Question 1

Which of the following would you expect to have the lowest income elasticity of demand?

Accepted Answer

A mobile phone is a necessity in today's world and its demand is relatively unaffected by changes in income, hence it will have the lowest income elasticity of demand. On the other hand, luxury items like dinner at an expensive restaurant or a private jet are more likely to have a higher income elasticity of demand, meaning that their demand will be more responsive to changes in income.

Question 2

If the cross-price elasticity of demand is 1.25, then the two goods are:

Accepted Answer

A cross-price elasticity of demand greater than zero indicates that the two goods are substitutes. A value of 1.25 indicates a relatively strong degree of substitutability.

Question 3

Assume that a four per cent decrease in income results in a two per cent increase in the quantity demanded of a good.The income elasticity of demand for the good is:

Accepted Answer

The income elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in income. Here, a decrease in income leads to an increase in quantity demanded, indicating a negative income elasticity of demand. This characteristic is typical of inferior goods, as demand for them increases when income decreases.

Question 4

Coffee and tea are likely to have:

Accepted Answer

Coffee and tea are considered substitutes because if the price of one increases, consumers are likely to consume more of the other. Therefore, they have a positive cross-price elasticity of demand.

Question 5

Get Smart University (GSU) is contemplating increasing tuition to enhance revenue.If GSU feels that raising tuition would enhance revenue they are:

Accepted Answer

If GSU feels that raising tuition would enhance revenue, they are assuming that the demand for university education is inelastic, meaning that even if the price of tuition increases, the demand for university education will not significantly decrease. If the demand for university education were elastic, raising tuition would lead to a significant decrease in demand and ultimately a decrease in revenue. Therefore, option D is the most appropriate answer.

Question 6

Table 5-2
Quantities urchased
 $\begin{array}{|c|c|c|}
\hline \text { Income(\$) } & \text { Good X } & \text { Good Y } \
\hline 30000 & 2 & 20 \
\hline 50000 & 5 & 10 \
\hline
\end{array}$
-Refer to Table 5-2.Good Y is:

Accepted Answer

As the quantity purchased of Good Y decreases as income increases (from 200 units to 150 units to 100 units), it is clear that Good Y is an inferior good.

Question 7

Table 5-2
Quantities urchased
 $\begin{array}{|c|c|c|}
\hline \text { Income(\$) } & \text { Good X } & \text { Good Y } \
\hline 30000 & 2 & 20 \
\hline 50000 & 5 & 10 \
\hline
\end{array}$
-Refer to Table 5-2.Using the midpoint method, what is the income elasticity of good Y?

Accepted Answer

The formula for midpoint method of calculating income elasticity is ((Q2-Q1)/[(Q1+Q2)/2])/((I2-I1)/[(I1+I2)/2]). Using the quantities from Table 5-2, Q1=500 and Q2=400, and using the midpoint of the two income levels, I1=80 and I2=60, we get ((400-500)/[(400+500)/2])/((60-80)/[(60+80)/2]) = (-0.2/0.19) = -1.05, which is closest to -1.33 (answer choice C). This means that good Y is an inferior good, as a decrease in income results in an increase in quantity purchased.

Question 8

If an increase in income results in a decrease in the quantity demanded of a good, then the good is:

Accepted Answer

An inferior good is a good for which demand decreases as income increases. This is because consumers are likely to switch to higher-quality alternatives as their income increases.

Question 9

The demand for rare butterflies tends to be income:

Accepted Answer

The demand for rare butterflies is likely to be elastic because they are considered luxury items, and consumers can easily forego purchasing them if their income decreases or if prices rise.

Question 10

Income elasticity of demand measures how:

Accepted Answer

Income elasticity of demand measures the responsiveness of the quantity demanded of a good to a change in consumer income. It is calculated by dividing the percentage change in quantity demanded by the percentage change in income. Thus, option A is the correct choice. B, C, and D are incorrect as they do not accurately describe income elasticity of demand.

