Question

Demand is considered to be unitary (or unit) elastic when

	a.	a 10% decrease in price results in a 10% decrease in quantity demanded
	b.	a 10% increase in price results in a 20% decrease in quantity demanded
	c.	a 10% decrease in price results in a 10% increase in quantity demanded
	d.	a 10% increase in price results in a 20% increase in quantity demanded

If the value of the own price elasticity of demand is zero,

	a.	demand is perfectly elastic
	b.	demand is unitary elastic
	c.	demand is elastic in the short-run, but inelastic in the long-run.
	d.	demand is perfectly inelastic

The firm's production function is given as follows: . qx represents the output produced by the firm, Lx represents the labor input and Kx the capital input. In the long-run, the firm uses both inputs to produce output.

An increase in the supply of capital (K) reduces the cost of capital from $6 per unit to $2 per unit. As a result, the firm's demand for the labor input (L) decreases from 200 to 120 units.

Based on this information, the cross-price elasticity of labor demand is:

	a.	-0.25
	b.	0.75
	c.	0.50
	d.	0.25

Answer 1

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The answers are

1. c. a 10% decrease in price results in a 10% increase in quantity demanded

2. d. demand is perfectly inelastic

3. The answer should be 0.60 (Kindly check the values of the question. It may be wrong)

Solution

1. Unitary elastic means percentage change in quantity demanded will be equal to percentage change in price.

Here the good will be unitary elastic when both price change and quantity change are same, i.e. 10%

Also by the law of demand if price falls, quantity should increase for a normal good. Hence we select option c instead of option a.

2. Own price elasticity of demand being 0 means that change in quantity demanded = 0.

Thus we can infer that no matter what the price change will be the quantity will not change. It is graphically shown below

c.

Here we use the cross price elasticity formula,

Cross Price Elasticity of Demand = % Change in Demand of Good #1 / % Change in Price of Good #2

Plugging in the values we have,

% Change in Demand of Good #1 = (120-200) / 200= - 0.4

% Change in Price of Good #2 = ($2 – $6) / $6 = -0.67

Cross Price Elasticity of Demand = 0.4/0.67

Therefore, Cross Price Elasticity of Demand is 0.59, approximately 0.60