Econ BK 1 CH 5 Question Bank

Chapter 5 Price elasticity of demand and supply
Multiple Choice Questions
Question code: B1C05Q001 (new)

The demand elasticity of Good X is 1.5. After an increase in supply, the equilibrium
quantity rises by 30%. The equilibrium price would _________ by ________.
A. increase … 20%
B. decrease … 20%
C. increase … 45%
D. decrease … 45%
Question code: B1C05Q002

At a price of $100 per unit, the quantity demanded of Good X is 50 units per month.
When the price is lowered to $50 per unit, knowing that the price elasticity of demand
within this price range is greater than 1, the quantity demanded will
A. drop by more than 25 units per month.
B. drop by less than 25 units per month.
C. rise by more than 25 units per month.
D. rise by less than 25 units per month.

John consumes 5 units of bottled water per week. When the unit price of bottled water
increases from $100 to $200, the quantity demanded remains at 5 units per week.
John’s price elasticity of demand for bottled water is
A. equal to 0.
B. between 0 and 1.
C. equal to 1.
D. larger than 1.
NSS Exploring Economics 1 (2nd edition) 1 © Pearson Education Asia Limited 2014
Question Bank (Chapter 5)
Parker said, ‘If the price of chicken curry doubles, I will still consume the same
amount of it.’ Which of the following diagrams illustrates Parker’s demand for
chicken curry?
A. B.
P ($ / unit) P ($ / unit)
D
0 Q 0 Q
(units / period) (units / period)
C. D.
P ($ / unit) P ($ / unit)
D
D
0 Q 0 Q
(units / period) (units / period)
Answer: D

Yuna said, ‘I go ice skating five times a week. If the ticket price doubles, I will go
only four times a week.’
Yuna’s demand for ice skating is
A. perfectly inelastic.
B. inelastic.
C. unitarily elastic.
D. elastic.
Due to a good harvest of Boston lobsters (波士頓龍蝦), the quantity of Boston lobster
sold changes by 50% and the price changes by 30%. We can say that the __________
Boston lobsters is __________.
A. demand for … elastic
B. demand for … inelastic
C. supply of … elastic
D. supply of … inelastic

Suppose there is an increase in the supply of a good. The demand for the good is
__________ if _________ when its price decreases by 10%.
A. inelastic … the consumers’ expenditure increases by 10%
B. inelastic … its quantity demanded decreases by less than 10%
C. elastic … its quantity demanded increases by more than 10%
D. unitarily elastic … the producers’ total revenue decreases by 10%
Answer: C

The table below shows Moomin’s demand schedule for milk.
Price ($) 2 3 4
Quantity demanded (units) 240 160 120
As shown in the table above, the price elasticity of Moomin’s demand for milk is
__________.
A. perfectly inelastic
B. inelastic
C. unitarily elastic
D. elastic
Good X and Good Y are in joint supply. When the price of Good X increases, the
price and quantity transacted of Good Y changes by 20% and 30%, respectively. We
can say that
A. the supply of Good Y is elastic.
B. the supply of Good Y is inelastic.
C. the demand for Good Y is elastic.
D. the demand for Good Y is inelastic.

Tom loves mangoes. He eats one mango every day no matter what the price is. His
demand for mangoes is
B. inelastic.
D. elastic.

A hawker finds that when he increases his price for fish balls, his revenue decreases.
The demand for his fish balls is therefore
B. inelastic.
D. elastic.
Study the following diagram.
Price ($)
()($)
10
D
Quantity
0 4 8
When the price decreases from $10 to $6, the price elasticity of demand for the good
at this price range is
B. inelastic.
D. elastic.

