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

Ans1. Option c

A necessity good's demand changes by less than 1% dues to a 1% change in price, so, elasticity is less than 1

Ans2. Option b

A decrease in price of the complement will increase the demand for the good under consideration, increasing equilibrium quantity and price and a decrease in price of substitute in production will increase the production of good under consideration, increasing the supply of the good, thus, increasing equilibrium quantity but decreasing the proce of the good.

So, quantity of good will increase definitely but price will be ambiguous.

Ans3. True

If demand and supply of a good change simultaneously then the quantity and price of the good will depend on the direction and magnitude if change in demand and supply. For example, a decrease in supply and decrease in demand will lead to increase in price if decrease in supply is more than decrease in supply and price will decrease if decrease in supply is less than decrease in demand and price won't change if decrease in demand equals decrease in demand. Thus, price level is ambiguous

Ans 4. False

Setting up of minimum price is called price floor and not price ceiling which is the upper cap on the price.

Ans 5. Option b

Elasticity = %Change in demand / % change in price = 25/ (-20) = -1.25

So, absolute elasticity = 1.25 and as it is greater than 1, so, it is elastic.

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