Question 1

If the price elasticity of demand for apples is - 1, then a change in price will cause no change in the amount spent on apples.

Accepted Answer

When the price elasticity of demand is -1, it indicates unit elasticity, meaning that a percentage change in price leads to an equal percentage change in quantity demanded. Therefore, the total expenditure on apples remains unchanged.

Question 2

If goods have few close substitutes they will tend to have low price elasticities of demand.

Accepted Answer

Goods with few close substitutes tend to have low price elasticities of demand because consumers have fewer alternatives to switch to if the price of these goods increases, making their demand less sensitive to price changes.

Question 3

After a price increase, the demand for items like natural gas and home heating fuel is likely to become less elastic 'as time goes by'.

Accepted Answer

As time goes by, consumers may find alternatives or adjust their consumption habits, making the demand more elastic, not less.

Question 4

Price and total revenue are inversely related (i.e. when price rises revenue falls) when demand is inelastic.

Accepted Answer

When demand is inelastic, an increase in price typically leads to an increase in total revenue because the percentage decrease in quantity demanded is less than the percentage increase in price, meaning consumers are relatively unresponsive to price changes in this scenario.

Question 5

If a firm knows that demand is inelastic, it should cut its price to increase revenue.

Accepted Answer

When demand is inelastic, a price increase will lead to an increase in revenue because the percentage decrease in quantity demanded is less than the percentage increase in price.

Question 6

Luxury goods have an income elasticity that is positive and greater than one. However, if the income elasticity of a demand for a good is negative, then the good is an inferior good.

Accepted Answer

Income elasticity of demand measures how the quantity demanded of a good responds to a change in income. A positive income elasticity greater than one indicates that the good is a luxury, as demand increases more than proportionally with income. Conversely, a negative income elasticity indicates that the good is an inferior good, meaning demand decreases as income increases.

Question 7

A good whose demand falls as income increases is a normal good.

Accepted Answer

A good whose demand falls as income increases is called an inferior good, not a normal good. Normal goods have demand that increases as income increases.

Question 8

Most basic foodstuffs have an income elasticity of demand which is low or negative.

Accepted Answer

Basic foodstuffs typically have a low income elasticity of demand because they are essential goods. As people's income increases, the proportion of income spent on these goods does not increase significantly, and in some cases, it might even decrease, indicating a low or negative elasticity.

Question 9

Cross- price elasticity of demand for complements is positive.

Accepted Answer

Cross-price elasticity of demand for complements is negative, indicating that as the price of one good increases, the demand for its complement decreases.

Question 10

The cross- price elasticity between X and Y is positive. An increase in the price of X will cause the demand for Y to decrease.

Accepted Answer

A positive cross-price elasticity indicates that goods X and Y are substitutes, meaning if the price of X increases, the demand for Y will actually increase, not decrease.

Question 11

In the long run, price elasticity of supply tends to be more inelastic.

Accepted Answer

In the long run, producers have more time to adjust their production and resources, making the price elasticity of supply more elastic as they can respond more effectively to price changes.

Question 12

The elasticity of both supply and demand for a good will reduce over time.

Accepted Answer

The elasticity of supply and demand for a good can change in various ways over time depending on factors such as technological advancements, availability of resources, consumer preferences, and market competition. Elasticity is not inherently bound to decrease.

Question 13

Speculation is always stabilising.

Accepted Answer

Speculation can sometimes destabilize markets by causing rapid price fluctuations based on rumors or expectations rather than underlying fundamentals.

Question 14

Following a rise in demand, prices first rise and then fall back towards the equilibrium. This suggests that speculation was destabilising.

Accepted Answer

This scenario suggests that the market is self-correcting. Prices rise in response to increased demand, but then adjustments in supply or demand bring prices back towards equilibrium, indicating a stabilizing rather than destabilizing effect of market forces.

Question 15

Short- selling is unlikely to cause any damage to the stock market.

Accepted Answer

Short-selling is a legitimate trading strategy that allows investors to profit from falling stock prices. While it can lead to temporary price fluctuations, it does not inherently damage the stock market.

Question 16

It is not possible to reduce uncertainty with 'forwards' and 'futures' due to the possibility of speculation.

Accepted Answer

Forwards and futures can be used to hedge against price movements, thereby reducing uncertainty for the parties involved, despite the potential for speculation.

Question 17

The price of a newspaper increases by 10% and quantity demanded of that newspaper falls by 10%. Calculate the price elasticity of demand for newspapers and comment on how revenue will be influenced by a change in price.

Accepted Answer

The answer of The price of a newspaper increases by...

Question 18

Explain the three main determinants of a good's price elasticity of demand.

Accepted Answer

The answer of Explain the three main determinants of a...

Question 19

Why do products with close substitutes have relatively price- elastic demands?

Accepted Answer

The answer of Why do products with close substitutes have...

Question 20

How will a knowledge of the price elasticity of demand for its products benefit a firm?

Accepted Answer

The answer of How will a knowledge of the price...

Quiz 5: Business in a Market Environment