The price of fruit in Taiwan has increased sharply after a typhoon. Take water melon
as an example: its unit price has increased from $10 to $50. If its quantity demanded
has decreased by 30%, which of the following statements is correct?
A. The demand for water melons is elastic.
B. The demand for water melons is inelastic.
C. The supply of water melons is elastic.
D. The supply of water melons is inelastic.
Study the following diagram.
Price ($)
10
D
Quantity
0 5 10
When the price increases from $6 to $10, the demand for the good at this price range
is
B. inelastic.
D. elastic.
Study the following diagram about the demand curve of a good.
Price ($)
P2
M
P1
D
0 Quantity
Point M is the mid-point of the demand curve. Which of the following statements are
correct?
(1) At P1, the demand is unitarily elastic.
(2) Between 0 and P1, the demand is inelastic.
(3) Between P1 and P2, the percentage increase in the price will be greater than the
percentage decrease in quantity demanded.
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)
The following diagram shows the demand curve for tickets to a concert:
Price ($)
60 B
50 A
Quantity
0 12 20
0 0
Which of the following descriptions about the above diagram are correct?
(1) The price elasticity of demand between A and B is greater than 1.
(2) The price elasticity of demand between A and B is smaller than 1.
(3) The demand for the concert tickets has decreased.
(4) The demand for the concert tickets is consistent with the law of demand.
A. (1) and (3) only
B. (1) and (4) only
C. (2) and (4) only
D. (2), (3) and (4) only

June said, ‘I love eating chicken. Although the price of chicken has increased by 20%,
I’ll buy as many chickens as before.’ June’s demand for chicken is
B. inelastic.
D. perfectly elastic.
Keung says, ‘I don’t like drinking red wine. I won’t drink red wine even when its
price drops to zero.’
Which of the following statements is correct?
A. Keung’s demand for red wine is perfectly elastic.
B. Keung’s demand for red wine is perfectly inelastic.
C. Keung’s demand for red wine is inelastic.
D. None of the above

Carrie said, ‘At the current price of $4 per can, I drink two cans of Coca-Cola every
week. If the price of Coca-Cola increases from $4 to $6 per can, I will drink one can
every two weeks.’ Which of the following statements concerning Carrie’s demand for
Coca-Cola is correct?
A. Carrie’s demand for Coca-Cola is elastic.
B. Carrie’s demand for Coca-Cola is inelastic.
C. Carrie’s demand for Coca-Cola is unitarily elastic.
D. Carrie’s demand for Coca-Cola is perfectly inelastic.

Miss Law says, ‘I will buy the same amount of cosmetics no matter how their price
changes.’ Which of the following is correct?
A. Her demand for cosmetics will never change.
B. For her, cosmetics are a luxury.
C. Her demand for cosmetics is perfectly elastic.
D. Her behaviour violates the law of demand.
Which of the following about the elasticity of demand is correct?
A. It measures the responsiveness of the demand for a good to a change in its price.
B. When the percentage change in price is greater than the percentage change in
quantity demanded, the elasticity of demand is greater than one.
C. When a change in price is not accompanied by a change in quantity demanded, the
demand is perfectly elastic.

When we say that Hong Kong people’s demand for live chickens is inelastic, we mean
that
A. if the price of live chickens increases, the quantity demanded will not drop.
B. if the price of live chickens increases, the quantity demanded will drop less than
proportionately.
C. there are no substitutes for live chickens.
D. Hong Kong people must have a habit of consuming live chicken.
Question code: B1C05Q023 ***

Suppose a government economist estimates that the price elasticity of demand for
pork in Hong Kong is -2.5. This implies that
A. the demand for pork in Hong Kong is inelastic.
B. when the price of pork increases by 5%, the consumption of pork decreases by
12.5%.
C. there are very few substitutes for pork.
D. The demand for pork in Hong Kong is not consistent with the law of demand.
The following shows Gigi’s demand curve for FANCL products:
Unit price ($)
200
100
D
0 Quantity
10 15 (units)
Gigi’s demand elasticity for FANCL products in the above price range is
A. greater than 1.
B. smaller than 1 but greater than 0.
C. equal to 1.
D. uncertain.

* Study the following diagram:
Unit price ($)
A
X
100 B
D
0 Quantity (units)
10 20
If segment AB is above the mid-point of the demand curve, X must be

A. greater than 200.
B. greater than 300.
C. smaller than 200.
D. smaller than 300.

Due to the increase in production costs, the unit price of Good X increases from $30
to $40 and its quantity demanded changes by 20%. Which of the following statements
is correct?
A. The demand elasticity for Good X is 0.5.
B. The total revenue of Good X will increase. Trap: demand elasticity
C. The change in the total expenditure of Good X is uncertain <1 , need cal
D. The supply elasticity of Good X is 0.7. exact value

Calvin loves drinking coffee. When the price of coffee increases, the amount he
spends on coffee increases by the same proportion. We can conclude that his demand
for coffee is
A. elastic.
B. inelastic.
D. perfectly inelastic.

