Question

Which of the following statements about price elasticity of supply is true?

a. It is a direction-free measure by using an initial value.

b. It is normally positive due to the law of supply.

c. It is a unit-free measure by using the magnitude change.

d. Its sign shows how sensitive it is to the change in price.

Income elasticity of demand and cross-price elasticity of demand are always calculated by using a _______ method because there is always a movement from one point on one demand curve to another point on _______ demand curve.

a. Slope: Another

b. Slope: The Same

c. Mid-point: The same

d. Mid-point: Another

With a price _______, there is a transfer of surplus from consumers to producers. However, there is a ________, which is a loss of total surplus compared to market equilibrium, due to reduction in quantity sold in the market and higher price.

a. Ceiling: DWL

b. Ceiling: GFT

c. Floor: DWL

d. Floor: GFT

Two goods are _____________ if their cross-price elasticity is 0.5. A good is a(n) ______ good if its income elasticity of demand is 0.5.

a. Weak substitutes: Necessity

b. Close substitutes: Luxury

c. Close complements: Inferior

d. Weak complements: Normal

A mid-point method is measured by using an ______ of prices and quantities but a ______ method is measured by using the slope of demand or supply curve.

a. Slope: Initial Value

b. Initial Value: Slope

c. Slope: Average

d. Average: Slope

Answer 1

Ans.

1. Option b

Accoding to law of supply, an increase in price leads to increase in quantity supplied. So, price elasticity of demand which the ratio of % change in quantity supplied to % change in price becomes positive.

2. Option d

A change in income or change in price of a relatef good leads to change in the demand for good. So, the new demand point lies on the different demand curve due to which we use midpoint formula

3. Option c

A price floor regulates the price above the market price due to which producer surplus increases and consumer surplus decreases but because now the consumers valuing the good at market price but below price floor are not able to buy the good, there is an inefficient allocation of resources which leads to a deadweight loss (DWL).

4. Option a

A positive cross price elasticity which is less than 1 shows that an increase in price of one good by 1% will increase the demand for other good by 0.5% making them weak substitutes.

A smaller than 1 income elasticity of demand shows that a 1% increase in income will increase demand by 0.5% making this good a necessity.

5. Option d

Midpoint method,

Price elasticity of demand/Supply = [Change in Quantity demanded/supplied / Average demand/supply] / [Change in price / Average price]
Slope method,

Price elasticity of demand/ supply = (1/slope)*(Initial price/ Initial Quantity)