The price of a sandwich rises from $4 to $6, and the quantity demanded falls from 120 to 80 per day. Using the midpoint method, what is the price elasticity of demand in absolute value?
1.0
✓
0.67
1.5
0.5
Correct Answer
1.0
With the midpoint method, the quantity change is 40 divided by the average quantity of 100, or 40 percent, and the price change is 2 divided by the average price of 5, also 40 percent, so the elasticity is 40/40 = 1.0, which is unitary. 0.67 comes from using the starting values as bases (33.3 percent divided by 50 percent). 1.5 inverts that starting-value mistake. 0.5 does not follow from either set of percentage changes.
Category: Measuring Elasticity
Question 2
When the price of a product rises from $9 to $11, the quantity supplied rises from 40 to 60 units. Using the midpoint method, what is the price elasticity of supply?
0.5
2.0
✓
2.25
1.0
Correct Answer
2.0
The quantity change is 20 divided by the average quantity of 50, or 40 percent, and the price change is 2 divided by the average price of 10, or 20 percent, so the elasticity of supply is 40/20 = 2.0. 0.5 divides the price change by the quantity change, which inverts the formula. 2.25 uses the starting values as bases (50 percent divided by 22.2 percent) instead of the midpoints. 1.0 would require equal percentage changes in quantity and price.
Category: Measuring Elasticity
Question 3
A ticket price rises from $9 to $11, and the number of tickets demanded falls from 105 to 95. Using the midpoint method, how is demand over this range best described?
Elastic, with an elasticity of 2.0
Unit elastic, with an elasticity of 1.0
Inelastic, with an elasticity of 0.5
✓
Elastic, with an elasticity of 1.5
Correct Answer
Inelastic, with an elasticity of 0.5
The quantity change is 10 divided by the average quantity of 100, or 10 percent, and the price change is 2 divided by the average price of 10, or 20 percent, so the elasticity is 10/20 = 0.5. Because 0.5 is less than 1, demand is inelastic over this range. Elastic, with an elasticity of 2.0 comes from dividing the price change by the quantity change. Unit elastic, with an elasticity of 1.0 would need equal percentage changes. Elastic, with an elasticity of 1.5 matches neither calculation.
Category: Measuring Elasticity
Question 4
When household income rises by 10 percent, the quantity demanded of a store-brand cereal falls by 5 percent, all else equal. How is this good classified?
Normal good, with an income elasticity of 0.5
Inferior good, with an income elasticity of -2.0
Normal good, with an income elasticity of 2.0
Inferior good, with an income elasticity of -0.5
✓
Correct Answer
Inferior good, with an income elasticity of -0.5
Income elasticity of demand is the percentage change in quantity demanded divided by the percentage change in income, here -5/10 = -0.5. A negative income elasticity means people buy less as income rises, which defines an inferior good. Normal good, with an income elasticity of 0.5 has the wrong sign. Inferior good, with an income elasticity of -2.0 divides income change by quantity change. Normal good, with an income elasticity of 2.0 has both the wrong sign and an inverted ratio.
Category: Other Elasticities
Question 5
When the price of printers rises by 10 percent, the quantity demanded of printer ink falls by 20 percent, all else equal. What does the cross-price elasticity of demand show about these goods?
Complements, with a cross-price elasticity of -2.0
✓
Substitutes, with a cross-price elasticity of 2.0
Complements, with a cross-price elasticity of -0.5
Substitutes, with a cross-price elasticity of 0.5
Correct Answer
Complements, with a cross-price elasticity of -2.0
Cross-price elasticity is the percentage change in quantity demanded of one good divided by the percentage change in price of the other, here -20/10 = -2.0. A negative value means a higher price for one good reduces purchases of the other, so the goods are complements. Substitutes, with a cross-price elasticity of 2.0 has the wrong sign. Complements, with a cross-price elasticity of -0.5 inverts the ratio. Substitutes, with a cross-price elasticity of 0.5 has the wrong sign and an inverted ratio.
Category: Other Elasticities
Question 6
A cafe sells 200 muffins a day at $5 each. When it cuts the price to $4, it sells 300 muffins a day. What happens to the cafe's total revenue from muffins?
It falls by $200
It rises by $200
✓
It rises by $100
It stays the same
Correct Answer
It rises by $200
Total revenue is price times quantity: 5 x 200 = $1,000 before the cut and 4 x 300 = $1,200 after, a rise of $200. Revenue rose after a price cut because quantity rose by a larger percentage than price fell, so demand is elastic over this range. It falls by $200 reverses the direction of the change. It rises by $100 is an arithmetic slip. It stays the same would point to unit elastic demand.
