Using the midpoint method, the price of a good rises from $8 to $12 and the quantity demanded falls from 50 to 30 units. What is the price elasticity of demand in absolute value, rounded to two decimal places?
1.25
✓
0.80
5.00
0.40
Correct Answer
1.25
The percentage change in quantity is 20 divided by the average quantity of 40, or 50 percent, and the percentage change in price is 4 divided by the average price of 10, or 40 percent, so elasticity is 50 / 40 = 1.25. The value 0.80 comes from dividing the price change by the quantity change, or from using starting values instead of averages. The value 5.00 divides the unit change in quantity by the dollar change in price, which is a ratio of unit changes, not an elasticity. The value 0.40 is only the percentage change in price written as a decimal.
Category: Midpoint Method
Question 2
A bakery supplies 40 loaves a day when bread sells for $9 and 60 loaves a day when it sells for $11. Applying the midpoint method and rounding to two decimal places, what is the bakery's price elasticity of supply?
0.50
2.00
✓
2.25
10.00
Correct Answer
2.00
Quantity changes by 20 on an average of 50, which is 40 percent, and price changes by 2 on an average of 10, which is 20 percent, so the elasticity of supply is 40 / 20 = 2.00. The value 0.50 puts the price change on top instead of the quantity change. The value 2.25 uses the starting values of 40 and 9 as the bases instead of the averages. The value 10.00 divides 20 units by $2, which is a ratio of unit changes rather than an elasticity.
Category: Midpoint Method
Question 3
Why do economists use the midpoint method to calculate elasticity between two points on a curve?
It measures the slope of the curve in dollars per unit
It guarantees an elasticity greater than 1
It gives the same answer whether price rises or falls
✓
It avoids the need to use percentage changes
Correct Answer
It gives the same answer whether price rises or falls
The midpoint method uses the average of the starting and ending values as the base for each percentage change, so moving from point A to point B gives the same elasticity as moving from B to A. It measures the slope of the curve in dollars per unit is wrong because elasticity compares percentages, not units. It guarantees an elasticity greater than 1 is wrong because the result can be any size. It avoids the need to use percentage changes is wrong because the method is a way of computing percentage changes.
Category: Midpoint Method
Question 4
The price elasticity of demand for a good is 0.4 in absolute value. Which description fits demand for this good?
Elastic, because quantity responds more than price
Unitary, because quantity responds exactly as much as price
Perfectly elastic, because any price rise drives quantity to zero
Inelastic, because quantity responds less than price
✓
Correct Answer
Inelastic, because quantity responds less than price
An elasticity below 1 means the percentage change in quantity demanded is smaller than the percentage change in price, which is inelastic demand. Elastic, because quantity responds more than price would require a value above 1. Unitary, because quantity responds exactly as much as price would require a value of exactly 1. Perfectly elastic, because any price rise drives quantity to zero describes an infinite elasticity on a horizontal curve.
Category: Interpreting Elasticity
Question 5
A demand curve is a straight line with a constant slope. How does the price elasticity of demand change as you move along it?
It is higher at high prices and lower at low prices
✓
It is the same at every point on the line
It is higher at low prices and lower at high prices
It equals the slope of the line at every point
Correct Answer
It is higher at high prices and lower at low prices
On a straight-line demand curve each step has the same unit changes, but at high prices a given quantity change is a large percentage of a small quantity and a given price change is a small percentage of a large price, so demand is more elastic there. It is the same at every point on the line confuses a constant slope with a constant elasticity. It is higher at low prices and lower at high prices reverses the pattern. It equals the slope of the line at every point is wrong because elasticity uses percentage changes, not unit changes.
Category: Interpreting Elasticity
Question 6
A demand curve is a horizontal line at a single price. Which term describes the price elasticity of demand along it?
Perfectly inelastic
Perfectly elastic
✓
Unitary elastic
Relatively inelastic
Correct Answer
Perfectly elastic
A horizontal demand curve means any price rise, however small, causes quantity demanded to fall to zero, so elasticity is infinite and demand is perfectly elastic. Perfectly inelastic describes a vertical curve, where quantity does not respond to price at all. Unitary elastic describes a curve where a 1 percent price change causes a 1 percent quantity change. Relatively inelastic describes a steep curve with an elasticity between 0 and 1.
Category: Polar Cases
Question 7
Supply tends to be highly elastic for goods whose production has which feature?
