Question

A firm sells a good that is perceived by consumers as a necessity. It also has few substitutes. This good is likely to have demand that is _______ and the price elasticity of demand (in absolute value) would be _______.
a. elastic, less than one
b. inelastic, greater than one
c. inelastic, less than one
d. elastic, greater than one

Assume there is a decrease in the price of a complement and a decrease in the price of a substitute in production. Which of the following statements is correct?
a. The equilibrium price will definitely decrease.
b. The equilibrium quantity will definitely increase.
c. The equilibrium quantity will definitely decrease.
d. The equilibrium price will definitely increase.

When both demand and supply change simultaneously, there will be some uncertainty in the results.
a. True
b. False

The sellers of a good have requested the government to stop the price from going below a certain amount. If the government grants the request, the price restriction will be a price ceiling.
a. True
b. False

Assume that a store has a 20% off sale that causes an increase in quantity demanded of 25%. The price elasticity of demand is _______ (in absolute value) and the demand for the good is _______.
a. 1.25, inelastic
b. 1.25, elastic
c. 0.80, elastic
d. 0.80, inelastic

Answer 1

1. Since the goods are necessary goods,the percentage change in quantity demanded would be less due to the percentage change in Price .

Thus,the demand will be inelastic and Price Elasticity would be less than 1.

Therefore,the Correct Answer is Option C

Option A and D is incorrect because elasticity of necessary goods is inelastic and not elastic.

Option B is incorrect because if Demand is inelastic,then the Price elasticity would be less than 1 and not greater than 1

2. Assuming negative demand curve and positive supply curve

Due to decrease in the Price of complementary good, the demand of good will increase

Due to the Decrease in the price of Substitute in Production, the cost of production of good Decreases which Increases the Supply of good Decreases

Thus,It will definitely Increase the equilibrium quantity . Therefore,the correct option is B.

Option A and D is incorrect because It can't be said that the Price will definitely change as the amount Decrease in the complementary and Substitute in Production is not given. Thus,It can't be determined if the change in Supply curve and Demand Curve will be different or same

Option C is incorrect because Increase in demand and supply will increase and not Decrease the quantity

3. TRUE, because to derive the conclusions, the amount of change in demand and supply curve must be known.

4. Price elasticity of demand =

% change in Quantity demanded/ % change in Price

=> 25/20 = 1.25

And the elasticity which is greater than 1 is said to be Elastic.

Therefore,the correct answer is Option B

Option A is incorrect because if the absolute value of Price elasticity is greater than 1, then It is said to be Elastic and not Inelastic. Absolute value of Inelastic goods are less than 1

Option C and D is incorrect Because Price elasticity of demand is calculated as %change in Quantity demanded due to % change in Price and not % chnage in Price due to % change in Quantity and here, the % change in Quantity demanded= 25% and % change in Price = 20%

=> Elasticity= 25/20 = 1.25 and NOT 20/25 = 0.8