Question 1

When demand is inelastic, a decrease in price increases total revenue.

Accepted Answer

When demand is inelastic, a decrease in price will not result in a significant increase in quantity demanded. Therefore, the increase in revenue from the increase in quantity sold will not be enough to offset the decrease in revenue from the lower price. As a result, total revenue will decrease when price is lowered in an inelastic market.

Question 2

The income elasticity of demand is defined as the percentage change in quantity demanded divided by the percentage change in income.

Accepted Answer

The definition provided is accurate and true to the concept of income elasticity of demand.

Question 3

If the price elasticity of demand is equal to 1, then demand is unit elastic.

Accepted Answer

A price elasticity of demand of 1 means that a 1% change in price results in a 1% change in quantity demanded, indicating unit elasticity.

Question 4

Cross-price elasticity of demand measures how the quantity demanded of one good changes as the price of another good changes.

Accepted Answer

Cross-price elasticity of demand is a measure of how responsive the quantity demanded of one good is to the change in the price of another good. It is calculated as the percentage change in quantity demanded of one good divided by the percentage change in price of the other good.

Question 5

If the price elasticity of demand is equal to 0, then demand is unit elastic.

Accepted Answer

If the price elasticity of demand is equal to 0, demand is perfectly inelastic, not unit elastic. Unit elastic demand occurs when the price elasticity of demand is equal to 1.

Question 6

The cross-price elasticity of garlic salt and onion salt is -2, which indicates that garlic salt and onion salt are substitutes.

Accepted Answer

A negative cross-price elasticity indicates that the goods are complements, not substitutes.

Question 7

If a firm is facing inelastic demand, then the firm should decrease price to increase revenue.

Accepted Answer

Inelastic demand means that a change in price does not have a significant impact on the quantity demanded. Therefore, if a firm decreases the price, the increase in quantity demanded may not be enough to offset the decrease in price, leading to a decrease in revenue. In this case, the firm should instead consider increasing the price to increase revenue.

Question 8

Cross-price elasticity is used to determine whether goods are substitutes or complements.

Accepted Answer

Cross-price elasticity measures the responsiveness of demand for one good to changes in the price of another good. If the cross-price elasticity between two goods is positive, it indicates that they are substitutes, while a negative cross-price elasticity indicates that they are complements.

Question 9

Along the elastic portion of a linear demand curve, total revenue rises as price rises.

Accepted Answer

Along the elastic portion of a demand curve, total revenue decreases as price rises because the percentage drop in quantity demanded is greater than the percentage increase in price, leading to a decrease in total revenue.

Question 10

If the income elasticity of demand for a good is negative, then the good must be an inferior good.

Accepted Answer

A negative income elasticity of demand indicates that as income increases, the demand for the good decreases, which is characteristic of inferior goods.

Question 11

If the cross-price elasticity of demand for two goods is negative, then the two goods are complements.

Accepted Answer

A negative cross-price elasticity of demand indicates that an increase in the price of one good leads to a decrease in the quantity demanded of the other good, which is characteristic of complementary goods.

Question 12

The income elasticity of demand is defined as the percentage change in quantity demanded divided by the percentage change in price.

Accepted Answer

The income elasticity of demand is defined as the percentage change in quantity demanded divided by the percentage change in income, not price.

Question 13

If we observe that when consumers' incomes rise by 10%, the quantity demanded of ice cream increases by 5%, then ice cream is an inferior good.

Accepted Answer

A good is considered inferior if the quantity demanded decreases as income rises, not increases. In this case, the fact that the quantity demanded increases as income rises suggests that ice cream is a normal good.

Question 14

If we observe that when the price of chocolate increases by 10%, total revenue increases by 10%, then the demand for chocolate is unit price elastic.

Accepted Answer

The answer of If we observe that when the price...

Question 15

Cross-price elasticity is used to determine whether goods are inferior or normal goods.

Accepted Answer

Cross-price elasticity is used to determine the relationship between the price change of one good and the quantity demanded of another good, not to determine whether goods are inferior or normal goods.

Question 16

If the cross-price elasticity of demand for two goods is negative, then the two goods are substitutes.

Accepted Answer

A negative cross-price elasticity of demand implies that an increase in the price of one good leads to a decrease in the quantity demanded of the other good. This is indicative of two goods being complements, not substitutes. If the cross-price elasticity of demand is positive, then the two goods are substitutes.

Question 17

The cross-price elasticity of demand for bacon and eggs likely would be negative because bacon and eggs are complements for many people.

Accepted Answer

Bacon and eggs are often consumed together, meaning that an increase in the price of bacon will likely lead to a decrease in the demand for eggs and vice versa. This inverse relationship between the two goods results in a negative cross-price elasticity of demand.

Question 18

Supply and demand both tend to be more elastic in the long run and more inelastic in the short run.

Accepted Answer

In the long run, producers and consumers have more time to adjust to changes in price and quantity, whereas in the short run, they may have limited options and must respond to changes more immediately. This makes both supply and demand more flexible in the long run and less flexible, or more inelastic, in the short run.

Question 19

Normal goods have negative income elasticities of demand, while inferior goods have positive income elasticities of demand.

Accepted Answer

Normal goods have positive income elasticities of demand, meaning that as income increases, the quantity demanded also increases. Inferior goods have negative income elasticities of demand, meaning that as income increases, the quantity demanded decreases.

Question 20

If a firm is facing elastic demand, then the firm should decrease price to increase revenue.

Accepted Answer

When demand for a product is elastic, a decrease in price will result in a proportionately larger increase in the quantity demanded, leading to an increase in total revenue. Therefore, the firm should decrease price to increase revenue.

Quiz 5: Elasticity and Its Application