It depends on a fixed amount of prime land
It requires rare inputs in limited supply
It can expand easily using readily available inputs
✓
It takes many years to increase
Correct Answer
It can expand easily using readily available inputs
When producers can easily get more of the inputs they need, as with bread or pencils, a small price rise leads to a large increase in quantity supplied, so supply is highly elastic. It depends on a fixed amount of prime land describes housing in a prime location, whose supply tends to be inelastic. It requires rare inputs in limited supply also limits how much output can grow, making supply inelastic. It takes many years to increase means quantity supplied barely responds in the short run.
Category: Polar Cases
Question 8
Which good is most likely to have highly inelastic demand?
A particular brand of breakfast cereal
A luxury cruise vacation
One restaurant's pepperoni pizza
A life-saving drug with no close substitute
✓
Correct Answer
A life-saving drug with no close substitute
A necessity with no close substitute, such as a life-saving drug, keeps being bought even when its price rises, so its demand is highly inelastic. A particular brand of breakfast cereal has many substitutes on the same shelf, so its demand is elastic. A luxury cruise vacation is a large, optional purchase, which tends to make demand elastic. One restaurant's pepperoni pizza competes with many other restaurants, so buyers switch easily when its price rises.
Category: Polar Cases
Question 9
A store sells 100 notebooks a day at $5 each. When it raises the price to $6, it sells 90 notebooks a day. What happens to its daily total revenue?
It rises by $40
✓
It falls by $40
It rises by $100
It stays the same
Correct Answer
It rises by $40
Total revenue is price times quantity, so it goes from $5 x 100 = $500 to $6 x 90 = $540, a rise of $40, which also shows that demand is inelastic over this range. It falls by $40 reverses the direction of the change. It rises by $100 multiplies the $1 price increase by 100 units and ignores the 10 lost sales. It stays the same would happen only if demand were unitary elastic over this range.
Category: Elasticity and Revenue
Question 10
Demand for a product has unitary elasticity at its current price. If the seller raises the price slightly, what happens to total revenue?
It rises noticeably
It stays about the same
✓
It falls noticeably
It roughly doubles
Correct Answer
It stays about the same
With unitary elasticity, the percentage fall in quantity demanded matches the percentage rise in price, so the two effects offset and total revenue stays about the same. It rises noticeably would happen if demand were inelastic. It falls noticeably would happen if demand were elastic. It roughly doubles is far too large for a slight price change under any elasticity.
Category: Elasticity and Revenue
Question 11
Demand for wheat is inelastic. A bumper crop shifts the supply curve to the right. According to the demand and supply model, what happens to farmers' total revenue?
It rises, because farmers sell a larger quantity
It stays the same, because the price and quantity changes cancel out
It falls, because price drops by a larger percentage than quantity rises
✓
It rises, because price falls by a smaller percentage than quantity rises
Correct Answer
It falls, because price drops by a larger percentage than quantity rises
With inelastic demand, the extra supply pushes price down by a larger percentage than quantity rises, so price times quantity falls. It rises, because farmers sell a larger quantity ignores the much lower price. It stays the same, because the price and quantity changes cancel out would require unitary elasticity. It rises, because price falls by a smaller percentage than quantity rises describes elastic demand, not inelastic demand.
Category: Elasticity and Revenue
Question 12
Compared with a similar tax on a good with elastic demand, why does a per-unit tax on a good with inelastic demand tend to raise more tax revenue?
Sellers absorb the entire tax
Supply becomes perfectly elastic
Buyers switch to many close substitutes
Quantity purchased falls only a little
✓
Correct Answer
Quantity purchased falls only a little
Tax revenue equals the tax per unit times the number of units sold, and when demand is inelastic the higher price reduces purchases only slightly, so most of the taxed units are still sold. Sellers absorb the entire tax is wrong because sellers bear the whole tax only when demand is perfectly elastic or supply is perfectly inelastic, and the split does not set the revenue. Supply becomes perfectly elastic is wrong because a tax does not change the elasticity of supply. Buyers switch to many close substitutes describes elastic demand, which shrinks the tax base.
Category: Tax Incidence
Question 13
Supply of a good is much more inelastic than demand. A per-unit tax is placed on the good. Who bears the larger share of the tax burden?
Mostly sellers
✓
Mostly buyers
Buyers and sellers equally
Mostly the government
Correct Answer
Mostly sellers
The burden of a tax falls more heavily on the side of the market that is less able to respond to price, which here is sellers. Mostly buyers would be the result if demand were the more inelastic side. Buyers and sellers equally would require the two elasticities to be balanced. Mostly the government is wrong because the government collects the tax rather than paying it.
Category: Tax Incidence
Question 14
Demand and supply for a good are both very elastic. What does the model predict about a per-unit tax on that good?