Category: Elasticity and Revenue
Question 7
A seller faces elastic demand and raises its price by 5 percent. According to the model, what happens to its total revenue?
It rises
It stays the same
It falls
✓
It rises at first and then falls
Correct Answer
It falls
With elastic demand, quantity demanded falls by a larger percentage than price rises, so price times quantity falls. It rises is what happens when a seller raises price under inelastic demand. It stays the same describes unit elastic demand. It rises at first and then falls describes no pattern the model predicts for a single price increase.
Category: Elasticity and Revenue
Question 8
A tax is placed on a good whose demand is inelastic and whose supply is elastic. According to the model, who bears most of the tax?
Sellers bear most of the tax
Buyers and sellers bear exactly equal shares
The government bears most of the tax
Buyers bear most of the tax
✓
Correct Answer
Buyers bear most of the tax
The burden of a tax falls more heavily on the side of the market with the less elastic curve, because that side cannot easily change its quantity to avoid the tax. Here buyers are less responsive, so the price they pay rises by most of the tax. Sellers bear most of the tax is the result when supply is the less elastic side. Buyers and sellers bear exactly equal shares would require equally responsive sides. The government bears most of the tax is wrong because the government collects the tax rather than paying it.
Category: Tax Incidence
Question 9
A tax is placed on hotel rooms in a beach town where the supply of rooms is inelastic and tourists' demand is elastic. According to the model, who bears most of the tax?
Hotel owners bear most of the tax
✓
Tourists bear most of the tax
Tourists and hotel owners bear exactly equal shares
Neither group bears any of the tax
Correct Answer
Hotel owners bear most of the tax
When supply is less elastic than demand, sellers cannot easily cut back the quantity they offer, so the price they keep falls by most of the tax. Tourists bear most of the tax would be the outcome if demand were the less elastic side. Tourists and hotel owners bear exactly equal shares would need equally elastic curves. Neither group bears any of the tax is wrong because a tax always drives a gap between what buyers pay and sellers keep.
Category: Tax Incidence
Question 10
Demand for a lifesaving medicine with no substitutes is perfectly inelastic. If its price rises by 20 percent, what happens to the quantity demanded?
Quantity demanded falls by 20 percent
Quantity demanded does not change
✓
Quantity demanded falls to zero
Quantity demanded falls by 10 percent
Correct Answer
Quantity demanded does not change
Perfectly inelastic demand has an elasticity of zero, so a price change of any size leaves quantity demanded the same, and the demand curve is vertical. Quantity demanded falls by 20 percent describes unit elastic demand. Quantity demanded falls to zero describes perfectly elastic demand. Quantity demanded falls by 10 percent describes inelastic demand with an elasticity of 0.5, not zero.
Category: Polar Cases
Question 11
Along a downward-sloping straight-line demand curve, where is demand most elastic?
At low prices and high quantities
At the same level at every point
At high prices and low quantities
✓
Only where the curve meets the quantity axis
Correct Answer
At high prices and low quantities
A straight line has a constant slope, but elasticity uses percentage changes. At high prices and low quantities, a given change in quantity is a large percentage of a small base while the price change is a small percentage of a large base, so elasticity is high. At low prices and high quantities is where demand is least elastic. At the same level at every point confuses elasticity with slope. Only where the curve meets the quantity axis is the point where price is zero and demand is least elastic.
Category: Measuring Elasticity
Question 12
The income elasticity of demand for restaurant meals is 0.5. If household income rises by 8 percent, all else equal, by how much does the quantity of restaurant meals demanded change?
It rises by 16 percent
It falls by 4 percent
It rises by 8.5 percent
It rises by 4 percent
✓
Correct Answer
It rises by 4 percent
Rearranging the definition, the percentage change in quantity demanded equals income elasticity times the percentage change in income: 0.5 x 8 = 4 percent, and the positive sign means it rises. It rises by 16 percent divides 8 by 0.5 instead of multiplying. It falls by 4 percent gives the wrong sign for a positive elasticity. It rises by 8.5 percent adds the two numbers.
Category: Other Elasticities
Question 13
When the interest rate paid on savings accounts rises by 10 percent, the quantity of financial savings rises by 2 percent. What is the interest rate elasticity of savings?
0.2, which is inelastic
✓
5.0, which is elastic
2.0, which is elastic
0.8, which is inelastic
Correct Answer
0.2, which is inelastic
The interest rate elasticity of savings is the percentage change in the quantity of savings divided by the percentage change in the interest rate: 2/10 = 0.2. Because this is less than 1, savings is inelastic with respect to the interest rate. 5.0, which is elastic inverts the ratio. 2.0, which is elastic uses only the change in savings. 0.8, which is inelastic does not follow from these figures.
