Question 1

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

Accepted Answer

When demand is inelastic, a decrease in price leads to a proportionally smaller increase in quantity demanded. As a result, the increase in revenue from selling more units is not enough to offset the decrease in revenue from selling each unit at a lower price. Therefore, total revenue decreases when price decreases in an inelastic market.

Question 2

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 when the price of one increases, the demand for the other is likely to decrease. Therefore, the cross-price elasticity of demand would be negative.

Question 3

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, both producers and consumers have more flexibility to adjust their behavior in response to changes in price or availability of goods and services, making both supply and demand more elastic. In the short run, however, producers may have limited capacity to increase production, while consumers may have limited options to substitute goods or services, making both supply and demand more inelastic.

Question 4

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, demand for the good increases as well. On the other hand, inferior goods have negative income elasticities of demand, meaning that as income increases, demand for the good decreases. This is because consumers typically switch to higher-quality or more expensive substitutes as their income increases, while turning to inferior goods when income decreases or during economic recessions.

Question 5

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

Accepted Answer

This is the correct definition of income elasticity of demand. It measures the responsiveness of quantity demanded to changes in consumer income.

Question 6

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

If ice cream were an inferior good, we would expect the quantity demanded to decrease as income increases. Therefore, the statement contradicts the definition of an inferior good.

Question 7

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 8

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

Accepted Answer

Cross-price elasticity measures how a change in the price of one good affects the demand for another good. It does not provide information on whether goods are inferior or normal. That determination can be made through income elasticity.

Question 9

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

Accepted Answer

If the cross-price elasticity of demand for two goods is negative, then the two goods are complements, not substitutes. In other words, if the price of one good increases, the demand for the other good decreases.

Question 10

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

Accepted Answer

If a firm is facing elastic demand, it means that a small change in price will result in a relatively larger change in quantity demanded. Therefore, decreasing the price will lead to an increase in revenue because the increase in quantity demanded will more than offset the decrease in price, resulting in a net increase in total revenue.

Question 11

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 a change in the price of another good.

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

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 a change in the price of another good. If the cross-price elasticity is positive, it indicates that the goods are substitutes (as the price of one good increases, demand for the other good increases). If the cross-price elasticity is negative, it indicates that the goods are complements (as the price of one good increases, demand for the other good decreases).

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

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

Accepted Answer

When the price elasticity of demand is equal to 1, it means that the percentage change in the quantity demanded is equal to the percentage change in price. This indicates that demand is unit elastic, meaning that a change in price will result in an equal change in the quantity demanded.

Question 16

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

Accepted Answer

If a firm is facing inelastic demand, it means that changes in price will not have a significant impact on the quantity demanded. Therefore, decreasing price will not necessarily lead to an increase in revenue. In some cases, increasing the price of the product may actually lead to an increase in revenue, as long as the increase in price does not lead to a significant decrease in demand.

Question 17

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 18

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. This is characteristic of an inferior good, which is a product that consumers demand less of as their income increases and they are able to afford higher quality alternatives.

Question 19

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 as the price of one good increases, the quantity demanded of the other good decreases. This is a characteristic of complementary goods, which are often consumed together.

Question 20

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, it means that a change in price has no effect on the quantity demanded. This is known as perfectly inelastic demand, which is not the same as unit elastic demand where the percentage change in quantity demanded is equal to the percentage change in price. Therefore, the statement that demand is unit elastic when the price elasticity of demand is equal to 0 is false.

Quiz 5: Elasticity and Its Application