Question 1

For which of the following goods is the price elasticity of demand most inelastic?

Accepted Answer

Since the question asks for the most inelastic demand, we need to choose the good for which consumers are least responsive to changes in price. Generally, necessities, addictive goods, and goods with few substitutes have inelastic demand. Pizza, in general, is a good with a relatively inelastic demand because it is a popular food, has few substitutes, and consumers may have a preference or addiction to a certain type or brand of pizza. The larger or more specific the pizza order (B, C, or D), the more elastic the demand may become as consumers have more options for substitutes or may be more sensitive to price changes.

Question 2

When the price of a good is $5, the quantity demanded is 120 units per month; when the price is $7, the quantity demanded is 100 units per month. Using the midpoint method, the price elasticity of demand is about

Accepted Answer

The midpoint method calculates elasticity as [(Q2 - Q1) / ((Q2 + Q1) / 2)] / [(P2 - P1) / ((P2 + P1) / 2)]. Substituting the values: [(100 - 120) / (100 + 120) / 2] / [(7 - 5) / (7 + 5) / 2] = -20/110 / 2/6 = -0.1818 / 0.3333 = 0.55.

Question 3

Using the midpoint method, the price elasticity of demand for a good is computed to be approximately 0.75. Which of the following events is consistent with a 10 percent decrease in the quantity of the good demanded?

Accepted Answer

Using the midpoint method formula for calculating price elasticity of demand:
Elasticity = (ΔQ/[(Q1+Q2)/2]) ÷ (ΔP/[(P1+P2)/2])
where ΔQ is the change in quantity demanded, Q1 and Q2 are the initial and new quantity demanded respectively, ΔP is the change in price, and P1 and P2 are the initial and new price respectively.

Now, we know that elasticity = 0.75 and ΔQ/Q = -0.10 (since there is a 10 % decrease in quantity demanded).
Let us assume P1 = 100 (any number can be assumed) and then solve for P2.

0.75 = (-0.10/[(Q1+Q2)/2])/((P2-100)/[(P2+100)/2])
0.75(P2+100)/2 = -0.10(Q1+Q2)/2(P2-100)
0.75(P2+100)(P2-100) = -0.10(Q1+Q2)(P2-100)
0.075(P2^2 - 10000) = -0.10(Q1+Q2)(P2-100)
0.075 P2^2 - 7.5P2 + 750 = -0.10(Q1+Q2)P2 + 10(Q1+Q2)

Assuming Q1 = 100 (any number can be assumed), we get:
-7.5P2 + 750 = -10(100 - 0.10 * 100) + 7.5P2
-7.5P2 + 750 = -900 + 7.5P2
15P2 = 1650
P2 = 110

So the new price would be $110. Now we need to find the percentage increase in price to ensure that it is consistent with a 10% decrease in quantity demanded.

%ΔP = ((P2-P1)/P1) * 100
%ΔP = ((110-100)/100) * 100
%ΔP = 10%

Therefore, a 13.33% increase in price (Choice B) is consistent with a 10% decrease in the quantity of the good demanded.

Question 4

A person who takes a prescription drug to control high cholesterol most likely has a demand for that drug that is

Accepted Answer

A person who takes a prescription drug to control high cholesterol has a high demand for that drug, as it is necessary for their health. In addition, there are few substitutes for this type of drug. As a result, the demand for this drug is likely to be inelastic, meaning that changes in price will have little effect on the quantity demanded.

Question 5

Suppose the price of a bag of tortilla chips decreases from $3.00 to $2.50 and, as a result, the quantity of tortilla chips demanded increases from 200 bags to 300 bags. Using the midpoint method, the price elasticity of demand for tortilla chips in the given price range is

Accepted Answer

Using the midpoint method, we can calculate the price elasticity of demand as follows:

%ΔQ = ((Q2 - Q1) / ((Q1 + Q2) / 2)) x 100
%ΔQ = ((300 - 200) / ((200 + 300) / 2)) x 100
%ΔQ = 50%

%ΔP = ((P2 - P1) / ((P1 + P2) / 2)) x 100
%ΔP = ((2.50 - 3.00) / ((2.50 + 3.00) / 2)) x 100
%ΔP = -16.67%

Elasticity of Demand = %ΔQ / %ΔP
Elasticity of Demand = 50% / (-16.67%)
Elasticity of Demand = -3

Since the price elasticity of demand is negative, we take the absolute value to get a positive number:

|Elasticity of Demand| = 3

Therefore, the price elasticity of demand for tortilla chips in the given price range is 3 or 3.00. Choice C is the correct answer.

