Question 1

Price elasticity of demand measures:
A) the change in price brought about by a change in consumer demand.
B) how consumers change their purchases in response to a change in income.
C) how consumers change their purchases in response to a change in the price of a substitute good.
D) how consumers change their purchases in response to a change in the price of a product.

Accepted Answer

Price elasticity of demand measures how consumers change their purchases in response to a change in the price of a product. Option A is incorrect as it mentions the change in price brought about by a change in consumer demand which is not the correct interpretation of price elasticity of demand. Option B is incorrect as it refers to income elasticity of demand which is a different concept altogether. Option C is incorrect as it refers to cross-price elasticity of demand which measures the change in demand for a product in response to a change in the price of its substitute product.

Question 2

Price elasticity of demand refers to the ratio of the:
A) percentage change in price of a good in response to a percentage change in quantity demanded.
B) percentage change in price of a good to a percentage increase in income.
C) percentage change in the quantity demanded of a good to a percentage change in its price.
D) percentage change in the quantity demanded of a good to a percentage change in income.

Accepted Answer

Price elasticity of demand refers to the responsiveness of quantity demanded to a change in price. Specifically, it is measured as the percentage change in quantity demanded divided by the percentage change in price. This ratio is important in determining how much a change in price will affect the quantity of a good demanded by consumers.

Question 3

If a decrease in the price of movie tickets increases the total revenue of movie theaters, this is evidence that demand is:
A) elastic.
B) inelastic.
C) unit elastic.
D) perfectly inelastic.

Accepted Answer

When a decrease in price leads to an increase in revenue, it indicates that the percentage increase in quantity demanded is more than the percentage decrease in price. This is characteristic of elastic demand. Therefore, the best choice is A) elastic.

Question 4

An increase in total revenue results from which of the following?
A) Price decreases when demand is inelastic.
B) Price increases when demand is elastic.
C) Price decreases when demand is elastic.
D) Price increases when demand is unitary elastic.

Accepted Answer

When demand is elastic, a decrease in price leads to a proportionally larger increase in quantity demanded, which increases total revenue.

Question 5

Using the midpoints formula, what would be price elasticity of demand for a gallbladder operation if the number of operations fell from 6,000 to 4,000 per week after its price increased from $6,000 to $10,000?
A) 0.25.
B) 0.50.
C) 0.80.
D) 1.25

Accepted Answer

The formula for price elasticity of demand (PED) is:
PED = ((Q2-Q1)/((Q2+Q1)/2))/((P2-P1)/((P2+P1)/2))
Using the given values, we get:
PED = ((4000-6000)/((4000+6000)/2))/((10000-6000)/((10000+6000)/2))
PED = (-2000/5000)/(4000/8000)
PED = -0.4/0.5
PED = -0.8
Since price elasticity of demand is a measure of responsiveness of demand to changes in price, the value obtained should be positive. Thus, we take the absolute value of the value obtained above, which gives us 0.8. Therefore, the price elasticity of demand for a gallbladder operation is 0.8, which is closest to the option C (0.80).

Question 6

If the demand for cigarettes is highly inelastic, this indicates that:
A) higher cigarette prices will increase the demand for cigarettes.
B) the price elasticity coefficient of cigarettes exceeds 1.
C) the price elasticity coefficient of cigarettes equals 1.
D) the quantity of cigarettes purchased by consumers is not very responsive to a change in the price of cigarettes.

Accepted Answer

If the demand for cigarettes is highly inelastic, it means that the quantity of cigarettes purchased by consumers is not very responsive to a change in the price of cigarettes. Therefore, even if the price of cigarettes increases, the demand for cigarettes will not decrease significantly as consumers will continue to purchase the same amount of cigarettes despite the price increase.

Question 7

If the percentage change in the quantity demanded of a good is less than the percentage change in price, price elasticity of demand is:
A) elastic.
B) inelastic.
C) perfectly inelastic.
D) unitary elastic.

Accepted Answer

When the percentage change in quantity demanded of a good is less than the percentage change in price, it means that consumers are not very responsive to changes in price. In other words, they still demand roughly the same quantity of the good even when the price increases. This indicates a relatively low price elasticity of demand, and the good is considered to be inelastic.

Question 8

If the percentage change in the quantity demanded of a good is greater than the percentage change in price, price elasticity of demand is:
A) elastic.
B) inelastic.
C) perfectly inelastic.
D) perfectly elastic.