It falls entirely on buyers
It raises relatively little tax revenue
✓
It leaves the quantity sold unchanged
It raises more revenue than taxes on any other good
Correct Answer
It raises relatively little tax revenue
When both sides respond strongly to price, the tax drives the quantity traded down sharply, and a tax applied to few units collects little revenue. It falls entirely on buyers would require perfectly inelastic demand. It leaves the quantity sold unchanged would require at least one side to be perfectly inelastic. It raises more revenue than taxes on any other good is the opposite of the prediction, since a shrinking tax base means less revenue.
Category: Tax Incidence
Question 15
In the short run, demand and supply for oil are both quite inelastic. When a supply disruption shifts the supply curve to the left, what does the model predict?
A small price rise and a large quantity drop
No change in price and a large quantity drop
A large price rise and a small quantity drop
✓
A price fall and a quantity rise
Correct Answer
A large price rise and a small quantity drop
When both curves are steep, a leftward shift in supply moves the equilibrium mostly up rather than left, so price rises a lot while quantity falls only a little. A small price rise and a large quantity drop describes elastic curves, which is more typical of the long run. No change in price and a large quantity drop would require perfectly elastic demand. A price fall and a quantity rise is the result of a rightward shift in supply, not a leftward one.
Category: Short and Long Run
Question 16
The price elasticity of demand for a good is 0.5. If its price rises by 10 percent, by about how much does quantity demanded fall?
20 percent
10 percent
0.5 percent
5 percent
✓
Correct Answer
5 percent
Elasticity equals the percentage change in quantity divided by the percentage change in price, so the quantity change is 0.5 x 10 = 5 percent. 20 percent divides 10 by 0.5 instead of multiplying. 10 percent assumes unitary elasticity. 0.5 percent treats the elasticity value itself as the percentage change.
Category: Interpreting Elasticity
Question 17
When consumer income rises by 10 percent, the quantity demanded of a good rises by 15 percent. What is the income elasticity of demand, and what kind of good is it?
1.5, a normal good
✓
-1.5, an inferior good
0.67, a normal good
-0.67, an inferior good
Correct Answer
1.5, a normal good
Income elasticity is the percentage change in quantity demanded divided by the percentage change in income, 15 / 10 = 1.5, and any positive value marks a normal good. Because the value is above 1, demand for this good is also income elastic, which is still a kind of normal good. -1.5, an inferior good has the wrong sign, since quantity rose with income. 0.67, a normal good divides income by quantity instead of quantity by income. -0.67, an inferior good inverts the ratio and also has the wrong sign.
Category: Other Elasticities
Question 18
The price of good B rises by 20 percent, and the quantity demanded of good A falls by 10 percent. What is the cross-price elasticity of demand, and how are the goods related?
0.5, substitutes
-0.5, complements
✓
2.0, substitutes
-2.0, complements
Correct Answer
-0.5, complements
Cross-price elasticity is the percentage change in the quantity demanded of A divided by the percentage change in the price of B, -10 / 20 = -0.5, and a negative value means the goods are used together as complements. 0.5, substitutes drops the minus sign, and substitutes would show quantity of A rising. 2.0, substitutes inverts the ratio and drops the sign. -2.0, complements has the right sign but inverts the ratio.
Category: Other Elasticities
Question 19
A farm's supply of tomatoes has a price elasticity of 1.5. A 4 percent increase in the market price would lead the farm to offer how much more output?
4 percent
2.7 percent
6 percent
✓
1.5 percent
Correct Answer
6 percent
The percentage change in quantity supplied equals elasticity times the percentage change in price, 1.5 x 4 = 6 percent. 4 percent assumes unitary elasticity. 2.7 percent divides 4 by 1.5 instead of multiplying. 1.5 percent treats the elasticity value itself as the percentage change.
Category: Interpreting Elasticity
Question 20
When the price of a product rises from $4 to $6, the quantity demanded falls from 120 to 80 units. Using the midpoint method, which description fits demand over this range?
Elastic, with an elasticity of 2
Inelastic, with an elasticity of 0.5
Perfectly inelastic, with an elasticity of 0
Unitary elastic, with an elasticity of 1
✓
Correct Answer
Unitary elastic, with an elasticity of 1
Quantity changes by 40 on an average of 100, which is 40 percent, and price changes by $2 on an average of $5, which is also 40 percent, so elasticity is 40 / 40 = 1. Elastic, with an elasticity of 2 would need quantity to change twice as much as price in percentage terms. Inelastic, with an elasticity of 0.5 would need quantity to change half as much as price. Perfectly inelastic, with an elasticity of 0 would mean quantity did not change at all.
Category: Midpoint Method