Category: Other Elasticities
Question 14
A worker's wage rises by 8 percent, and the hours of labor she supplies rise by 2 percent. What is her wage elasticity of labor supply?
4.0
0.25
✓
0.5
2.0
Correct Answer
0.25
The wage elasticity of labor supply is the percentage change in the quantity of labor supplied divided by the percentage change in the wage: 2/8 = 0.25, which is inelastic. 4.0 divides the wage change by the change in hours, inverting the formula. 0.5 and 2.0 do not follow from these two percentage changes.
Category: Other Elasticities
Question 15
Using the midpoint method, what is the percentage change in price when a price rises from $8 to $12?
50 percent
33 percent
40 percent
✓
4 percent
Correct Answer
40 percent
The midpoint method divides the change of $4 by the average of the two prices, $10, giving 40 percent. 50 percent uses the starting price of $8 as the base. 33 percent uses the ending price of $12 as the base. 4 percent is the dollar change, not a percentage.
Category: Measuring Elasticity
Question 16
A new technology lowers the cost of producing a crop and shifts its supply curve to the right. If demand for the crop is very inelastic, what does the model predict?
A small fall in price and a large rise in quantity
A large rise in price and a small fall in quantity
No change in price and a large rise in quantity
A large fall in price and a small rise in quantity
✓
Correct Answer
A large fall in price and a small rise in quantity
When demand is inelastic, buyers will take only a little more of the good, so the price must fall a lot to clear the market after supply shifts right. A small fall in price and a large rise in quantity is the result with elastic demand. A large rise in price and a small fall in quantity describes a leftward supply shift. No change in price and a large rise in quantity describes perfectly elastic demand.
Category: Elasticity and Revenue
Question 17
The price elasticity of supply for a good is 1.5. If its price rises by 6 percent, by how much does the quantity supplied rise?
9 percent
✓
4 percent
7.5 percent
1.5 percent
Correct Answer
9 percent
The percentage change in quantity supplied equals the elasticity times the percentage change in price: 1.5 x 6 = 9 percent. 4 percent divides 6 by 1.5 instead of multiplying. 7.5 percent adds the two numbers. 1.5 percent is the elasticity itself, not the change in quantity.
Category: Measuring Elasticity
Question 18
How is the price elasticity of demand defined?
Percentage change in price divided by percentage change in quantity demanded
Percentage change in quantity demanded divided by percentage change in price
✓
Change in quantity demanded divided by change in price, in units
Percentage change in quantity demanded divided by percentage change in income
Correct Answer
Percentage change in quantity demanded divided by percentage change in price
Price elasticity of demand measures how strongly quantity demanded responds to price, so the percentage change in quantity demanded goes on top and the percentage change in price on the bottom. Percentage change in price divided by percentage change in quantity demanded inverts the ratio. Change in quantity demanded divided by change in price, in units is a slope-type measure that depends on units. Percentage change in quantity demanded divided by percentage change in income is the income elasticity of demand.
Category: Measuring Elasticity
Question 19
A small firm faces perfectly elastic demand for its product. If it raises its price 5 percent above the market price, what happens to the quantity it sells?
It stays the same
It falls by 5 percent
It falls to zero
✓
It falls by half
Correct Answer
It falls to zero
Perfectly elastic demand is horizontal: buyers will take any amount at the market price but none at a higher price, so a firm that charges more sells nothing. It stays the same describes perfectly inelastic demand. It falls by 5 percent describes unit elastic demand. It falls by half describes a large but limited response, not an infinitely elastic one.
Category: Polar Cases
Question 20
According to the model, what happens when a tax is placed on a good whose demand and supply are both very elastic?
It raises a large amount of revenue, because quantity sold barely changes
It is paid entirely by buyers, because sellers can leave the market
It leaves both price and quantity sold unchanged
It raises little revenue, because quantity sold falls sharply
✓
Correct Answer
It raises little revenue, because quantity sold falls sharply
Tax revenue equals the tax per unit times the quantity sold. When both sides are very responsive, the tax causes a large drop in quantity, so little revenue is collected. It raises a large amount of revenue, because quantity sold barely changes describes inelastic markets. It is paid entirely by buyers, because sellers can leave the market ignores that buyers here can also cut back. It leaves both price and quantity sold unchanged is wrong because a tax always raises the price buyers pay relative to what sellers keep.
Category: Tax Incidence