Question 1

When a 2 per cent increase in price generates a greater than 2 per cent decrease in quantity demanded, then:
A) demand is price inelastic.
B) total revenue increases.
C) demand is positively sloped.
D) total revenue decreases.

Accepted Answer

When a 2 per cent increase in price leads to a greater than 2 per cent decrease in quantity demanded, demand is considered price elastic. In such a case, a higher price results in a decrease in total revenue because the increase in revenue from higher prices is more than offset by the decrease in revenue due to lower sales volume. Therefore, total revenue decreases.

Question 2

On a part of the demand curve where the price elasticity of demand is less than 1, a decrease in price:
A) is impossible.
B) will increase total revenue.
C) decreases quantity demanded.
D) will reduce total revenue.

Accepted Answer

When the price elasticity of demand is less than 1, the percentage decrease in price is less than the percentage increase in quantity demanded. As a result, even though the quantity demanded increases, the decrease in price causes a reduction in total revenue. Therefore, option D is the correct answer.

Question 3

Suppose the price of a bus ticket rises from $2.75 to $3 and the number of tickets sold falls from 10 000 to 8500, the price elasticity of demand is:
A) elastic.
B) unitary elastic.
C) perfectly elastic.
D) inelastic.

Accepted Answer

The formula for price elasticity of demand (PED) is (% change in quantity demanded / % change in price). Using the given information:
Price increase = ($3 - $2.75) / $2.75 = 0.0909 or 9.09%
Quantity decrease = (10,000 - 8,500) / 10,000 = 0.15 or 15%
Using the formula, we get PED = 15% / 9.09% = 1.65, which is greater than 1. This is indicative of an elastic demand, where a change in price causes a relatively larger change in the quantity demanded. Therefore, the best choice is A) elastic.

Question 4

If demand price elasticity measures 2, this implies that consumers would:
A) buy twice as much of the product if the price drops 10 per cent.
B) require a 2 per cent drop in price to increase their purchases by 1 per cent.
C) buy 2 per cent more of the product in response to a 1 per cent drop in price.
D) require at least a $2 increase in price before showing any response to the price increase.

Accepted Answer

A demand price elasticity of 2 means that if the price drops by 1%, the quantity demanded will increase by 2%. Thus, if the price drops by 10%, the quantity demanded will increase by 20% (10% x 2). Therefore, consumers would buy 2% more of the product in response to a 1% drop in price.

Question 5

The short-run price elasticity of demand for airline travel is 0.05, while the long-run elasticity is 2.36. This means that a significant increase in airline ticket prices will cause airline companies to:
A) collect less revenue from short-notice travellers.
B) collect more revenue from travellers who book well in advance.
C) lose money on short-notice travellers.
D) collect less revenue from travellers who book well in advance.

Accepted Answer

In the long run, demand is more elastic (2.36), so a significant price increase will lead to a proportionally larger decrease in quantity demanded, reducing revenue from advance bookings.

Question 6

If the price elasticity of demand for football tickets is estimated to be 4.5, then a 10 per cent increase in football ticket prices would be expected to cause a:
A) 4.5 per cent decrease in quantity demanded.
B) 4.5 per cent increase in quantity demanded.
C) 45 per cent decrease in quantity demanded.
D) 45 per cent increase in quantity demanded.

Accepted Answer

The price elasticity of demand of 4.5 implies that for a 1% increase in price, quantity demanded will decrease by 4.5%. Therefore, for a 10% increase in price, quantity demanded is expected to decrease by 10% x 4.5 = 45%.

Question 7

Price elasticity of demand measures:
A) the responsiveness of the quantity demanded of a good to a change in income.
B) the responsiveness of the quantity demanded of a good to a change in consumers'
Preferences.
C) the responsiveness of the quantity demanded of a good to a one percent change in price.
D) the reduction in the quantity demanded of a good when the price is reduced.

Accepted Answer

Price elasticity of demand measures the responsiveness of quantity demanded to a one percent change in price. It shows how sensitive consumers are to changes in price and helps businesses predict how changes in price will affect their revenue. Answers A, B, and D are not accurate descriptions of price elasticity of demand.

Question 8

If Sam, the Pizza Man, lowers the price of his pizzas from $6 to $5 and finds that sales increase from 400 to 600 pizzas per week, then the demand for Sam's pizzas in this range is:
A) 3.5.
B) 0.5.
C)1.
D) 2.2.

Accepted Answer

To calculate the demand elasticity, we use the formula:

% change in quantity demanded / % change in price

From the given information, we can calculate the % change in quantity demanded:

% change in quantity demanded = ((new quantity - old quantity) / (old quantity)) * 100%
= ((600 - 400) / 400) * 100%
= 50%

And the % change in price:

% change in price = ((old price - new price) / (old price)) * 100%
= ((6 - 5) / 6) * 100%
= 16.67%

So, the demand elasticity is:

% change in quantity demanded / % change in price
= 50% / 16.67%
= 3

Since the demand elasticity is greater than 1, we can say that the demand for Sam's pizzas is elastic in this price range. In other words, a small change in price leads to a relatively larger change in quantity demanded. The value of 2.2 is not one of the answer choices.