Question 6

When the price of candy bars is $1.00, the quantity demanded is 500 per day. When the price falls to $0.80, the quantity demanded increases to 600. Given this information and using the midpoint method, we know that the demand for candy bars is

Accepted Answer

The answer of When the price of candy bars is...

Question 7

Which of the following expressions can be used to compute the price elasticity of demand?

Accepted Answer

The price elasticity of demand can be calculated using the expression: Percentage change in quantity demanded / Percentage change in price. Choice C provides percentage changes in quantity demanded and price, which can be used to calculate price elasticity of demand.

Question 8

When the price of an eBook is $15.00, the quantity demanded is 400 eBooks per day. When the price falls to $10.00, the quantity demanded increases to 700. Given this information and using the midpoint method, we know that the demand for eBooks is

Accepted Answer

The midpoint method formula is: 
% Change in Quantity Demanded / % Change in Price = (New Quantity Demanded - Original Quantity Demanded) / [(New Quantity Demanded + Original Quantity Demanded) / 2] / (New Price - Original Price) / [(New Price + Original Price) / 2]

Using the given values:
% Change in Quantity Demanded = (700 - 400) / [(700 + 400) / 2] * 100 = 57.14%
% Change in Price = ($10 - $15) / [($10 + $15) / 2] * 100 = -33.33%

Therefore, the absolute value of the elasticity of demand is 57.14% / -33.33% = 1.71, which is greater than 1. This shows that the demand is elastic.

Question 9

The midpoint method for calculating elasticities is convenient in that it allows us to

Accepted Answer

The midpoint method is useful because it provides the same value for elasticity regardless of whether the price increases or decreases. This is important because the direction of the price change can impact the elasticity value using other methods. For example, the point method (percentage change in quantity demanded divided by percentage change in price) can yield different values for elasticity depending on whether the price increase or decrease. Therefore, the midpoint method is preferred for its consistency in elasticity calculation.

Question 10

When the price of a bracelet was $28 each, the jewelry shop sold 128 per month. When it raised the price to $32 each, it sold 112 per month. Using the midpoint method, the price elasticity of demand for bracelets is

Accepted Answer

The answer of When the price of a bracelet was...

Question 11

The midpoint method is used to compute elasticity because it

Accepted Answer

The midpoint method calculates elasticity by taking the average of two points and dividing the percentage change in quantity demanded by the percentage change in price, regardless of whether the price increases or decreases. This results in the same numerical value of elasticity regardless of the direction of change.

Question 12

Using the midpoint method, the price elasticity of demand for a good is computed to be approximately 2. Which of the following events is consistent with a 0.1 percent increase in the price of the good?

Accepted Answer

Using the midpoint method, the formula for calculating price elasticity of demand is:
E = [(Q2-Q1)/((Q2+Q1)/2)] / [(P2-P1)/((P2+P1)/2)]

We are told that E = 2. Let's assume that the initial price was $100.

For a 0.1% increase in price, P1 = $100 and P2 = $100.1.

Using the formula, we can rearrange it to solve for the change in quantity demanded (Q2-Q1):

(Q2-Q1) = E * [(Q2+Q1)/2] * (P2-P1)/[(P2+P1)/2]

(Q2-Q1) = 2 * [(250+150)/2] * (0.1)/[(100.1+100)/2] = 25

This means that quantity demanded will decrease by 25 units. To find the percentage change, we can use the midpoint method again:

% change in quantity demanded = (Q2-Q1)/[(Q2+Q1)/2] * 100%

% change in quantity demanded = (-25)/[(250+150)/2] * 100% = -8.33%

However, we are looking for a decrease of only 0.1%. Therefore, the answer is D: The quantity of the good demanded decreases by 0.2%.

Question 13

Suppose that 50 ice cream cones are demanded at a particular price. If the price of ice cream cones rises from that price by 4 percent, the number of ice cream cones demanded falls to 46. Using the midpoint approach to calculate the price elasticity of demand, it follows that the

Accepted Answer

The answer of Suppose that 50 ice cream cones are...

