Question

Q1. Price elasticity of demand measures

A) how responsive suppliers are to price changes.

B) how responsive sales are to changes in the price of a related good.

C) how responsive quantity demanded is to a change in price.

D) how responsive sales are to a change in buyers' incomes.

Q2. Suppose the value of the price elasticity of demand is -3. What does this mean?

A) A 1 percent increase in the price of the good causes quantity demanded to increase by 3 percent.

B) A 1 percent increase in the price of the good causes quantity demanded to decrease by 3 percent.

C) A 3 percent increase in the price of the good causes quantity demanded to decrease by 1 percent.

D) A $1 increase in price causes quantity demanded to fall by 3 units.

Q3. If the percentage increase in price is 15 percent and the value of the price elasticity of demand is - 3, then quantity demanded

A) will increase by 45 percent. B) will increase by 5 percent.

C) will decrease by 45 percent. D) will decrease by 5 percent.

Q4. If 50 units are sold at a price of $20 and 80 units are sold at a price of $15, what is the absolute value of the price elasticity of demand? Use the midpoint formula.

A) 0.17 B) 0.62 C) 1.62 D) 5

Q.5 Rank these three items in terms of the elasticity of the demand for them at any given price, from most elastic to least elastic: hot beverages, coffee and Peets' Coffee.

A) hot beverages, coffee, Peets' Coffee

B) Peets' Coffee, coffee, hot beverages

C) coffee, Peets' Coffee, hot beverages

D) coffee, hot beverages, Peets' Coffee

Q.6. Income elasticity measures

A) how a good's quantity demanded responds to change in the goods price.

B) how a good's quantity demanded responds to change in the price of another good.

C) how a good's quantity demanded responds to change in buyers' incomes.

D) how a good's quantity demanded responds to producers' incomes.

Q.7 Last year, Sefton purchased 60 pounds of potatoes to feed his family of five when his household income was $30,000. This year, his household income fell to $20,000 and Sefton purchased 80 pounds of potatoes. All else constant, Sefton's income elasticity of demand for potatoes is

A) negative, so Sefton considers potatoes to be an inferior good.

B) positive, so Sefton considers potatoes to be an inferior good.

C) positive, so Sefton considers potatoes to be a normal good and a necessity.

D) negative, so Sefton considers potatoes to be a normal good.

Answer 1

1.Ans: C) how responsive quantity demanded is to a change in price.

Explanation:

Price elasticity of demand refers to the degree of responssiveness of quantity demanded to the change in price.

2.Ans: B) A 1 percent increase in the price of the good causes quantity demanded to decrease by 3 percent.

Explanation:

Price elasticity of demand = % Change in Quantity demanded / % Change in Price

3.Ans: C) will decrease by 45 percent.

Explanation:

According to the law of demand , there is an inverse relationship between the price and quantity demanded of a good.

Price elasticity of demand = % Change in Quantity demanded / % Change in Price

= -45 / 15

= -3

4.Ans: C) 1.62

Explanation:

Initial price ( P1)= $20

New price ( P2) =$15

Initial Quantity ( Q1) = 50

New Quantity ( Q2) = 80

PED  = ∆Q/∆P *( P1 + P2 / Q1 + Q2)

= {( 80 - 50) / ( 15 - 20) } * { ( 20 + 15 ) / ( 50 + 80)}

= ( 30 / -5) * ( 35 / 130)

= -6 * 0.2692

= - 1.6152 or 1.62 ( absolute value)

5.Ans: B) Peets' Coffee, coffee, hot beverages

6.Ans: C) how a good's quantity demanded responds to change in buyers' incomes.

7.Ans: A)  negative, so Sefton considers potatoes to be an inferior good.