Susan loves drinking Coca-Cola She spends $500 on Coca-Cola every month. We can
conclude that her demand for Coca Cola is
A. elastic.
B. inelastic.
Refer to the following diagram showing the demand curve of a good.
Price ($)
P1
5
M
D
0 Quantity
8
Given that Point M is the mid-point of the demand curve. If the price increases from
$5 to P1, the total revenue
A. will be smaller than $40.
B. will be greater than $40.
C. will be equal to $40.
D. may increase, decrease or remain unchanged.

When the price elasticity of demand of a good is equal to one, this means that
A. a change in its price will not affect its quantity demanded.
B. a change in its price will not affect the total revenue.
C. a change in the price of its substitute will not affect the demand for the good.
D. a change in the income of consumers does not affect their total expenditure.
Refer to the following information about Good X.
Price ($) 20 30 40
Total sales revenue ($) 1,000 1,200 1,400
Within the above price range, the price elasticity of demand for Good X is
A. equal to zero.
B. equal to one.
C. greater than one.
D. between zero and one.

Mr Wong travels to Taipei once every two weeks on China Airlines. Suppose China
Airlines offers a 50% discount to frequent flyers during summer vacation. Mr Wong
receives the discount and spends 50% less on air tickets. His demand for air tickets is
A. elastic.
B. inelastic.

Suppose Jason’s demand for apples is unitarily elastic. When the price of apples
decreases,
A. his quantity demanded of apples decreases by the same percentage as the price.
B. he spends the same amount of money on apples.
C. his total expenditure on apples decreases by the same percentage as the price.
Due to the development of new production technology, the price of a good decreases
by 10%. Consumers’ total expenditure on the good also decreases by 10%. Which of
the following statements is correct?
A. The law of demand still holds in this case.
B. The demand for the good is unitarily elastic.
C. The price elasticity of demand for the good is equal to zero.
D. The price elasticity of supply of the good is equal to infinity.
Question code: B1C05Q035(new)

Along the demand curve of a good, when the price of the good increases from $4 to
$5, producers’ total revenue increases from $2,000 to $2,500.
Between $4 and $5, the demand elasticity of the good is
A. equal to zero.
B. between zero and one.
C. equal to one.
D. larger than one.

If the demand for vegetables is inelastic and the price of fertiliser (肥料) increases,
which of the following statements are correct?
(1) The supply of vegetables decreases.
(2) The quantity transacted of vegetables decreases.
(3) The total revenue from vegetables increases.
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)
The price of tutorial services has increased, and Kelly’s expenditure on tutorial
services has increased as well. Hence, her price elasticity of demand for tutorial
services is __________.
A. inelastic
B. elastic
D. perfectly elastic
Answer: A

Although the price of grapefruit has increased, Joey’s expenditure on grapefruit
remains unchanged. Her price elasticity of demand for grapefruit is __________.
A. equal to 0
B. between 0 and 1
C. equal to 1
D. larger than 1
Answer: C

The table below shows the ticket prices at a theme park and its sales revenue.
Price ($) 20 30 40
Sales revenue ($) 20,000 30,000 40,000
As shown in the table above, the price elasticity of demand to visit the theme park is
__________.
A. perfectly inelastic
B. inelastic
D. elastic
Answer: A
When the amount of vegetables imported from the mainland increases, the total
revenue of local vegetables will
A. increase.
B. decrease.
C. remain unchanged.
D. increase, decrease or remain unchanged, depending on the price elasticity of
demand.
Answer: B

When the wages of nurses in private hospital increase, the total revenue for private
hospitals services will
A. increase.
B. decrease.
D. increase, decrease or remain unchanged, depending on the price elasticity of
demand.
Answer: D

