Question

Multiple-Choice Questions

1) The price elasticity of demand is a measure of

A) the responsiveness of the quantity demanded to price changes.

B) the quantity demanded at a given price.

C) the shift in the demand curve when price changes.

D) the demand for a product holding price constant.

2) The elasticity of demand for a product is likely to be greater

A) the smaller the number of substitute products available.

B) the smaller the proportion of one's income spent on the product.

C) the larger the number of substitute products available.

D) if the product is an imported good rather than a domestically produced good.

3) If OPEC increases its price of oil, and still the demand for oil decreases by a very small amount, we can conclude that the demand for oil is

A) relatively elastic.

B) relatively inelastic.

C) perfectly elastic.

D) perfectly inelastic.

4) If the consumption of sugar does not change at all following a price increase from 50 cents per pound to 65 cents per pound, the demand for sugar is considered to be

A) relatively inelastic.

B) perfectly elastic.

C) perfectly inelastic.

D) unitary elastic.

5) If the demand for a product is said to be relatively inelastic, the "absolute" value of the elasticity coefficient will be

A) less than one.

B) greater than one.

C) equal to one.

D) zero.

6) If an item has several good substitutes, the demand curve for that item is likely to be

A) relatively inelastic.

B) relatively elastic.

C) perfectly inelastic.

D) unit elastic.

7) Remembering that demand elasticity is defined as the percentage change in quantity divided by the percentage change in price, if price decreases and, in percentage terms, quantity rises more than price has dropped, total revenue will

A) increase.

B) decrease.

C) remain the same.

D) either increase or decrease.

8) Suppose the price of beans rises from $1.00 a pound to $2.00 a pound, quantity demanded falls from 10 units to 6 units, the coefficient of elasticity of demand for beans using the arc elasticity approach is

A) -1.33.

B) -0.75.

C) -0.4.

D) -0.25.

9) Suppose the price of beans rises from $1.00 a pound to $2.00 a pound, quantity demanded falls from 10 units to 6 units. In this example, the demand for beans is said to be

A) relatively elastic.

B) relatively inelastic.

C) perfectly elastic.

D) perfectly inelastic.

10) A perfectly elastic demand curve

A) can be represented by a line parallel to the vertical axis.

B) is a 45-degree line.

C) can be represented by a line parallel to the horizontal axis.

D) cannot be represented on a two-dimensional graph.

11) The sensitivity of the change in quantity consumed of one good to a change in the price of a related good is called

A) cross-elasticity.

B) substitute elasticity.

C) complementary elasticity.

D) price elasticity of demand.

12) The cross-price elasticity of demand for coffee and tea is likely to be

A) greater than zero.

B) less than zero.

C) zero.

D) infinity.

13) The cross-price elasticity of demand for coffee and coffee-cream is likely to be

A) greater than zero.

B) less than zero.

C) zero.

D) infinity.

14) The cross-price elasticity of demand for coffee and caskets is likely to be

A) less than zero.

B) greater than zero.

C) zero.

D) infinity.

15) When purchases of tennis socks decline following an increase in the price of tennis sneakers (other things remaining equal), the relationship between these two items can be described as

A) substitutable.

B) complementary.

C) unique.

D) ordinary.

16) The owner of a produce store found that when the price of a head of lettuce was raised from 50 cents to $1, the quantity sold per hour fell from 18 to 8. The arc elasticity of demand for lettuce is

A) -0.56.

B) -1.15.

C) -0.8.

D) -1.57.

17) Suppose the price of crude oil drops from $150 a barrel to $120 a barrel. The quantity bought remains unchanged at 100 barrels. The coefficient of price elasticity of demand in this example would be

A) -0.5.

B) infinity.

C) -1.0.

D) 0.

18) If a firm decreases the price of a good and total revenue decreases, then

A) the demand for this good is price elastic.

B) the demand for this good is price inelastic.

C) the cross elasticity is negative.

D) the income elasticity is less than 1.

19) When total revenue reaches its peak (elasticity equals 1), marginal revenue reaches

A) 1.

B) zero.

C) -1.

D) Cannot be determined from the information provided

20) If the income elasticity of a particular good is negative 0.2, it would be considered

A) a superior good.

B) a normal good.

C) an inferior good.

D) an elastic good.

Answer 1

Ans1.) Option A

The pruce elasticity of demand is the measure of the responsiveness of the change in quantity demanded to the change in price.

Mathematically,

E_d = % change in quantity ÷ % change in price

Ans 2.) Option C

The elasticity of a product is likely to be greater, more the no. of substitutes available in the market.If a consumer has multiple no .of goods of almost same quality to choose from, he/she can easily switch to those goods and reduce the consumption of the other good whose prices have increased.

For example, if the price of tea increases, one would start consuming more coffee.

Ans 3.) Option B

The perfectly inelastic demand is the magnitude of the price ealsticity in which the percentage change in the quantity is less than the percentage change in the price.

Ans 4.) Option C

The perfectly inelastic demand is the type of price elasticity of demand in which the ratio of the percentage change in the quantity to the percentage change in price is equal to 0.

Mathematically,

E_d = 0 if , (% change_quantity ÷ %change_price) = 0

Ans 5 ) Option A

If the price elasticity of a demand is relatively inelastic, then the absolute coefficient of the elasticity is less than one.We shall be ignoring the minus (-) sign as of now.

For example, if the price of sugar increases by 30 % and the demand for sugar decreases by only 10%, then ,

E_d = (10÷30) = 0.33

Thus, we can see that when the quantity changes less as compared to the change in price, the absolute value of coefficient of elasticity is less than 1.

Ans 6.) Option B

If the good has more no. of substitutes, then the demand for that good changes substantially in reponse to the change in price.

For example, Nike shoes and Adidas shoes are perfect subtitutes and if the price of nike shoes increases, the demand for those shoes would decrease substantially as the consumers would buy more of adidas shoes.In this case,

E_d = % change in quantity_Adidas÷ % change in price_Nike > 1

Ans 7.) Option A

If the price elasticity of demand is elastic, the quantity effect outweughs the price effect leading to the increase in revenue if price decreases and vice - versa.

Ans 8.) Option B

The arc elasticity of demand use the mid point formula which is as follows;:

E_d = [((Q2 - Q1)÷(Q2+Q1)/2))*100] ÷    [((P2 - P1)÷(P2+P1)/2))*100]

  

= ((6-10)/8)) ÷ ((2-1)/1.5))

= (-4/8)÷(1/1.5)

= -0.75

Ans 9.) Option B

Percent increase in price = (1÷1)*100 = 100%

Percent decrease in quantity = (-4÷10)*100 = - 40%

E_d = (-40÷100) = -0.4

As the value of elasticity is less than 1, the demand is said to be relatively inelastic

Ans 10.) Option C

The perfectly elastic demand denotes that the quantity demanded chages infinitely with even a small chanve in price.

Ans 11 ) Option A

For example, if price of tea changes, thrn to determine its effect on demand of coffee we calculate cross price elasticity which is as follows:

E_d = (% change in quantity_coffee ÷ % change in price_tea)