Elasticity practice with answers PDF

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Elasticity practice with answers...

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Elasticity Graphs Use the graph below to answer questions 1 &2

1. Which of the demand curves shown in this graph is perfectly inelastic? A. D1 B. D2 C. D3 D. D4 E. D5 2. Which of the demand curves shown in this graph is perfectly elastic? A. D1 B. D2 C. D3 D. D4 E. D5

3. If the price elasticity of demand for point 2 equals 1, what must also be true? A. The value of price elasticity at point 1 is less than 1 B. Point 3 also has a price elasticity of demand equal to 1 C. The value of price elasticity at point 3 is inelastic D. Point 3 is perfectly inelastic E. Point 1 is perfectly inelastic

Price Elasticity of Demand Questions 4. Gas prices rose by 12%, percent following a hurricane in the Gulf of Mexico. As a result, the amount of gas purchased in the week fell by 3%, percent following the price increase. What is the price elasticity of demand for gas in the week following the price increase? A. B. C. D. E.

0.25 -0.75 4 2.5 0.5

Reason: A price elasticity of demand of 0.25 indicates that for every 1% increase in price, the quantity demanded of gas decreases 0.25%. Remember: the convention in economics is to take the absolute value of the price elasticity of demand, so this will always be a positive value. The price elasticity of demand is calculated with this formula: PED= %change in quantity demanded / %change in price

5. The price elasticity of demand for a brand of breakfast cereal is 5. 5. Based on this elasticity, what will be the percentage change in the quantity of breakfast cereal bought as a result of a 5%, percent decrease in the cereal's price? A. B. C. D. E.

-25% +25% -1% +1% 5%

Reason: The5%,per centdecr easei npr i cewi l l causequant i t ydemandedt oi ncr easeby5 t i mesmor et hant he changei npr i ce( si ncet heel ast i c i t ycoeffic i enti s-5) .Thi smeansquant i t ydemandedi ncr easesby25% Thet abl ebel owc ont ai nst hedemands chedul ef orgr apes .

6.Whati st hepr i ceel ast i ci t yofdemandf orgr apeswhent hepr i cei ncr easesf r om $0. 50t o$1. 00? A.5 B.1 C.2 D.0. 25 E. 0. 2

Other Types of Elasticity Questions 7. When the price of pickles increased 20%, percent, the quantity supplied of pickles increased 80%, percent. What is the price elasticity of supply and how is that value interpreted? A. B. C. D. E.

4; elastic 4; inelastic 0.25; inelastic 0.25; normal good 6; elastic

Reason: The price elasticity of supply is the percentage change in quantity supplied divided by the percentage change in price. Any value greater than 1 is elastic. 8. When Eric's income was $500, per week he bought 10 fish tacos per week, but when his income increased to $600, per week he started buying 15 fish tacos per week. What is Eric's income elasticity of demand for fish tacos? A. B. C. D. E.

2 0.1 4 .4 2.5

Reason: Math 9. Farmers can easily grow raspberries or strawberries in the same soil using the same inputs and achieve the same output per acre in pounds. All else equal, what is the value of the relative price elasticity of supply of raspberries over two days or two years? A. B. C. D. E.

relatively inelastic in two days; relatively elastic in two years relatively more elastic in two days than in 2 year relatively more elastic in two years than in two days relatively elastic in two days; relatively inelastic in two years relatively inelastic in two days; relatively inelastic in two years

Reason: In the short run, farmers would not be able to respond to price, but in the long run they would be able to respond.

10. Burgin's income elasticity for gizmos is -5. What happens when Burgin's income increases by 10%, percent? A. B. C. D. E.

He will buy 5 more gizmos He will buy$50 worth of gizmos more He will buy 5%, percent fewer gizmos He will buy 50%, percent more gizmos He will buy 50%, percent fewer gizmos

Reason: An income elasticity of -5,indicates that for every 1% increase in income, Burgin buys 5%, percent fewer gizmos. Therefore, if his income increases by 10%, percent, he will buy 50%, percent fewer gizmos.

11. When Pam's income increased by 10%, percent, she bought 5% fewer containers of yogurt. What kind of good does Pam consider yogurt? A. B. C. D. E.