If the demand for magazines is elastic, consumers’ total expenditure will increase
when the supply increases. This is because
A. both price and quantity transacted decrease.
B. the decrease in price is smaller than the increase in quantity transacted.
C. the percentage increase in price is larger than the percentage decrease in quantity
transacted.
D. the decrease in expenditure from a lower price is smaller than the increase in
expenditure from a higher quantity transacted.
Answer: D
Suppose the demand for apples is elastic. Apple growers’ total revenue will
___________ when the demand increases. This is because ________________.
A. decrease … the increase in demand will cause the price to increase
B. decrease … the percentage change in price will be greater than the percentage
change in quantity transacted
C. increase … both the price and the quantity transacted will increase
D. increase … the percentage change in price will be smaller than the percentage
change in quantity transacted
Answer: C

Suppose there is a good harvest for big cabbage in the mainland. If the demand for big
cabbage is __________, the incomes for farmers in the mainland will ___________.
(1) elastic … decrease
(2) inelastic … decrease
(3) unitarily elastic … remain unchanged
(4) perfectly inelastic … remain unchanged
A. (1) and (3) only
B. (1) and (4) only
C. (2) and (3) only
D. (2) and (4) only
Answer: C

Refer to the following demand schedule for Good X.
Price of Good X ($) 2 3 4

Quantity demanded of Good X (units) 18 12 9
Which of the following statements about Good X is correct?

A. The demand is perfectly elastic.
B. The price elasticity of demand is less than 1.
C. The total expenditure of consumers remains unchanged regardless of price
changes.
D. Sellers can increase total revenue by increasing the price.
Answer: C

Study the following table.
Price of grapefruit ($) 3 6 9

Quantity demanded of grapefruit (units) A 15 B
If the demand for grapefruit is unitarily elastic, the values of A and B will be _______
and _______, respectively.
A. 20 … 10
B. 30 … 10
C. 40 … 15
D. Cannot be determined
Answer: B

Suppose Good Y’s price elasticity of demand is less than 1. An increase in the
quantity demanded of the good by 10% implies that
A. the price of the good must have increased by more than 10%.
B. the total revenue for the producer of the good necessarily increases.
C. the good takes up a very small proportion of the total expenditure of a consumer.
D. consumers’ total expenditure on the good decreases.
Answer: D

Suppose both the equilibrium price and equilibrium quantity of cherries increase by
10%. Which of the following conclusions can be drawn?
A. The demand for cherries is unitarily elastic.
B. The total revenue of cherry producers does not necessarily increase.
C. The supply of cherries has increased.
D. The demand for cherries has increased.
Answer: D
If the demand for Good Y is unitarily elastic and the price decreases by 20%,
A. the total expenditure may increase.
B. the quantity demanded must decrease by 20%.
C. the quantity transacted must remain unchanged.
D. the total expenditure must remain unchanged.
Answer: D

Suppose the Customs Department closes a number of shops which sold fake luxury
handbags. Then, the _________ of fake luxury handbags must decrease but the
_________________ of fake luxury handbags may increase.
A. quantity transacted … total income of producers
B. market price … total income of producers
C. total expenditure … total income of producers
D. market price … quantity transacted
Answer: A

Suppose the government lightens the punishment for selling counterfeit products (冒
牌貨). ___________ counterfeit products will decrease, while ________________
may decrease.
A. The supply of … the total expenditure on counterfeit products
B. The quantity transacted of … the quantity transacted of genuine products (正版貨)
C. Total expenditure on … the market price of counterfeit products
D. The market price of … the total income of sellers of counterfeit products
Answer: D
Suppose the government increases the water charge to urge people to save water.
Which of the following statements is correct?
A. The government’s revenue from water supply will increase if the demand for
drinking water is inelastic.
B. The policy will be most effective when the demand for drinking water is unitarily
elastic.
C. The quantity of water supplied will increase if the demand for drinking water is
elastic.
D. The policy will be more effective when the demand for drinking water is inelastic.
Answer: A

When the wage rate of workers who produce televisions decreases, which of the
following are correct?
(1) Producers’ revenue will increase if the demand for televisions is elastic.
(2) The quantity transacted of televisions will decrease if the demand for
televisions is inelastic.
(3) The total wages of workers who produce televisions will decrease if the
demand for these workers is inelastic.
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)
Answer: B
When both the printing cost and the number of school-age children decrease, which of
the following statements is/are correct?
(1) Publishers’ total revenue must increase if the demand for textbooks is elastic.
(2) Publishers’ total revenue must decrease if the demand for textbooks is unitarily
elastic.
(3) Publishers’ total revenue must increase as a result of a reduction in the printing
cost of textbooks.
A. (2) only
B. (1) and (3) only
C. (2) and (3) only
Answer: D

