Question 1

Which of the following is most likely to have an income elasticity of demand that exceeds 1?
A) Food
B) Telephone services
C) Airline travel
D) Alcoholic beverages
E) Tobacco

Accepted Answer

Airline travel is a luxury good, and luxury goods tend to have income elasticities of demand greater than 1. As people's incomes rise, they tend to travel more frequently and choose more expensive modes of transportation.

Question 2

If your income was to increase from $20,000 to $30,000 and the number of home -delivered pizzas you bought per year increased from 22 to 40, then your income elasticity of demand for home-delivered pizza equals
A) 1.45.
B) 0.58.
C) 2.86.
D) 0.69.
E) 0.40.

Accepted Answer

The income elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in income. Here, the change in quantity demanded is from 22 to 40 pizzas, which is an increase of 18 pizzas. The percentage change in quantity demanded is (18/22) * 100 = 81.82%. The change in income is from $20,000 to $30,000, which is an increase of $10,000. The percentage change in income is (10,000/20,000) * 100 = 50%. Therefore, the income elasticity of demand is 81.82% / 50% = 1.6364, which is approximately 1.45 when rounded to the nearest options provided.

Question 3

When income increases from $30,000 a year to $40,000 a year, the quantity demanded of weekend vacations by Sara increases from 2 a year to 5 a year. For Sara, the income elasticity of demand of weekend vacations is ________ and weekend vacations are ________ good.
A) 1/3; a normal
B) -4.5; an inferior
C) 3; a normal
D) 1/3; an inferior
E) 4.5 a normal

Accepted Answer

Income elasticity of demand = % change in quantity demanded / % change in income

% change in quantity demanded = (5-2)/2 = 1.5
% change in income = (40,000-30,000)/30,000 = 0.3333

Income elasticity of demand = 1.5 / 0.3333 = 4.5

Since the income elasticity of demand is positive and greater than 1, the good is a normal good. Therefore, the correct choice is (C).

Question 4

When the price of going to a movie rises 5 per cent, the quantity of DVDs demanded increases 10 per cent. The cross elasticity of demand equals
A) -2.0.
B) -0.50.
C) 10.0.
D) 2.0.
E) 0.50.

Accepted Answer

The cross elasticity of demand is calculated as the percentage change in quantity demanded of one good divided by the percentage change in price of another good. Here, it is 10% / 5% = 2.0.

Question 5

If the income elasticity of demand for used cars is less than zero, then used cars are
A) a normal good.
B) a perfectly inelastic good.
C) an inelastic good.
D) an inferior good.
E) a substitute good.

Accepted Answer

If the income elasticity of demand for used cars is less than zero, it means that as income increases, the demand for used cars decreases. This is characteristic of an inferior good, which is a good for which demand decreases as income increases.

Quiz 5: Elasticities of Demand and Supply

Which of the following is most likely to have an income elasticity of demand that exceeds 1?

If your income was to increase from $20,000 to $30,000 and the number of home -delivered pizzas you bought per year increased from 22 to 40, then your income elasticity of demand for home-delivered pizza equals

When income increases from $30,000 a year to $40,000 a year, the quantity demanded of weekend vacations by Sara increases from 2 a year to 5 a year. For Sara, the income elasticity of demand of weekend vacations is and weekend vacations are good.

When the price of going to a movie rises 5 per cent, the quantity of DVDs demanded increases 10 per cent. The cross elasticity of demand equals

If the income elasticity of demand for used cars is less than zero, then used cars are