Accepted Answer

When the percentage change in quantity demanded is greater than the percentage change in price, it indicates that consumers are highly responsive to changes in price, which means that demand is elastic.

Question 9

If a demand curve for a good were completely vertical, it would be considered:
A) perfectly elastic.
B) perfectly inelastic.
C) unitary elastic.
D) relatively inelastic.

Accepted Answer

A completely vertical demand curve means that no matter the price, the quantity demanded remains constant. This is the definition of perfectly inelastic demand.

Question 10

Along the elastic range of a demand curve, a price change causes:
A) a change in total revenue in the opposite direction.
B) a change in total revenue in the same direction.
C) no change in total revenue.
D) an unpredictable change in the total revenue.

Accepted Answer

Along the elastic range of a demand curve, a price change causes a more than proportionate change in the quantity demanded, resulting in a change in total revenue in the opposite direction. This means that as price increases, total revenue decreases and as price decreases, total revenue increases.

Question 11

Suppose the president of a college argues that a 25 percent tuition increase will raise revenues for the college. It can be concluded that the president thinks that demand to attend this college is:
A) elastic.
B) inelastic, but not perfectly inelastic.
C) unitary elastic.
D) perfectly elastic.

Accepted Answer

The president believes that a 25 percent increase in tuition will raise revenues, implying that the quantity demanded will not decrease proportionally. This suggests the demand is inelastic (but not perfectly inelastic), as the total revenue increases with price increases when demand is inelastic.

Question 12

The president of Tucker Motors says, "Lowering the price won't sell a single additional Tucker car." The president believes that the price elasticity of demand is:
A) perfectly elastic.
B) perfectly inelastic.
C) unitary elastic.
D) elastic.

Accepted Answer

The president's statement indicates that the demand for Tucker cars is perfectly inelastic, meaning that a change in price will not result in a change in quantity demanded.

Question 13

Suppose you are the manager of a local water company, and you are instructed to get consumers to reduce their water consumption by 10 percent. If the price elasticity of demand for water is 0.25, by how much would you have to raise the price of water?
A) 10 percent
B) 25 percent
C) 40 percent
D) 100 percent

Accepted Answer

Price elasticity of demand (E) = (% Change in Quantity Demanded) / (% Change in Price)

Given, E = 0.25 and we want to reduce consumption by 10%.

We can use the formula to find the necessary percentage increase in price:

0.25 = (-10%) / (% Change in Price)
% Change in Price = (-10%) / 0.25 = -40%

So, we would have to raise the price of water by 40% in order to get consumers to reduce their consumption by 10%.

Question 14

Suppose that Starbucks reduces the price of its premium coffee from $2.20 to $1.80 per cup, and as a result, the quantity sold per day increased from 350 to 450. Over this price range, the price elasticity of demand for Starbucks coffee is:
A) 0.40.
B) 0.80.
C) 1.25.
D) 2.50.

Accepted Answer

Price elasticity of demand (Ed) is calculated as the percentage change in quantity demanded divided by the percentage change in price.

Using the midpoint method:

Ed = ((Q2 - Q1) / ((Q2 + Q1)/2)) / ((P2 - P1) / ((P2 + P1)/2))

Ed = ((450 - 350) / ((450 + 350)/2)) / (($1.80 - $2.20) / (($1.80 + $2.20)/2))

Ed = (100/400) / (-0.4/2)

Ed = 0.25 / -0.2

Ed = -1.25

Since the elasticity value is negative, we can say that Starbucks coffee is price elastic. A value of -1.25 means that for every 1% decrease in price, there is a 1.25% increase in the quantity demanded. Therefore, the best choice is C (1.25).

Question 15

Suppose an increase in symphony tickets prices reduces the total revenue. This is evidence that demand is:
A) price elastic.
B) price inelastic.
C) unitary elastic.
D) perfectly elastic.

Accepted Answer

If an increase in prices leads to a decrease in revenue, it suggests that quantity demanded is highly responsive to changes in price, indicating a price elastic demand.

Question 16

If the price elasticity of demand is computed for two products, and product A measures .79, and product B measures 1.6, then:
A) product A is more elastic than product B.
B) product B is more elastic than product A.
C) consumers are more responsive to price changes in product A than in product B.
D) products A and B must be substitutes.

