Question

1)Two good (x and y) are complements. The cross-price elasticity of x with respect to the price of y is

a. positive.

b. negative.

c. zero.

d. None of the above.

2) For an inferior good, the income and substitution effects

a. Work together.

b. Work against each other.

c. Can work together or in opposition to each other depending upon their relative magnitudes.

d. Always exactly cancel each other.

3) Elasticity measures

a. The slope of a demand curve.

b. The inverse of the slope of a demand curve.

c. The percentage change in one variable in response to a one percentage increase in another variable.

d. The percentage change in one variable in response to a change in another variable.

4) The demand curve function is given P=100–Q. At price 40, the consumer surplus is

a. 40.

b. 60.

c. 1800.

d. 2400.

5) If the demand for a product is inelastic, then a rise in price will

a. cause total spending on the good to increase.

b. cause total spending on the good to decrease.

c. keep total spending the same, but reduce the quantity demanded.

d. keep total spending the same, but increase the quantity demanded

Answer 1

Ans 1.

Cross-price elasticity is negative for goods that are complements of each other. This is because an increase/decrease in the price of one good decreases/increases the quantity demanded of the other. Complementary goods are goods that are used together such as pen and paper and toothbrush and toothpaste. If the price of toothpaste falls, the demand for toothbrush is likely to increase along with the demand for toothpaste.

Hence, the right answer is option B - NEGATIVE.

Ans 2.

An inferior good is one the demand for which decreases with an increase in income. An increase in the price of an inferior good leads to a decrease in the quantity demanded of the good because the good has become relatively pricier than its substitutes - Substitution Effect. While the income effect reflects in the increase in the quantity demanded of the good as the real income of the consumers’ decreases with increase in price. Hence, it is clear that both the effects work in opposite directions -- Substitution effect decreases the quantity demanded when the price increases while the income effect increases the quantity demanded when the price increases.

The right answer is option B - Work against each other.

Ans 3.

Elasticity measures the degree of responsiveness of the quantity demanded of a commodity to a change in its price. The elasticity of demand of goods can either be elastic or inelastic depending on the nature of the good. For instance, the demand for essential commodities like milk, sugar is inelastic as consumers always need some quantity of these goods. Consumers are insensitive to changes in the prices of these goods.

Hence, the right answer is option D - the percentage change in one variable in response to a change in another variable.

Ans 4.

Consumer surplus is the difference between what the consumer is willing to pay and what is actually paid by them.

P=100–Q (given demand function)

The above equation can be written inversely as follows-

Q = 100 - P

At price $40, Q = 100 -40

=60 units

Now P = $ 40 and q = 60 units

Therefore, consumer surplus (CS) can be calculated as follows -

CS = 1/2 (100- 40) * 60

CS = 1/2 (60) * 60)

CS = 1800

The right answer is option C - 1800

Ans 5.

When the demand for a good is inelastic, consumers will be unresponsive to price changes. They will continue to buy the product despite a rise in its price but only in lower quantities. For instance, if the price of milk - an essential commodity - increases, consumers will still buy it daily but may decide to reduce the quantity of milk brought or switch to basic varieties.

The right answer is option C - keep total spending the same, but reduce the quantity demanded.