Question 1

If a firm is facing elastic demand,then the firm should decrease price to increase revenue.

Accepted Answer

When a firm faces elastic demand, the percentage change in quantity demanded is more than the percentage change in price. Therefore, decreasing the price will lead to a relatively larger increase in quantity demanded, which will result in an increase in total revenue.

Question 2

The income elasticity of demand is defined as the percentage change in quantity demanded divided by the percentage change in price.

Accepted Answer

The income elasticity of demand is defined as the percentage change in quantity demanded divided by the percentage change in income, not price.

Question 3

If the cross-price elasticity of demand for two goods is negative,then the two goods are substitutes.

Accepted Answer

If the cross-price elasticity of demand for two goods is negative, it means that an increase in the price of one good leads to a decrease in the quantity demanded of the other good. This indicates that the two goods are complements, not substitutes. If the cross-price elasticity is positive, then the two goods are substitutes.

Question 4

Along the elastic portion of a linear demand curve,total revenue rises as price rises.

Accepted Answer

Along the elastic portion of a demand curve, total revenue decreases as price rises because the percentage drop in quantity demanded is greater than the percentage increase in price, leading to a decrease in total revenue.

Question 5

If the income elasticity of demand for a good is negative,then the good must be an inferior good.

Accepted Answer

A negative income elasticity of demand indicates that as income increases, the demand for the good decreases, which is characteristic of inferior goods.

Question 6

If a firm is facing inelastic demand,then the firm should decrease price to increase revenue.

Accepted Answer

Inelastic demand means that changes in price have little effect on the quantity demanded by consumers. Therefore, decreasing price may not necessarily lead to a significant increase in revenue for the firm. In fact, in some cases, decreasing price may even lead to a decrease in revenue due to lower profit margins. Instead, the firm should focus on increasing the quality or features of its product to differentiate itself from competitors and attract customers even at a higher price point.

Question 7

If demand is perfectly inelastic,the demand curve is vertical,and the price elasticity of demand equals 0.

Accepted Answer

When demand is perfectly inelastic, the quantity demanded remains the same regardless of any changes in price. This means that the demand curve is vertical, as there is no change in the quantity demanded even if there is a large change in price. The price elasticity of demand equals 0 because there is no responsiveness of quantity demanded to any changes in price.

Question 8

If the price elasticity of demand is equal to 1,then demand is unit elastic.

Accepted Answer

If the price elasticity of demand is equal to 1, then the percentage change in quantity demanded is equal to the percentage change in price, resulting in a unit elastic demand.

Question 9

If demand is perfectly elastic,the demand curve is horizontal,and the price elasticity of demand equals 1.

Accepted Answer

When demand is perfectly elastic, the demand curve is horizontal, but the price elasticity of demand is infinite, not equal to 1.

Question 10

Cross-price elasticity is used to determine whether goods are substitutes or complements.

Accepted Answer

Cross-price elasticity measures the responsiveness of demand for one good to a change in the price of another good. If the cross-price elasticity is positive, it indicates that the two goods are substitutes (i.e. an increase in price of one good leads to an increase in demand for the other good). If the cross-price elasticity is negative, it indicates that the two goods are complements (i.e. an increase in price of one good leads to a decrease in demand for the other good).

Question 11

Cross-price elasticity of demand measures how the quantity demanded of one good changes as the price of another good changes.

Accepted Answer

This is a correct definition of cross-price elasticity of demand.

Question 12

An advantage of using the midpoint method to calculate the price elasticity of demand is that it uses the metric system.

Accepted Answer

The advantage of using the midpoint method is not related to the metric system. Instead, the advantage is that it gives a more accurate measurement of price elasticity when there is a significant change in price or quantity, compared to using the traditional formula of (change in quantity / average quantity) divided by (change in price / average price).

Question 13

If we observe that when the price of chocolate increases by 10%,total revenue increases by 10%,then the demand for chocolate is unit price elastic.

Accepted Answer

The answer of If we observe that when the price...

Question 14

Cross-price elasticity is used to determine whether goods are inferior or normal goods.

Accepted Answer

Cross-price elasticity of demand measures the responsiveness of the demand for one good to the change in the price of a related good. It does not directly determine whether goods are inferior or normal goods.

Question 15

Normal goods have negative income elasticities of demand,while inferior goods have positive income elasticities of demand.

Accepted Answer

Normal goods have positive income elasticities of demand, while inferior goods have negative income elasticities of demand.

Question 16

If we observe that when consumers' incomes rise by 10%,the quantity demanded of ice cream increases by 5%,then ice cream is an inferior good.

Accepted Answer

An inferior good is a good for which the quantity demanded decreases when consumers' incomes rise. In the given scenario, the quantity demanded of ice cream increases as consumers' incomes rise, indicating that ice cream is actually a normal good.

Question 17

If the price elasticity of demand is equal to 0,then demand is unit elastic.

Accepted Answer

If the price elasticity of demand is equal to 0, demand is considered to be perfectly inelastic, not unit elastic. In a perfectly inelastic scenario, a change in price would not affect the quantity demanded at all.

Question 18

When demand is inelastic,a decrease in price increases total revenue.

Accepted Answer

When demand is inelastic, a decrease in price may not significantly increase the quantity demanded, resulting in a decrease in total revenue. On the other hand, when demand is elastic, a decrease in price can lead to a significant increase in quantity demanded, resulting in an increase in total revenue.

Question 19

If the cross-price elasticity of demand for two goods is negative,then the two goods are complements.

Accepted Answer

A negative cross-price elasticity of demand indicates that an increase in the price of one good leads to a decrease in the quantity demanded of the other good. This is characteristic of complementary goods, which are typically consumed together (e.g. coffee and creamer).

Question 20

The income elasticity of demand is defined as the percentage change in quantity demanded divided by the percentage change in income.

Accepted Answer

This statement correctly defines the income elasticity of demand formula.

Quiz 5: Elasticity and Its Application