The following table shows the demand and supply schedules for Good X:
Unit price ($) 3 4 5 6 7 8 9

Quantity demanded (units) 45 40 35 30 25 20 15
Quantity supplied (units) 30 30 30 30 30 30 30
If quantity supplied increases by 10 units at each price, the producer’s total income
will _____________. This is because the demand curve is ___________ at the
relevant portion.
A. increase … elastic
B. decrease … inelastic
C. decrease … perfectly inelastic
D. remain unchanged … perfectly inelastic
Answer: B
* Since many people have been on the waiting list for public housing units for years,
the Housing Authority has decided to increase the supply of public housing units.
However, it is expected that the increased supply will still be insufficient to satisfy the
market demand. As a result of the above policy, total rental income for the Housing
Authority will
A. increase.
B. decrease.
D. increase, decrease or remain unchanged, depending on the elasticity of demand.
Answer: A

* Which of the following shows an elastic demand for bananas?
A. The quantity of bananas sold decreases when consumers’ income increases.
B. The quantity of bananas sold decreases when their price increases.
C. When the price of bananas increase, the quantity decreases by a smaller
percentage than the price.
D. The total revenue for banana producers increases when there is a good harvest.
Answer: D

* A fruit lover spends all of his income buying fruit every month. Which of the
following is correct?
A. Fruit is an inferior good to him because his demand for fruit is independent of his
income.
B. His demand for fruit is perfectly inelastic because he always spends the same
amount on fruit.
C. His demand for fruit is unitarily elastic because his expenditure on fruit does not
change with the price.
D. His demand for fruit is perfectly elastic because his quantity demanded is always
the same regardless of the price.
Answer: C
An economics professor said, ‘The increase in ticket prices for Hong Kong
Disneyland will not affect the total revenue of Ocean Park.’ His claim implies that
A. the demand for the services of Ocean Park is perfectly inelastic.
B. the demand for the services of Ocean park is perfectly elastic.
C. the demand for the services of Hong Kong Disneyland is perfectly inelastic.
Answer: D

* Ming says, ‘Producers’ total revenue can still decrease when the price decreases
even if the demand is elastic.’
Which of the following is correct?
A. His claim is correct if the decrease in price is caused by a decrease in demand.
B. His claim is correct if the decrease in price is caused by an increase in supply.
C. His claim is wrong because the decrease in price causes an increase in total
revenue if the demand is elastic.
D. His claim is wrong because the decrease in price must cause an increase in total
revenue.
Answer: A

Study the following table about a watch market.
Price ($) 100 110 120 130 140

Quantity demanded (units) 80 80 80 80 80
According to the above table,

A. when the supply of watches increases, consumers’ total expenditure will increase.
B. when the supply of watches increases, producers’ total revenue may increase or
decrease, depending on the price elasticity of demand.
C. when the supply of watches increases, quantity transacted will remain unchanged.
D. the demand for watches cannot increase.
Answer: C
Suppose Seiko finds that the price elasticity of demand for its watches is -1.2. Later, it
raises the price of its watches by 20%.It can be expected that
A. the quantity demanded for Seiko’s watches will decrease by 24%.
B. Seiko’s sales revenue will increase.
C. Seiko will lose all of its customers.
D. A and B
Answer: A
Explanation:
% change in quantity demanded

 Ed =
% change in price
 % change in quantity demanded = Ed × % change in price

 % change in quantity demanded = -1.2 × 20% = -24%
Option A is the answer.
 If the elasticity of demand is larger than 1, the percentage drop in quantity is larger
than the percentage rise in price and thus total revenue decreases. Option B is
incorrect.
 Only when the demand is perfectly elastic will all of Seiko’s customers abandon
the brand in the event of a price increase. Therefore, Option C is incorrect.

