Mastering Elasticity: Demand, Supply, and Market Dynamics
Test your understanding of economic elasticity concepts with these practice questions and answers. This section covers various aspects of price, income, and cross elasticity, along with their implications for market behavior and total revenue.
Price and Income Elasticity Fundamentals
Which of the following is not characteristic of the demand for a commodity that is elastic?
D. The elasticity coefficient is less than one.
The price elasticity of demand for widgets is 0.80. Assuming no change in the demand curve for widgets, a 16 percent increase in sales implies a:
B. 12 percent reduction in price.
The price elasticity of demand is generally:
A. negative, but the minus sign is ignored.
Suppose we find that the price elasticity of demand for a product is 3.5 when its price is increased by 2 percent. We can conclude that quantity demanded:
D. decreased by 1.75 percent.
Which of the following statements is not correct?
B. In the range of prices in which demand is elastic, total revenue will diminish as price decreases.
If a firm finds that it can sell $13,000 worth of a product when its price is $5 per unit and $11,000 worth of it when its price is $6, then:
A. the demand for the product is elastic in the $6-$5 price range.
Which of the following statements is correct?
C. Demand is more elastic when a large number of substitute goods are available.
If price and total revenue vary in opposite directions, demand is:
D. relatively elastic.
The supply of product X is inelastic (but not perfectly inelastic) if the price of X:
C. 10 percent and quantity supplied remains the same.
Suppose that the price of product X rises by 20 percent and the quantity supplied of X increases by 15 percent. The coefficient of price elasticity of supply for good X is:
C. less than 1 and therefore supply is inelastic.
The larger the positive cross elasticity coefficient of demand between products X and Y, the:
B. greater their substitutability.
Which of the following goods (with their respective income elasticity coefficients in parentheses) will most likely suffer a decline in demand during a recession?
D. Plasma screen and LCD TVs (+4.2)
Elasticity can be thought of as degree of relative:
D. quantity stretch.
Advanced Elasticity Applications
If the price elasticity of demand for a product is 2.5, then a price cut from $2.00 to $1.80 will:
C. increase the quantity demanded by about 25 percent.
A perfectly inelastic demand schedule:
B. can be represented by a line parallel to the vertical axis.
The price elasticity of demand for beef is about 0.60. Other things equal, this means that a 20 percent increase in the price of beef will cause the quantity of beef demanded to:
B. decrease by approximately 12 percent.
Suppose the price elasticity coefficients of demand are 1.43, 0.67, 1.11, and 0.29 for products W, X, Y, and Z respectively. A 1 percent decrease in price will increase total revenue in the case(s) of:
A. W and Y.
Which of the following statements is not correct?
B. In the range of prices in which demand is elastic, total revenue will diminish as price decreases.
Other things the same, if a price change causes total revenue to change in the opposite direction, demand is:
B. relatively elastic.
If the income elasticity of demand for lard is -3.00, this means that:
C. lard is an inferior good.
We would expect the cross elasticity of demand between Pepsi and Coke to be:
C. positive, indicating substitute goods.
Suppose that when your income increases from $28,000 to $30,000 per year, your purchases of X increase from 4 to 5 units because of that income increase. Thus:
D. the demand for X is elastic with respect to income.
Assume that a 4 percent increase in income in the economy produces an 8 percent increase in the quantity demanded of good X. The coefficient of income elasticity of demand is:
D. positive and therefore X is a normal good.
The price of old baseball cards rises rapidly with increases in demand because:
A. the supply of old baseball cards is inelastic.
Farmers often find that large bumper crops are associated with declines in their gross incomes. This suggests that:
C. the price elasticity of demand for farm products is less than 1.
Compared to coffee, we would expect the cross elasticity of demand for:
B. tea to be positive, but negative for cream.