Complementary with peaches A normal necessity A normal luxury An inferior good Substitute for eggs

Reason: When Pam's income increases, her demand for this good decreased. The definition of an inferior good is a good that experiences a decrease in demand when consumer incomes increase.

12. If the cross-price elasticity of demand for good X with respect to good Y equals 0, how is that value interpreted? A. These goods are complements, and the quantity demanded of good X increases if the price of good Y decreases. B. These goods are necessities, and the quantity demanded of good X never changes even if the price of good X changes. C. These goods are normal goods, and a change in buyers income increases the quantity demanded of good X. D. These goods are substitutes, and the quantity demanded of good X decreases if the price of good Y decreases. E. These goods are unrelated, and a change in the price of good Y has no effect on the quantity of good X demanded. Reason: Acr os s pr i ceel as t i c i t yofdemandequal t oz er oi ndi cat est hatwhent hepr i c eofgoodYi ncr eas es ,t her ei s nochangei nquant i t ydemandedofgoodX.I not herwor ds ,changesi nt hepr i c eofgoodYhav enoeffectont he demandf orgoodX,andt hes egoodsmus tbeunr el at ed. 13. When the price of canned pickle juice increased 50%, percent, the quantity supplied of pickle juice increased 40%, percent. What is the price elasticity of supply, and how is that value interpreted? A. B. C. D. E.

0.8; inelastic 0.8; elastic .10; unit elastic .10; inelastic 1.25; elastic

Reason: A price elasticity of supply less than 1 indicates that supply is inelastic. Price elasticity of supply is calculated as: 14. The makers of a brand of potato chip know that the prices of other products might increase soon. The cross-price elasticity of potato chips and four other goods are given below.

Which product is the most complementary for chips?

A. B. C. D.

Product W Product X Product Y Product Z

Reason: The negative sign on this elasticity indicates that these two goods are complements, and it has the largest elasticity of the two complements in this list. 15. Mera is researching consumer reactions. She has determined that when the price of hand lotion increases 1%, percent, the quantity demanded of tissues increases 10%. What kind of elasticity is being measured, and what can Mera determine based on this information? A. B. C. D. E.

Price elasticity of demand; tissues are a necessity. Price elasticity of demand; lotion is a luxury. Cross-price elasticity of demand; these goods are substitutes. Cross-price elasticity of demand; these goods are unrelated. Income elasticity of demand; tissues are a normal good.

Reason: This is a cross-price elasticity of demand because it describes how the quantity demanded of one good changes in response to a change in the price of another good. This good would have cross-price elasticity equal to 10, which is a positive number, and positive cross-price elasticities indicate substitute goods.

Total Revenue Questions 16. If the price elasticity of demand for books is 5, what happens if a bookseller increases the price of books? A. There is no change to the bookseller’s total revenue. B. The bookseller’s total revenue decreases. C. Consumer spending on books increases. D. The bookseller’s total revenue increases. E. The price elasticity of demand will decrease.

17. If the price elasticity of demand for apples is 3, then what will be the impact on total revenue if price increases? A. Total revenue will increase B. Total revenue will not change C. Total revenue will fall to zero D. Total revenue will decrease E. Total revenue triples 18. According to the total revenue rule, what happens when you raise the price on a good with inelastic demand? A. Total revenue increases. B. Total revenue falls to zero. C. Consumer spending on the good stays the same D. Total revenue doesn’t change. E. Total revenue decreases. 19. When the price of jackfruit decreased 50%, percent, total revenues earned by jackfruit sellers decreased. What can be concluded based on this information? A. Thedemandf orj ac kf r ui ti spr i c ei nel as t i c . B.Thedemandf orj ac kf r ui ti sel ast i c. C.Thepr i c eel ast i c i t yofdemandf orj ackf r ui ti s5 D.Thepr i c eel ast i c i t yofdemandf orj ackf r ui ti s111. E. Thedemandf orj ackf r ui ti suni tel ast i c

20. Zikri wants to increase total revenue at his restaurant. The price elasticity of demand for several dishes that he serves are given in the table below.

What dish should Zikri increase the price of if he wants to increase total revenue? A. Nasi lemak B. Pulut C. Rendang D. Satay E. Ulam...