Price elasticity of supply equals the percentage change in quantity supplied divided by the percentage change in price.
Correct Answer
True
True. Price elasticity of supply measures how strongly sellers respond to a price change, with the quantity change in the numerator and the price change in the denominator, both in percentages.
Category: Interpreting Elasticity
Question 2
A price elasticity of supply of 0.6 means that supply is elastic.
Correct Answer
False
False. An elasticity below 1 means quantity responds by a smaller percentage than price, so a value of 0.6 means supply is inelastic. Supply is elastic only when the value is greater than 1.
Category: Interpreting Elasticity
Question 3
A price elasticity of demand of 2 means that a 1 percent rise in price lowers quantity demanded by 0.5 percent.
Correct Answer
False
False. An elasticity of 2 means quantity demanded changes by twice the percentage change in price, so a 1 percent price rise lowers quantity demanded by 2 percent.
Category: Interpreting Elasticity
Question 4
On a demand curve with constant unitary elasticity, a 1 percent rise in price causes a 1 percent fall in quantity demanded.
Correct Answer
True
True. Unitary elasticity means the percentage change in quantity equals the percentage change in price, and on a constant unitary elasticity curve this holds at every point.
Category: Polar Cases
Question 5
A demand curve with constant unitary elasticity is curved rather than a straight line.
Correct Answer
True
True. To keep the percentage changes in price and quantity equal everywhere, the curve must be steep at high prices and flat at low prices, which bends it into a curve. A straight-line demand curve has elasticity that changes from point to point.
Category: Polar Cases
Question 6
A perfectly elastic supply curve is a vertical line.
Correct Answer
False
False. A perfectly elastic supply curve is horizontal, because sellers will supply any quantity at one price and none below it. A vertical supply curve is perfectly inelastic, with an elasticity of zero.
Category: Polar Cases
Question 7
When demand is inelastic, a price increase reduces total revenue.
Correct Answer
False
False. With inelastic demand, quantity falls by a smaller percentage than price rises, so a price increase raises total revenue. A price increase reduces total revenue only when demand is elastic.
Category: Elasticity and Revenue
Question 8
A seller facing elastic demand can raise its total revenue by lowering its price.
Correct Answer
True
True. With elastic demand, a price cut raises quantity demanded by a larger percentage than the price falls, so price times quantity goes up.
Category: Elasticity and Revenue
Question 9
Firms can pass higher input costs on to buyers more easily when demand for their product is inelastic.
Correct Answer
True
True. When demand is inelastic, buyers keep purchasing nearly the same amount at a higher price, so firms can raise prices to cover higher costs without losing many sales. With elastic demand, a price increase drives many buyers away.
Category: Elasticity and Revenue
Question 10
The burden of a per-unit tax falls more heavily on whichever side of the market is more elastic.
Correct Answer
False
False. The tax burden falls more heavily on the side that is less elastic, because that side cannot easily reduce its quantity to avoid the tax. The more elastic side shifts more of the burden away.
Category: Tax Incidence
Question 11
Price elasticities of demand and supply are usually lower in the short run than in the long run.
Correct Answer
True
True. Over a longer period, consumers can find substitutes or change habits and producers can build capacity, so both sides respond more to a price change. For example, drivers can buy more fuel-efficient cars over several years but not in a few weeks.
Category: Short and Long Run
Question 12
Demand for a good tends to be less elastic when it has many close substitutes.
Correct Answer
False
False. Many close substitutes make demand more elastic, because buyers can easily switch when the price rises. Goods with few or no close substitutes tend to have inelastic demand.
Category: Interpreting Elasticity
Question 13
Two complements, such as bread and peanut butter, have a negative cross-price elasticity of demand.
Correct Answer
True
True. When the price of one complement rises, people buy less of it and therefore less of the good used with it, so the quantity change and the price change move in opposite directions and the elasticity is negative.
Category: Other Elasticities
Question 14
A larger income elasticity of demand in absolute value means that a given change in income shifts the demand curve by more.
Correct Answer
True
True. Income elasticity measures how strongly demand responds to income, so a larger absolute value means a bigger shift in demand for the same percentage change in income.
Category: Other Elasticities
Question 15
Cross-price elasticity of demand measures how the quantity demanded of a good responds to a change in consumer income.
Correct Answer
False
False. Cross-price elasticity measures how the quantity demanded of one good responds to a change in the price of a different good. The response to a change in income is measured by income elasticity of demand.
Category: Other Elasticities
Question 16
The wage elasticity of labor supply divides the percentage change in hours worked by the percentage change in the interest rate.
Correct Answer
False
False. The wage elasticity of labor supply divides the percentage change in hours worked by the percentage change in the wage. The interest rate appears in the elasticity of savings.
Category: Other Elasticities
Question 17
Because elasticity is based on percentage changes, its value does not depend on the units in which price and quantity are measured.
Correct Answer
True
True. Percentage changes have no units, so measuring price in cents instead of dollars or quantity in ounces instead of pounds gives the same elasticity. This is one reason economists prefer elasticity to slope for comparing responsiveness.
Category: Interpreting Elasticity
Question 18
Under the midpoint method, the percentage change in price is found by dividing the price change by the starting price.
Correct Answer
False
False. The midpoint method divides the price change by the average of the starting and ending prices. Using the average as the base gives the same elasticity whether price rises or falls between the two points.
Category: Midpoint Method
Question 19
When demand is perfectly inelastic, buyers bear the entire burden of a per-unit tax.
Correct Answer
True
True. With a vertical demand curve, buyers purchase the same quantity at any price, so the price they pay rises by the full amount of the tax and sellers receive the same price as before.
Category: Tax Incidence
Question 20
A price elasticity of demand of exactly 1 is called perfectly elastic.
Correct Answer
False
False. An elasticity of exactly 1 is called unitary elasticity. Perfectly elastic demand has an infinite elasticity and is drawn as a horizontal line.
Category: Polar Cases