Question 9

If Pete raises the price of his muffins from $2 to $3 and his sales revenue increases from $35 000 to $38 000, then:
A) the demand for Pete's muffins in this range is price elastic.
B) the demand for Pete's muffins in this range is price inelastic.
C) the demand for Pete's muffins in this range is unit elastic.
D) the percentage change in quantity demanded must exceed the percentage change in product price.

Accepted Answer

If the increase in price leads to an increase in revenue, it suggests that the demand for Pete's muffins is inelastic in the given price range. If demand were elastic, the increase in price would lead to a decrease in revenue, as the increase in price would cause a significant decrease in demand.

Question 10

Karin is a popular hairdresser in a small town. She charges her clients $30 for a haircut and earned $60 000 last year only doing haircuts. This year, Karin decided to increase the price for the haircut by $5. What is the elasticity of demand for Karin's haircut, if the number of her clients has dropped to 1800 per year?
A) It is approximately equal to 2.3.
B) It is approximately equal to 1.68.
C) It is approximately equal to 1.
D) It is approximately equal to 0.68.

Accepted Answer

The answer of Karin is a popular hairdresser in a...

Question 11

Price elasticity of demand can be:
A) only greater than 1.
B) equal to 1, greater than 1, less than 1.
C) only less than 1.
D) only equal to 1.

Accepted Answer

Price elasticity of demand can be equal to 1, greater than 1 or less than 1, depending on the responsiveness of quantity demanded to a change in price. If the elasticity of demand is greater than 1, it means that a small change in price will result in a relatively larger change in quantity demanded, indicating a high level of responsiveness to price changes. If the elasticity of demand is less than 1, it means that a change in price will result in a relatively smaller change in quantity demanded, indicating a low level of responsiveness to price changes. If the elasticity of demand is equal to 1, it means that a change in price will result in an equivalent change in quantity demanded, indicating unitary elastic demand.

Question 12

Using the midpoint formula, what would be the price elasticity of demand for a gallbladder operation if the number of operations fell from 7000 to 4000 per week after its price increased from $6000 to $15 000?
A) 0.254.
B) 0.636.
C) 0.801.
D) 1.25.

Accepted Answer

Using the midpoint formula:
Price elasticity of demand = [(Q2-Q1)/((Q2+Q1)/2)] / [(P2-P1)/((P2+P1)/2)]
= [(4000-7000)/((4000+7000)/2)] / [(15000-6000)/((15000+6000)/2)]
= -0.636
(Note that the negative sign indicates that demand is elastic, meaning that the percentage change in quantity demanded is greater than the percentage change in price.)

Question 13

An economist estimates that 0.67 is the price elasticity of demand for disposable diapers. This suggests that disposable diaper producers could:
A) advertise more to raise the price elasticity of demand.
B) encourage more parents to use cloth diapers.
C) lower the price of disposable diapers to raise more revenue.
D) raise the price of disposable diapers to raise more revenue.

Accepted Answer

Since the price elasticity of demand is less than 1 (inelastic), raising the price will lead to an increase in total revenue.

Question 14

Which of the statements below does not describe a demand curve that is unit elastic?
A) The percentage change in the quantity demanded equals the percentage change in product price.
B) An increase in product price will not change total revenue.
C) The price elasticity of demand equals one.
D) A change in price does not change quantity demanded.

Accepted Answer

A demand curve that is unit elastic means that the percentage change in quantity demanded is equal to the percentage change in product price. This means that total revenue remains the same when the price changes. The price elasticity of demand is equal to one in a unit elastic demand curve. However, if a change in price does not change the quantity demanded, it means that the demand curve is perfectly inelastic, not unit elastic. Therefore, statement D does not describe a demand curve that is unit elastic.

Question 15

The president of Tucker Motors says, 'Lowering the price won't sell a single additional Tucker car'. The president believes that the price elasticity of demand is:
A) perfectly elastic.
B) perfectly inelastic.
C) unitary elastic.
D) elastic.
Inelastic.

Accepted Answer

The statement made by the president implies that no matter how much the price is lowered, there will not be an increase in demand for Tucker cars. This suggests that the demand for Tucker cars is not sensitive to changes in price, meaning that it is perfectly inelastic. This means that the quantity demanded remains the same regardless of changes in price.

Question 16

The price elasticity of demand for a vertical demand curve is:
A) perfectly elastic.
B) perfectly inelastic.
C) unitary elastic.
D) elastic.

Accepted Answer

A vertical demand curve indicates a fixed quantity of goods or services is demanded at any price. This leads to perfectly inelastic demand, where changes in price do not affect the quantity demanded. Therefore, the price elasticity of demand for a vertical demand curve is perfectly inelastic.

