Question

Q -1

A- Price elasticity of demand measures how responsive:

Select one:

a. sales are to a change in buyers' incomes.

b. sales are to changes in the price of a related good.

c. suppliers are to price changes.

d. quantity demanded is to a change in price.

B-

If 20 units are sold at a price of $50 while 25 units are sold at a price of $40, then the price elasticity of demand for this good using the midpoint formula is:

Select one:

a. price-elastic

b. one in absolute terms.

c. perfectly price-inelastic.

d. price-inelastic.

C-

On a downward-sloping, straight-line demand curve, total revenue is the greatest where the price elasticity of demand is:

Select one:

a. the most inelastic.

b. unit-elastic.

c. normal.

d. the most elastic.

D-

Opera Estate Girls’ School is considering increasing its tuition fees to raise revenue. If the school believes that raising tuition fees will increase revenue, it is assuming that the price elasticity of demand for attending the school is:

Select one:

a. perfectly elastic.

b. inelastic.

c. unit-elastic.

d. elastic.

E-

Price-inelastic supply occurs whenever the price elasticity of supply value is:

Select one:

a. negative.

b. positive and greater than one.

c. positive and less than one.

d. positive and greater than five.

F-

If the current market price of beer is $10 per six-pack and a price floor of $12 per six-pack is imposed, then:

Select one:

a. there will be a surplus of beer in the market at the price floor.

b. quantity demanded of beer will rise.

c. $12 per six-pack is the maximum legal price that can be charged.

d. All of the options are correct.

Answer 1

A : d. quantity demanded is to a change in price
(Price elasticity of demand measures how quantity varies due to a change in price)

B : b. one in absolute terms
P1 = $50; Q1 = 20 units and P2 = $40; Q2 = 25 units
Midpoint formula of elasticity of demand = {(Q2-Q1)/[(Q2+Q1)/2]} / {(P2-P1)/[(P2+P1)/2]}
Q2 - Q1 = 25 - 20 = 5
(Q2 + Q1)/2 = (25+20)/2 = 22.5
P2 - P1 = 40 - 50 = -10
(P2+P1)/2 = (40+50)/2 = 45
So, elasticity of demand = (5/22.5)/(-10/45) = -(5*45)/(10*22.5) = -225/225 = -1 = 1 (in absolute terms)

C : b. unit elastic
(When demand is unit elastic, total revenue reached its maximum and starts declining after it.)

D: b. inelastic
(When demand is inelastic it means due to an increase in price demand will not be affected which will raise total revenue)

E : c. positive and less than one
(Range of inelaticity is from 0 to 1)

F : a. there will be a surplus of beer in the market at the price floor.
(Price floor is the minimum legal price that can be charged so as it exceeds market price, supply will exceed demand creating a surplus in the market)