Question

Assume that you are told that because of some changes, the equilibrium price increased but it is unknown if the equilibrium quantity increased, remained the same, or decreased. Which of the following would be consistent with this outcome?
a. There was a decrease in input costs and consumers expected lower income.
b. Consumers expected a lower price and firms expected a higher price.
c. There was a decrease in income (the good is inferior) and a decrease in the number of firms.
d. There was a positive change in consumer tastes and an increase in productivity.

When demand is _______ consumers are _______ to price changes and the price elasticity of demand is _______.
a. elastic, relatively sensitive, greater than one (in absolute value)
b. inelastic, completely insensitive, equal to one (in absolute value)
c. inelastic, relatively sensitive, less than one (in absolute value)
d. unit elastic, hyper-sensitive, equal to zero
e. perfectly elastic, hyper-sensitive, equal to one (in absolute value)

The price elasticity of demand for sandwiches at a deli is estimated to be 1.75 (in absolute value). This means that the demand for the sandwiches is _______ and for any given percentage change in price (in absolute value), the percentage change in quantity demanded will be _______ (in absolute value).
a. elastic, smaller
b. elastic, larger
c. inelastic, smaller
d. inelastic, larger

If demand is inelastic, a change in the selling price causes no change in the quantity demanded.
a. True
b. False

Which of the following is not correct about a price ceiling?
The amount of the good or service bought and sold under a price ceiling is less than the equilibrium quantity.
a. A price ceiling creates a persistent surplus.
b. Price ceilings cause underinvestment in the industry.
c. For it to be effective, a price ceiling is imposed below the equilibrium price.
d. Black markets often develop when a price ceiling is in place.

Answer 1

1) if the good is inferior, decrease in income increased the demand which would Increase the equilibrium price. If there is a Decrease in the number of firms then the supply of the good will decrease. This will lead to an increase in the equilibrium price.

Hence, Option c is correct i.e, there was a decrease in income (the good is inferior) and a decrease in the number of firms.

2) when the demand is elastic consumers are relatively sensitive to price changes and the price elasticity of demand is greater than one(in absolute value).

Hence, Option a is correct.

3) the price elasticity of demand for sandwiches at Deli is estimated to be 1.75 ( in absolute value). This means that the demand for the sandwiches is elastic and for any given percentage change in price ( in absolute value) the percentage change in quantity demanded will be larger ( in absolute value)

Hence, Option b is correct

4) if the demand is inelastic a change in the selling price will still cause a change in the quantity demanded, however the change in quantity demanded be lower. But it is not that there will be no change at all in the quantity demanded. That happens only when the demand is perfectly inelastic. But here, the demand is given as only inelastic.

Hence, the given statement is FALSE.

5) if price ceiling is put below the equilibrium price in the market. So it will never create a persistent surplus. Rather it would create a persistent shortage.

Hence, a price ceiling creates a persistent surplus is not correct.

Therefore, Option a is correct.