Question

1. Which of the following statements is  inconsistent with an elastic demand curve?

		The relative change in quantity exceeds the relative change in price.
		The price-elasticity coefficient is greater than 1.
		Buyers are relatively sensitive to price changes.
		Total revenue increases when price increases.

2. Answer the question on the basis of the following demand schedule.

Price	Quantity Demanded
$6	1
5	2
4	3
3	4
2	5
1	6

Which of the following is  correct?

		Although the slope of the demand curve is constant, price elasticity increases as we move from high to low price ranges.
		Although the demand curve is convex to the origin, price elasticity of demand is constant throughout.
		Although the slope of the demand curve is constant, price elasticity declines as we move from high to low price ranges.
		A steep slope means demand is inelastic; a flat slope means demand is elastic.

Product	% Change in Income	% Change in Quantity Demanded
W	-1	-1
X	+6	+3
Y	-1	+1
Z	+4	+8

3. Refer to the above table. Which product is most responsive to a change in income?

		Product Y
		Product X
		Product Z
		Product W

Answer 1

(1) Price elasticity of demand = (% change in Qty. Demand / % change in Price)

If demand is elastic if % change in Qty Demand (in absolute term) is greater than the % change in Price (in absolute term).

In elastic demand case the  absolute value of price elasticity coefficient is greater than 1.

In elastic demand case, there is negative relationship between price and total revenue.

Hence an increase in price will decrease the total revenue.

Answer: Option (D).

(2)  

Quantity Demanded	Price
1	6
2	5
3	4
4	3
5	2
6	1

Demand curve is linear downward sloping. Hence the slope is constant. In this case the price elasticity increases as price increases from high to low price ranges.  

Steeper the demand curve then inelastic the demand.

Flatter the demand curve then elastic the demand.

Answer: Option (a)

(3) Income elasticity = % change in quantity demanded / % change in income.

Product W

Income elasticity = -1 / -1 = 1

Product X

Income elasticity = 3 / 6 = 0.5

Product Y

Income elasticity = 1 / (-1) = -1

Product Z

Income elasticity = 8 / 4 = 2

Product Z is most responsive to change in income.

Answer: Option (C)