Accepted Answer

Product B is more elastic than product A because its price elasticity of demand (1.6) is higher than that of product A (.79), indicating consumers are more responsive to price changes in product B.

Question 17

A local doughnut shop reduced the price of its doughnuts from $4 per dozen to $3.50 per dozen, and as a result, the daily sales increased from 300 to 400 dozen. This indicates that the price elasticity of demand for the doughnuts was:
A) elastic.
B) inelastic.
C) unitary elastic.
D) indeterminate; more information is needed to determine the price elasticity of demand.

Accepted Answer

The decrease in price from $4 per dozen to $3.50 per dozen led to a significant increase in daily sales from 300 dozen to 400 dozen. This indicates that demand for the doughnuts is elastic, meaning that consumers are very sensitive to changes in price. If the demand had been inelastic, the increase in sales would have been lower or negligible.

Question 18

Suppose that a jewelry store found that when it increased prices by 10 percent, sales revenue increased by 3 percent. Which of the following is true about the price elasticity of demand for the store's goods?
A) Demand is perfectly inelastic.
B) Demand is inelastic, but not perfectly.
C) Demand is perfectly elastic
D) Demand is elastic, but not perfectly.

Accepted Answer

If a 10% increase in price led to only a 3% increase in revenue, then demand is not very responsive to changes in price, which means demand is inelastic. However, since there was a noticeable increase in revenue, demand is not perfectly inelastic. Therefore, the correct answer is B - demand is inelastic, but not perfectly.

Question 19

The price elasticity of demand for a vertical demand curve is:
A) perfectly elastic.
B) perfectly inelastic.
C) unitary elastic.
D) elastic.

Accepted Answer

A vertical demand curve represents a situation where the demand for the product is the same at all prices. This means that no matter how much the price changes, the quantity demanded remains the same. Therefore, the price elasticity of demand is zero, indicating perfectly inelastic demand.

Question 20

A perfectly inelastic demand curve has an elasticity coefficient of:
A) 0.
B) 1.
C) less than 1.
D) infinity.

Accepted Answer

A perfectly inelastic demand curve means that no matter the change in price, the quantity demanded will remain constant. This translates to an elasticity coefficient of 0, as there is no percentage change in quantity demanded when there is a change in price.

Quiz 5: Price Elasticity of Demand and Supply

Price elasticity of demand measures:

Price elasticity of demand refers to the ratio of the:

If a decrease in the price of movie tickets increases the total revenue of movie theaters, this is evidence that demand is:

An increase in total revenue results from which of the following?

Using the midpoints formula, what would be price elasticity of demand for a gallbladder operation if the number of operations fell from 6,000 to 4,000 per week after its price increased from $6,000 to $10,000?

If the demand for cigarettes is highly inelastic, this indicates that:

If the percentage change in the quantity demanded of a good is less than the percentage change in price, price elasticity of demand is:

If the percentage change in the quantity demanded of a good is greater than the percentage change in price, price elasticity of demand is:

If a demand curve for a good were completely vertical, it would be considered:

Along the elastic range of a demand curve, a price change causes:

Suppose the president of a college argues that a 25 percent tuition increase will raise revenues for the college. It can be concluded that the president thinks that demand to attend this college is:

The president of Tucker Motors says, "Lowering the price won't sell a single additional Tucker car." The president believes that the price elasticity of demand is:

Suppose you are the manager of a local water company, and you are instructed to get consumers to reduce their water consumption by 10 percent. If the price elasticity of demand for water is 0.25, by how much would you have to raise the price of water?

Suppose that Starbucks reduces the price of its premium coffee from $2.20 to $1.80 per cup, and as a result, the quantity sold per day increased from 350 to 450. Over this price range, the price elasticity of demand for Starbucks coffee is:

Suppose an increase in symphony tickets prices reduces the total revenue. This is evidence that demand is:

If the price elasticity of demand is computed for two products, and product A measures .79, and product B measures 1.6, then:

A local doughnut shop reduced the price of its doughnuts from $4 per dozen to $3.50 per dozen, and as a result, the daily sales increased from 300 to 400 dozen. This indicates that the price elasticity of demand for the doughnuts was:

Suppose that a jewelry store found that when it increased prices by 10 percent, sales revenue increased by 3 percent. Which of the following is true about the price elasticity of demand for the store's goods?

The price elasticity of demand for a vertical demand curve is:

A perfectly inelastic demand curve has an elasticity coefficient of: