When supply is inelastic, an increase in demand raises the price by a larger percentage than it raises the quantity supplied.
Correct Answer
True
True. Inelastic supply means the percentage change in quantity supplied is smaller than the percentage change in price. So when demand rises, most of the adjustment shows up as a higher price rather than a larger quantity.
Category: Measuring Elasticity
Question 2
The price elasticity of supply is the percentage change in price divided by the percentage change in quantity supplied.
Correct Answer
False
False. The price elasticity of supply is the percentage change in quantity supplied divided by the percentage change in price. Quantity goes on top because elasticity measures how quantity responds to price.
Category: Measuring Elasticity
Question 3
When demand is unit elastic, a small change in price leaves total revenue roughly unchanged.
Correct Answer
True
True. With unit elasticity, quantity changes by the same percentage as price in the opposite direction. The two effects offset, so price times quantity stays about the same.
Category: Elasticity and Revenue
Question 4
When demand is inelastic, a 10 percent price increase reduces quantity demanded by more than 10 percent.
Correct Answer
False
False. Inelastic demand means quantity demanded falls by less than 10 percent after a 10 percent price increase. A fall of more than 10 percent would mean demand is elastic.
Category: Measuring Elasticity
Question 5
A positive cross-price elasticity of demand indicates that two goods are substitutes.
Correct Answer
True
True. A positive value means that a higher price for one good raises the quantity demanded of the other, as when buyers switch from coffee to tea. Complements have a negative cross-price elasticity.
Category: Other Elasticities
Question 6
A good with many close substitutes tends to have less elastic demand than a similar good with no close substitutes.
Correct Answer
False
False. When close substitutes are available, buyers can easily switch away after a price increase, so demand tends to be more elastic. Goods with no close substitutes, such as lifesaving drugs, tend to have inelastic demand.
Category: Polar Cases
Question 7
In the short run, a shift in supply tends to cause a larger change in price than the same shift causes in the long run.
Correct Answer
True
True. Elasticities of demand and supply are generally lower in the short run because buyers and sellers have less time to adjust. With less responsive quantities, more of the adjustment happens through price.
Category: Short and Long Run
Question 8
When demand is inelastic, cutting the price raises total revenue.
Correct Answer
False
False. With inelastic demand, a price cut raises quantity demanded by a smaller percentage than the price falls, so total revenue falls. A price cut raises total revenue only when demand is elastic.
Category: Elasticity and Revenue
Question 9
Over several years, firms can expand production more easily than they can within a few months, so supply tends to be more elastic in the long run.
Correct Answer
True
True. Building factories and hiring and training workers take time, so the quantity supplied responds more to price over longer periods. This is one reason elasticities tend to be higher in the long run.
Category: Short and Long Run
Question 10
A demand curve with a constant unitary elasticity along its whole length is a straight line.
Correct Answer
False
False. A demand curve with constant unitary elasticity is curved, steep at high prices and flatter at low prices. A straight-line demand curve has a constant slope but an elasticity that changes from point to point.
Category: Polar Cases
Question 11
The interest rate elasticity of borrowing is the percentage change in the quantity of borrowing divided by the percentage change in the interest rate.
Correct Answer
True
True. Elasticity can relate any pair of variables, and this one measures how strongly borrowing responds to interest rates. It follows the same pattern as every elasticity, with the responding quantity on top.
Category: Other Elasticities
Question 12
Measuring a good's price in cents instead of dollars changes the value of its price elasticity of demand.
Correct Answer
False
False. Elasticity is a ratio of two percentage changes, so it has no units and does not depend on how price or quantity is measured. This is a key advantage of elasticity over slope.
Category: Measuring Elasticity
Question 13
Because demand for food is generally inelastic, shifts in supply caused by weather can produce large swings in farm prices.
Correct Answer
True
True. When demand is inelastic, a shift in supply changes the price a lot and the quantity only a little. A good or bad harvest therefore moves crop prices sharply.
Category: Elasticity and Revenue
Question 14
Elasticity can be calculated only for the relationship between a good's quantity and its own price.
Correct Answer
False
False. Elasticity is a general measure of how one variable responds in percentage terms to another. Economists also measure income elasticity, cross-price elasticity, wage elasticity of labor supply and interest rate elasticity of savings.
Category: Other Elasticities
Question 15
A tax break that raises the return on saving has a larger effect on the quantity of saving when the supply of financial capital is elastic than when it is inelastic.
Correct Answer
True
True. With elastic supply of financial capital, savers respond strongly to a higher return, so the quantity saved rises a lot. With inelastic supply, the same higher return changes saving very little.
Category: Other Elasticities
Question 16
If the price elasticity of demand is 2, a 5 percent price increase reduces quantity demanded by 2.5 percent.
Correct Answer
False
False. The percentage change in quantity demanded equals the elasticity times the percentage change in price, so 2 x 5 = 10 percent. Dividing 5 by 2 to get 2.5 percent inverts the relationship.
Category: Measuring Elasticity
Question 17
A firm can pass a cost increase on to buyers as a higher price more easily when demand for its product is inelastic.
Correct Answer
True
True. When demand is inelastic, buyers keep purchasing nearly the same amount at a higher price, so much of the cost increase shows up in the price they pay. With elastic demand, buyers cut back sharply, so the firm cannot raise its price much.
Category: Elasticity and Revenue
Question 18
Using the midpoint method, the elasticity between two prices depends on whether the price is rising or falling.
Correct Answer
False
False. The midpoint method uses the average of the two values as the base for each percentage change. As a result, a move from the first point to the second gives the same elasticity as the move back.
Category: Measuring Elasticity
Question 19
Cross-price elasticity of demand divides the percentage change in quantity demanded of one good by the percentage change in the price of a different good.
Correct Answer
True
True. Cross-price elasticity shows how purchases of one good respond to the price of another. Its sign tells whether the goods are substitutes (positive) or complements (negative).
Category: Other Elasticities
Question 20
If a good's price rises by 10 percent and its quantity supplied rises by 10 percent, its supply is elastic.
Correct Answer
False
False. When quantity supplied changes by the same percentage as price, the elasticity of supply is 10/10 = 1, which is unitary. Supply is elastic only when the percentage change in quantity supplied is larger than the percentage change in price.
Category: Measuring Elasticity