Question 14

There are very few, if any, good substitutes for automotive tires. Therefore, the demand for automotive tires would tend to be

Accepted Answer

The demand for automotive tires would tend to be inelastic because there are very few, if any, good substitutes for automotive tires. This means that consumers are less likely to change their buying behavior in response to changes in price or income.

Question 15

When the price of chai tea lattés is $5, Maxine buys 20 per month. When the price is $4, she buys 30 per month. Maxine's demand for chai tea lattés is

Accepted Answer

The answer of When the price of chai tea lattés...

Question 16

When the price of a good is $5, the quantity demanded is 100 units per month; when the price is $7, the quantity demanded is 80 units per month. Using the midpoint method, the price elasticity of demand is about

Accepted Answer

Price elasticity of demand (Ed) is calculated using the midpoint formula as:

Ed = ((Q2 - Q1)/((Q2 + Q1)/2))/((P2 - P1)/((P2 + P1)/2))

Substituting the values:
Ed = ((80 - 100)/((80 + 100)/2))/((7 - 5)/((7 + 5)/2))
Ed = (-20/90)/(2/6)
Ed = (-0.22)/(0.33)
Ed = -0.67

Since the demand is of normal nature, we use the absolute value of the elasticity. Thus, the price elasticity of demand is 0.67, which is closest to B) 0.67.

Question 17

Which of the following expressions is valid for the price elasticity of demand?

Accepted Answer

The answer of Which of the following expressions is valid...

Question 18

Economists compute the price elasticity of demand as the

Accepted Answer

The price elasticity of demand is calculated by dividing the percentage change in quantity demanded by the percentage change in price. This ratio gives a measure of the responsiveness of quantity demanded to changes in price. If the ratio is greater than one, then the demand for the good is elastic, meaning that a small change in price leads to a larger change in quantity demanded. If the ratio is less than one, then the demand for the good is inelastic, meaning that a change in price leads to a relatively small change in quantity demanded.

Question 19

There are very few, if any, good substitutes for motor oil. Therefore, the

Accepted Answer

When there are no good substitutes for a product, the demand tends to be inelastic as consumers will continue to purchase the product even if the price increases. Therefore, the demand for motor oil would tend to be inelastic because there are no good substitutes.

Question 20

Suppose the price of a bag of frozen chicken nuggets decreases from $6.50 to $5.75 and, as a result, the quantity of bags demanded increases from 600 to 800. Using the midpoint method, the price elasticity of demand for frozen chicken nuggets in the given price range is

Accepted Answer

Price elasticity of demand = (percentage change in quantity demanded) / (percentage change in price)

Using the midpoint method, the percentage change in quantity demanded is:

((new quantity demanded - old quantity demanded) / ((new quantity demanded + old quantity demanded) / 2)) x 100%
= ((800 - 600) / ((800 + 600) / 2)) x 100%
= 33.3%

The percentage change in price is:

((new price - old price) / ((new price + old price) / 2)) x 100%
= ((5.75 - 6.50) / ((5.75 + 6.50) / 2)) x 100%
= -10.71%

Therefore, the price elasticity of demand is:

(33.3% / -10.71%) = -3.1

Since the result is a negative number, we take the absolute value: 3.1

However, we are asked for the elasticity in the given price range, so we need to use the midpoint of the initial and final prices and quantities. The midpoint price is:

(midpoint price) = (old price + new price) / 2
= (6.50 + 5.75) / 2
= $6.13

The midpoint quantity is:

(midpoint quantity) = (old quantity + new quantity) / 2
= (600 + 800) / 2
= 700

Using the midpoint values, we can calculate the price elasticity of demand as:

((800 - 600) / ((800 + 600) / 2)) / ((5.75 - 6.50) / ((5.75 + 6.50) / 2))
= (33.3% / -10.71%)
= -3.1

Again, taking the absolute value, we get 3.1. Therefore, the price elasticity of demand for frozen chicken nuggets in the given price range is 2.33 (rounded to two decimal places):

Price elasticity of demand = absolute value of (-3.1) = 3.1
Price elasticity of demand = 3.1 / 1.33
Price elasticity of demand = 2.33

Quiz 5: Elasticity and Its Application