Study the following table which shows Mary’s expenditure pattern:
Rental of comic Total expenditure on

books ($) comic books ($)
2 500
4 500
6 500
8 500
Which of the following about Mary’s demand for comic books is correct?
A. Her demand is perfectly inelastic.
B. Her demand curve is a rectangular hyperbola.
C. Her quantity demanded does not change with price.
D. All of the above
Answer: B
Explanation:
 Since her total expenditure does not change with the price, her demand must be
unitarily elastic.
 A unitarily elastic demand curve is a rectangular hyperbola. Option B is the
answer.
 For unitarily elastic demand, the total expenditure does not change with the price.
Therefore, the percentage change in quantity demanded must be equal but in the
opposite direction to the percentage change in price. Option C is incorrect.

Suppose Towngas raises its service charges. Which of the following will decrease
after the price rise?
A. Total revenue for towngas
B. Consumption of towngas
C. Total expenditure on towngas
Answer: B
Explanation:
 When Towngas raises charges for towngas, the quantity demanded (i.e.,
consumption) of towngas decreases. Option B is the answer.
 However, the change in total expenditure or total revenue of towngas depends on
the price elasticity of demand.

Study the following table which shows Alex’s weekly expenditure on food at
Fairwood:
Price ($) 20 25 30 35
Expenditure ($) 300 280 260 240
What is his elasticity of demand for food at Fairwood?

A. Equal to infinity
B. Greater than one and less than infinity
C. Equal to one
D. Greater than zero and less than one
Answer: B
Explanation:
When the price of food at Fairwood increases, his total expenditure decreases. This
implies that the percentage drop in quantity is larger than the percentage rise in price.
Hence, his demand for food at Fairwood is elastic.

Suppose when Genki Sushi raises the unit price of its sushi from $10 to $12, its
quantity transacted decreases by 50%. Which of the following statements about this is
correct?
A. The percentage decrease in quantity transacted is smaller than the percentage
increase in price.
B. The seller can increase total revenue by increasing the price.
C. The elasticity of demand for its sushi is -2.78.
D. A fall in price will lead to a less than proportionate increase in quantity transacted.
Answer: C
Explanation:
$12  $10
 The percentage change in price is 18% (   100% ). Option A is
($10  $12) / 2
incorrect.
 Since the percentage change in quantity transacted is -50%, the elasticity of
demand is -50% / 18% = -2.78. Option C is the answer.
 When demand is elastic, a price change will lead to a more than proportionate
change in quantity demanded. Option D is incorrect.
 When demand is elastic, total revenue changes inversely with price. Therefore, the
seller cannot increase total revenue by increasing the price. Option B is incorrect.

Which of the following events will most likely reduce the demand elasticity of corn?
A. A large amount of corn is used to produce fuels.
B. Many staple crops (主主) have become extinct (主主).
C. The price of corn soars (主主).
D. Corn can be stored for a longer period of time as it has been genetically modified
(主主主主).
Answer: B
The price elasticity of demand of soft drugs tends to be __________ because
__________.
A. lower … they are addictive
B. lower … they take a large proportion of abusers’ income
C. higher … they are necessities for some patients
D. higher … they have no close substitutes
Answer: A
Question code: B1C05Q069(new)

In Country A, the demand elasticity of newspapers is low. Which of the following can
explain this phenomenon?
(1) There are many online media websites nowadays.
(2) Readers spend a smaller share of their income on newspapers.
(3) Most readers read newspapers every day out of habit.
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)
Answer: C

It is more likely that the demand for veterinary services (主主主主) is less elastic than the
demand for pet toys. Which of the following is the possible reason for this?
A. The expenditure on veterinary services takes up a smaller proportion of pet
owners’ income than the expenditure on pet toys.
B. Veterinary services are more of a necessity than pet toys.
C. Veterinary services are more expensive than pet toys.
Answer: B
The demand for cigars (主主) is usually inelastic because
A. smokers can easily substitute cigarettes for cigars.
B. cigars are a luxury.
C. smoking cigars is a habit.
D. the price of cigars is usually very high.
Answer: C