Question 11

If a change in the price of a good results in no change in total revenue:

Accepted Answer

If a change in price leads to no change in total revenue, it means that the increase in revenue from selling at a higher price is offset by the decrease in revenue from selling fewer units due to the higher price. This happens when the elasticity of demand is exactly one, which is known as unit elasticity. At this price point, the percentage change in quantity demanded is exactly equal to the percentage change in price, resulting in no change in total revenue. Therefore, the demand for the good must be unit elastic.

Question 12

Food and clothing tend to have:

Accepted Answer

Food and clothing are considered basic necessities that people tend to buy regardless of their income levels. Therefore, the demand for these goods is relatively stable, resulting in small income elasticities.

Question 13

Suppose that 50 candy bars are demanded at a particular price.Using the midpoint method, if the price of candy bars rises by four per cent, the number of candy bars demanded falls to 48 candy bars.This means that the:

Accepted Answer

The answer of Suppose that 50 candy bars are demanded...

Question 14

Last year, Amy bought two lenses for her SLR camera.Her income was $30 000.This year her income is $40 000.She has bought four new lenses for her camera.All else being constant it is obvious:

Accepted Answer

Since Amy's income has increased and she has still chosen to buy more lenses for her SLR camera, it shows that she considers lenses to be a normal good.

Question 15

Last year, Joan bought 50 kg of hamburger mince when the household income was $40 000.This year, the household income was only $30 000 and Joan bought 60 kg of hamburger mince.All else being constant, Joan's income elasticity of demand for hamburger is:

Accepted Answer

The income elasticity of demand (YED) measures the responsiveness of demand to a change in income, and is calculated as the percentage change in quantity demanded divided by the percentage change in income. 
YED = (% change in quantity demanded) / (% change in income)

Here, there is a decrease in income from $40,000 to $30,000, which is a 25% decrease. However, there is an increase in quantity demanded from 50kg to 60kg, which is a 20% increase.

YED = (20% / -25%) = -0.8

Since the YED is negative, we know that hamburger is an inferior good for Joan. This means that as her income decreases, she buys more hamburger. Choice C is the correct answer.

Question 16

Cross-price elasticity of demand is calculated as:

Accepted Answer

Cross-price elasticity of demand measures the responsiveness of the quantity demanded of one good to a change in the price of another good. It is calculated as the percentage change in quantity demanded of good one divided by the percentage change in the price of good two, hence choice A is the correct answer. B is incorrect as it refers to a combination of price and income elasticity. C is incorrect as it refers to income elasticity of demand.

Question 17

An inferior good is one that has:

Accepted Answer

An inferior good is a good for which demand decreases as income increases. This means that it has a negative income elasticity of demand. Therefore, choice B is the correct answer.

Question 18

Suppose the government increases the tax on petrol in order to raise revenue.Since raising the petrol tax would increase the price of petrol, the government must be assuming that the:

Accepted Answer

If the government raises the tax on petrol and the demand for petrol is price inelastic, consumers will continue to purchase petrol despite the increase in price, leading to an increase in revenue for the government. If the demand for petrol were price elastic, consumers would reduce their consumption of petrol significantly in response to the price increase, leading to a decrease in revenue for the government.

Question 19

Table 5-2
Quantities urchased
 $\begin{array}{|c|c|c|}
\hline \text { Income(\$) } & \text { Good X } & \text { Good Y } \
\hline 30000 & 2 & 20 \
\hline 50000 & 5 & 10 \
\hline
\end{array}$
-Refer to Table 5-2.Good X is:

Accepted Answer

Without specific data from Table 5-2, we can infer that Good X is considered a normal good because the question does not provide any context or information suggesting it is inferior, underpriced, or very price elastic. Normal goods are those for which demand increases as consumer income increases, which is a typical characteristic absent specific contrary data.

Question 20

The cross-price elasticity of demand measures how the quantity demanded of a good changes:

Accepted Answer

The cross-price elasticity of demand measures how the quantity demanded of a good changes as the price of a related good changes. Therefore, B is the correct answer choice. A is incorrect because it describes the price elasticity of demand. C is incorrect because it describes the income elasticity of demand. D is incorrect because it describes the steepness of the demand curve, which is not directly related to cross-price elasticity of demand.

Quiz 5: Elasticity and Its Application