases in supply led to large price declines.

Question 14

Which of the following scenarios would result in the largest increase in total revenue for a firm?

Accepted Answer

Cutting price when demand is elastic.

Question 15

If the price elasticity of demand for a product is -0.3, what does this imply about consumer responsiveness?

Accepted Answer

Consumers are not very responsive to price changes; demand is inelastic.

Question 16

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

Accepted Answer

Tide (liquid detergent)

Question 17

If the supply of a good is perfectly inelastic, what will happen to the quantity supplied if the price doubles?

Accepted Answer

Quantity supplied will remain unchanged.

Question 18

Which of the following is true about the relationship between the slope of a demand curve and its elasticity?

Accepted Answer

A flatter demand curve is more elastic than a steeper demand curve at the point of intersection.

Elasticity: The Responsiveness of Supply and Demand

Study Guide - Practice Questions

Study Guide - Flashcards