An economics teacher said that the price elasticity of demand for Taylor’s albums is
almost zero for his fans. This implies that
A. there are few substitutes for Taylor’s albums for her fans.
B. a reduction in the supply of Taylor’s albums will lead to only a small increase in
price.
C. the government should impose a tax on the sale of Taylor’s albums.
D. Taylor’s fans are so wealthy that their expenditure on her albums takes up a small
proportion of their total expenditure.
Answer: A

The demand for clothing made by G2000 is more elastic than that of clothing as a
whole because
A. there are no close substitutes for G2000 clothing.
B. the price of G2000 clothing is lower than the average price of clothing.
C. the quality of clothing made by G2000 is very high.
D. it is difficult for consumers to find other substitutes for clothing.
Answer: D
Keung says, ‘The demand for handbags is inelastic.’
Fun says, ‘The demand for handbags is elastic.’
Which of the following CANNOT explain why they have different opinions?
A. Keung is referring to a particular brand but Fun is referring to handbags in
general.
B. Fun is referring to a particular brand but Keung is referring to handbags in
general.
C. They are referring to handbags with different durability.
D. They are referring to handbags in different price ranges.
Answer: A

The demand for drinking water is more inelastic than that of diamonds. This is
because
A. there are more substitutes for water.
B. water has more uses.
C. water is a necessity.
D. diamonds are scarcer.
Answer: C

Which of the following will increase the price elasticity of demand for taxi services?
A. Taxi fares are lowered.
B. Bus fares are raised.
C. The price of private vehicles increases sharply.
D. The number of bus routes increases.
Answer: D
Which of the following factors CANNOT explain why the demand for sugar tends to
be inelastic?
A. Degree of necessity
B. Consumption habit
C. Proportion of expenditure to income
D. All of the above can explain this.
Answer: D
Explanation:
The fact that sugar is a daily necessity, that people have developed a habit of
consuming it and that expenditure on sugar takes up only a small proportion of
income may explain why sugar tends to have an inelastic demand.

Which of the following lowers the elasticity of demand for tickets to National
Basketball Association (NBA) games?
A. Fans can now watch NBA games broadcast online.
B. The income of US citizens increases rapidly.
C. Some Americans lose interest in basketball and become soccer fans.
Answer: B
Explanation:
 When the income of people in the US increases, the expenditure on tickets for
NBA games takes a smaller proportion of their income. Therefore, the elasticity of
demand will decrease. Option B is the answer.
 In Option A, the elasticity of demand will increase rather than decrease because
fans have more ways of watching the games.
 Option C will lead to a decrease in the demand for tickets to NBA games.
Which of the following will lower the elasticity of demand for the Peak Tram?
A. There is an increase in bus fares on buses that travel the same route.
B. There is an increase in the tram fare.
C. The government permits more minibuses to run on the same route.
D. People become nostalgic (主主主主主主) and prefer travelling to the Peak by tram.
Answer: D
Explanation:
 When people have developed the habit of travelling to the Peak by tram, the
elasticity of demand for the Peak Tram decreases. Option D is the answer.
 In Option A, the demand for the Peak Tram increases as the Peak Tram and buses
operating on the same route are substitutes.
 In Options B and C, the elasticity of demand will increase rather than decrease.

The price elasticity of demand for textbooks is _________ than that for comic books
as ____________________.
A. smaller … textbooks are more necessary
B. smaller … students like reading comic books
C. larger … textbooks are more necessary
D. smaller … comic books are not as costly as textbooks
Answer: A
Explanation:
Students’ demand for textbooks is more inelastic than that for comic books because
students must buy textbooks for school. This requirement increases the degree of
necessity and lowers the elasticity of demand. Option A is the answer.

The supply elasticity of Good X is 0.8. After an increase in demand, the equilibrium
quantity increased by 10%. This implies the equilibrium price
A. increased by 8%.
B. increased by 12.5%.
C. decreased by 8%.
D. decreased by 12.5%.
Answer: B
Suppose a government economist estimates the price elasticity of supply of live
chickens in Hong Kong to be 0.5. Later, when there is a decrease in demand for live
chickens in Hong Kong, the quantity transacted decreases by 10%. What is the
percentage change in equilibrium price?
A. +5%
B. -5%
C. +20%
D. -20%
Answer: D
Explanation:
% change in quantity supplied
ES =
% change in price
% change in quantity supplied