Question 17

Suppose the price of a bus ticket rises from $2.75 to $3.75 and the number of tickets sold falls from 10 000 to 8500, the price elasticity of demand, in absolute term, is:
A) 0.527.
B)1.
C) -0.527.
D) -1.

Accepted Answer

The price elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in price. Here, the change in price is $1 ($3.75 - $2.75), which is a 36.36% increase from the original price ($1 / $2.75). The change in quantity demanded is 1500 tickets (10000 - 8500), which is a 15% decrease from the original quantity (1500 / 10000). The price elasticity of demand, in absolute terms, is the absolute value of the percentage change in quantity demanded divided by the percentage change in price, which is 0.15 / 0.3636 = 0.527.

Question 18

A health club sells 100 memberships when the monthly price is $70 and 120 memberships when the monthly price is $60. The price elasticity of demand for memberships at this health club is (using the midpoint formula):
A) 0.25.
B) 0.65.
C) 1.18.
D) 1.

Accepted Answer

Using the midpoint formula:
Price elasticity of demand = [(Q2-Q1) / ((Q2+Q1)/2)] / [(P2-P1) / ((P2+P1)/2)]
Where:
Q1=100, P1=$70
Q2=120, P2=$60

Plugging in the values:
Price elasticity of demand = [(120-100)/((120+100)/2)] / [(60-70)/((60+70)/2)]
= [20/110] / [-10/65]
= (-20/110) * (65/-10)
= 1.18

Therefore, the price elasticity of demand for memberships at this health club is 1.18, which means that a 1% decrease in price would result in a 1.18% increase in quantity demanded, indicating the demand is elastic.

Question 19

If the price elasticity of demand for a product measures 0.45, then:
A) this good has many available substitutes.
B) this good must be a non-essential good.
C) this good is a high-priced good.
D) this good is demand price inelastic.

Accepted Answer

A price elasticity of demand of 0.45 indicates that the product is demand price inelastic, meaning that a change in price will result in a proportionally smaller change in quantity demanded. This suggests that the product is likely an essential or highly valued good for consumers and does not have easily available substitutes.

Question 20

Suppose the price of a bus ticket rises from $2.75 to $3 and the number of tickets sold falls from 10 000 to 8500, the total revenue test:
A) shows a decrease in total revenue.
B) cannot be calculated.
C) shows no change in total revenue.
D) shows an increase in total revenue.

Accepted Answer

The total revenue before the price increase is $2.75 * 10,000 = $27,500. After the price increase, the total revenue is $3 * 8,500 = $25,500. Comparing the two, there's an increase in total revenue from $27,500 to $25,500, indicating that choice D is correct.

Quiz 6: Elasticity of Demand and Supply

When a 2 per cent increase in price generates a greater than 2 per cent decrease in quantity demanded, then:

On a part of the demand curve where the price elasticity of demand is less than 1, a decrease in price:

Suppose the price of a bus ticket rises from $2.75 to $3 and the number of tickets sold falls from 10 000 to 8500, the price elasticity of demand is:

If demand price elasticity measures 2, this implies that consumers would:

The short-run price elasticity of demand for airline travel is 0.05, while the long-run elasticity is 2.36. This means that a significant increase in airline ticket prices will cause airline companies to:

If the price elasticity of demand for football tickets is estimated to be 4.5, then a 10 per cent increase in football ticket prices would be expected to cause a:

Price elasticity of demand measures:

If Sam, the Pizza Man, lowers the price of his pizzas from $6 to $5 and finds that sales increase from 400 to 600 pizzas per week, then the demand for Sam's pizzas in this range is:

If Pete raises the price of his muffins from $2 to $3 and his sales revenue increases from $35 000 to $38 000, then:

Price elasticity of demand can be:

Using the midpoint formula, what would be the price elasticity of demand for a gallbladder operation if the number of operations fell from 7000 to 4000 per week after its price increased from $6000 to $15 000?

An economist estimates that 0.67 is the price elasticity of demand for disposable diapers. This suggests that disposable diaper producers could:

Which of the statements below does not describe a demand curve that is unit elastic?

The president of Tucker Motors says, 'Lowering the price won't sell a single additional Tucker car'. The president believes that the price elasticity of demand is:

The price elasticity of demand for a vertical demand curve is:

Suppose the price of a bus ticket rises from $2.75 to $3.75 and the number of tickets sold falls from 10 000 to 8500, the price elasticity of demand, in absolute term, is:

A health club sells 100 memberships when the monthly price is $70 and 120 memberships when the monthly price is $60. The price elasticity of demand for memberships at this health club is (using the midpoint formula) :

If the price elasticity of demand for a product measures 0.45, then:

Suppose the price of a bus ticket rises from $2.75 to $3 and the number of tickets sold falls from 10 000 to 8500, the total revenue test: