Question 1

When the price of a good rises, total revenue will fall if the good is elastic in demand.

Accepted Answer

If a good is elastic in demand, it means that consumers are highly sensitive to changes in price. As a result, if the price of the good rises, consumers may decrease their demand for it, leading to a decrease in total revenue for the seller. On the other hand, if a good is inelastic in demand, consumers are less sensitive to changes in price, and a price increase may actually lead to an increase in total revenue for the seller.

Question 2

The cross elasticity of demand coefficient between Coca-Cola and Pepsi Cola would be expected to be negative.

Accepted Answer

The cross elasticity of demand between Coca-Cola and Pepsi Cola is expected to be positive because they are substitute goods, meaning if the price of one increases, the demand for the other is likely to increase as well.

Question 3

Income elasticity of demand measures the responsiveness of quantity supplied to changes in price.

Accepted Answer

Income elasticity of demand measures the responsiveness of quantity demanded to changes in income, not changes in price.

Question 4

Cross elasticity of demand measures consumer responsiveness to a change in the price of one good, in terms of the quantity demanded of some other good.

Accepted Answer

Cross elasticity of demand measures the percentage change in quantity demanded of one good in response to a percentage change in the price of another good. It shows how substitutable or complementary two goods are to each other, and thus measures consumer responsiveness to a change in the price of one good in terms of the quantity demanded of some other good.

Question 5

Price elasticity of demand is the ratio of the percentage change in price of one good to the percentage change in quantity demanded of another good.

Accepted Answer

Price elasticity of demand is the ratio of the percentage change in quantity demanded of a good to the percentage change in its price.

Question 6

When a good is perfectly inelastic in demand, or perfectly elastic in supply, the buyers will pay the full tax that is placed on the sellers.

Accepted Answer

When a good is perfectly inelastic in demand, or perfectly elastic in supply, the buyers will bear the entire burden of an indirect tax imposed on the sellers. This is because sellers cannot shift any part of the burden of the tax onto the buyers due to the nature of the inelastic or elastic demand/supply.

Question 7

A good is unit elastic in demand if as the price changes there is no resulting change in total revenue.

Accepted Answer

A good is considered unit elastic when the percent change in quantity demanded is equal to the percent change in price, resulting in no change in total revenue.

Question 8

It is very important for the seller of a good to know whether the good is elastic, unit elastic, or inelastic in demand so that she will know what will happen to total revenue when she changes the price of the good.

Accepted Answer

This is true because if the good is elastic, a small change in price will result in a large change in demand, meaning that total revenue will decrease if the price is raised and increase if the price is lowered. If the good is inelastic, a change in price will have little effect on demand, so the seller can raise prices without decreasing total revenue. Knowing the elasticity of the good allows the seller to make informed decisions about pricing and revenue.

Question 9

The more narrowly defined a good is, the more elastic the demand for the good will tend to be,  ceteris paribus .

Accepted Answer

This statement is true according to the law of demand, which states that as the price of a good increases, the quantity demanded decreases. When a good is narrowly defined, there are more substitutes available in the market, making it easier for consumers to switch to alternative goods if the price of the narrowly defined good increases. This makes the demand for the narrowly defined good more elastic.

Question 10

If the demand for cocaine is inelastic and people commit crimes to buy drugs, then a drug bust can increase the amount of drug-related crime.

Accepted Answer

If the demand for cocaine is inelastic, meaning that people are willing to pay a high price for the drug regardless of the consequences, a drug bust may lead to a temporary increase in the price of cocaine on the street. This can lead to drug users committing crimes, such as theft or burglary, in order to obtain the funds needed to purchase cocaine at the higher price. Therefore, a drug bust can increase the amount of drug-related crime in the short term.

Question 11

Ford Mustangs would tend to be more elastic in demand than all cars because there are more substitutes for Ford Mustangs than for cars.

Accepted Answer

This is because Ford Mustangs are a specific type of car and there are many other types of cars that can serve the same purpose, whereas there are fewer substitutes for all cars in general.

Question 12

As the price of a product rises the product will become more elastic in demand, assuming that the demand curve for the product is a downward-sloping straight line.

Accepted Answer

According to the law of demand, as the price of a product rises, the quantity demanded decreases. If the demand curve for the product is a downward-sloping straight line, it means that the change in quantity demanded is proportional to the change in price, and therefore, the product has an elastic demand. This implies that small changes in price will have a relatively large effect on the quantity demanded.

Question 13

From the sellers' perspective, it is most desirable for a product to be perfectly elastic in demand.

Accepted Answer

From the sellers' perspective, it is most desirable for a product to have inelastic demand, meaning that changes in price do not significantly affect the quantity of the product demanded. This allows sellers to increase their prices without losing too many customers, resulting in higher profits. A perfectly elastic demand means that even a small increase in price will result in a complete loss of customers, making it difficult for sellers to increase their profits.

Question 14

The existence of substitutes for a good and the percentage of one's budget spent on the good are among the factors that determine how elastic the demand for the good will be.

Accepted Answer

The presence of substitutes for a good and the proportion of one's budget spent on the good are two of the primary determinants of a good's price elasticity of demand. When a good has close substitutes, consumers are more likely to change to those substitutes if the price of the good rises, making this demand more elastic. Similarly, when a good accounts for a large portion of a customer's budget, even small price rises can make a significant difference in how much of the product they purchase, particularly if alternatives are available. Both of these factors contribute to a good's elasticity of demand.

Question 15

If the supply curve for good X is vertical, then the demand for good X must be perfectly inelastic.

Accepted Answer

A vertical supply curve indicates that the supply of good X is perfectly inelastic, meaning the quantity supplied does not change regardless of the price. This does not imply anything about the demand for good X, which could be elastic or inelastic.

Question 16

If a good is a normal good, it can not also be income inelastic.

Accepted Answer

A good can be both normal and income inelastic. Normal good refers to a good whose demand increases when income increases, while income inelastic refers to a good whose demand does not change much when income changes. Therefore, a normal good can still have a relatively small change in demand when income changes, making it income inelastic.

Question 17

If the percentage change in quantity supplied is greater than the percentage change in price, then supply is elastic.

Accepted Answer

This is the definition of elastic supply - when the percentage change in quantity supplied is greater than the percentage change in price.

Question 18

When the price of a good rises, the total revenue received by the seller of that good always rises.

Accepted Answer

The total revenue received by the seller may not always rise with an increase in the price of a good due to the price elasticity of demand. If the demand is elastic, a price increase could lead to a proportionally larger decrease in quantity demanded, thus reducing total revenue.

Question 19

It is impossible for a given good to be both elastic in demand and inelastic in supply.

Accepted Answer

The elasticity of demand and the elasticity of supply for a good are independent concepts; a good can have any combination of demand and supply elasticities, including being elastic in demand and inelastic in supply.

Question 20

If a good is perfectly inelastic in a given price range, it will be perfectly inelastic at all prices.

Accepted Answer

The elasticity of demand for a good can vary at different price levels. A good that is perfectly inelastic in one price range may not necessarily be perfectly inelastic at all prices, as consumer responsiveness to price changes can differ across different price ranges.

Quiz 6: Elasticity