Question

1.If a demand curve is a straight downward-sloping line, which of the following is true

A. The elasticity varies along the line

B. The elasticity is constant along the line.

C. The elasticity is inelastic along the line.

D. The elasticity is perfectly elastic along the line.

2. The income elasticity for Good A is 0.7, and its cross elasticity with Good B is 0.7. What should we conclude about Good A?

A. It is a normal good and a substitute for Good B.

B. It is a normal good and a complement of Good B.

C. It is an inferior good and a substitute for Good B.

D. It is an inferior good and a complement of Good B.

3.The shorter the time period for action on a purchase, the ______ the _______ elasticity of demand

A.   lower; price

B.   lower; income

C.   higher; price

D.   higher; income

Answer 1

Question No 1

Answer Option B. The elasticity is constant along the line.

Explanation: a demand curve is a graphical representation of showing various quantities demanded for a product at different prices. When a demand curve is straight line and sloping downward from left to right. It indicates that the demand curve is a linear one, whose slope (price elasticity = Change in quantity / change in price ) should remains constant along the line.

Question No 2

Answer Option A. It is a normal good and a substitute for Good B.

Explanation: income elasticity measures the responsiveness of change in quantity demanded due to change in the income of the consumer. The income elasticity of demand is negative for inferior goods and positive for normal goods. As per the question income elasticity of good A is 0.7, which is positive it shows that Good A is a normal good.

Cross-elasticity of demand refers to change in quantity demanded for a commodity due to change in the price of its related goods. The cross-elasticity of demand is positive for substitutes and negative for complementary goods. As per the question Good A’s cross elasticity of demand with Good B is 0.7, which is positive indicates both Good A and Good B are substitute to each other. Therefore we conclude that Good A is a normal good and a substitute for Good B.

Question No 3

Answer Option A. Lower ; Price

Explanation: if the time period for action on purchase is shorter, its price elasticity becomes lower. Because the price elasticity of demand measures the change in quantity demanded for a product due to change of its price. In the shorter period the consumer cannot take overall information about the price of available alternatives of the product and the consumer is habituated with the consumption of the product. So the consumer is willing to buy the quantity even at higher price and becomes less sensitive to change in price, as a result the price elasticity of demand becomes relatively inelastic or Price elasticity < 1 ( Lower).

Where as in longer period for action on purchase, the consumer can take overall information about the available alternatives and their price. So the price elasticity of demand becomes relatively elastic or Price elasticity > 1( Higher).