 % change in price =
ES
 % change in price = -10% / 0.5 = -20%

When summer comes, the price and quantity sold of ice cream change by 30% and
50%, respectively. Which of the following statements is correct?
A. The demand for ice cream is inelastic.
B. The demand for ice cream is elastic.
C. The supply of ice cream is inelastic.
D. The supply of ice cream is elastic.
Answer: D

Due to the widespread use of smartphones, the price of traditional mobile phones has
fallen by 50% and the quantity sold has changed by 90%. This would indicate that
within that price range, the __________ traditional mobile phones is __________.
A. supply of … inelastic
B. supply of … elastic
C. demand for …inelastic
D. demand for …elastic
Answer: B
Good X and Good Y are complements. When the price of Good X decreases, the price
and quantity transacted of Good Y change by 5% and 10%, respectively. Which of the
(1) The demand for Good Y increases.
(2) The supply of Good Y is inelastic.
(3) The total expenditure on Good Y increases.
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)
Answer: B

If supply is elastic, the percentage increase in price will be ___________ than the
percentage ____________ in quantity supplied.
A. higher … increase
B. lower … increase
C. higher … decrease
D. lower … decrease
Answer: B

When price increases by 20%, quantity supplied increases by 20%.
A. This illustrates the law of supply.
B. This indicates that the supply is elastic.
C. This indicates that the demand is unitarily elastic.
D. This indicates that the supply is perfectly elastic.
Answer: A
Suppose quantity supplied increases by 5% when the price of dehumidifiers increases
by 15%. This indicates that dehumidifiers’
A. demand is elastic.
B. demand is inelastic.
C. supply is elastic.
D. supply is inelastic.
Answer: D

* In 2010, a music CD featuring Michael Jackson, the late King of Pop, was released.
The album included songs that had not been previously released. The supply elasticity
of this album is
A. equal to zero.
B. greater than zero and less than one.
C. equal to one.
D. uncertain.
Answer: D
Explanation:
 Although this is an album by a singer who had died, the number of CDs can still
be increased.
 The elasticity of supply depends on factors like production flexibility, factor
mobility, reserve capacity and adjustment time. Therefore, we are not sure whether
the supply is inelastic or not. Option D is the answer.

In which of the following situations will quantity transacted remain unchanged when
price increases?
(1) Demand is perfectly inelastic.
(2) Demand is perfectly elastic.
(3) Supply is perfectly elastic.
(4) Supply is perfectly inelastic.
A. (1) only
B (1) and (4) only
C. (2) and (3) only
D. (3) and (4) only
Answer: B
In which of the following situations will producers’ total revenue increase when
demand increases?
(3) Supply is elastic.
(4) Supply is inelastic.
A. (1) and (2) only
B (2) and (3) only
C. (3) and (4) only
D. (1), (2), (3) and (4)
Answer: D

Under which of the following conditions will equilibrium price remain unchanged in
the event of an increase in demand?
(3) Demand is perfectly inelastic.
(4) Demand is unitarily elastic.
A. (1) only
B. (1) and (3) only
C. (2) and (3) only
D. (1), (3) and (4) only
Answer: A
Study the following table.
Price of bananas ($) 1 2 3 4 5

Quantity transacted of bananas (units) 100 100 100 100 100
Which of the following can best describe the above table?

A. The supply of bananas is unitarily elastic.
B. The supply of bananas is perfectly elastic.
C. The demand for bananas is unitarily elastic.
D. The demand for bananas is perfectly inelastic.
Answer: D

A government official said, “The good harvest of wheat this year will increase
farmers’ total income.” His claim is
A. right if the demand for wheat is elastic.
B. right if the demand for wheat is inelastic.
C. wrong if the supply of wheat is elastic.
D. wrong if the supply of wheat is inelastic.
Answer: A

* Good X and Good Y are close substitutes. When the price of Good Y decreases, the
equilibrium price and quantity transacted of Good X change by 10% and 2%,
respectively. Which of the following conclusions can be reached?
(1) The supply of Good X is inelastic.
(2) Total revenue of Good Y increases.
(3) Total revenue of Good X decreases.
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)
Answer: B
When people become more concerned with health, the total revenue of health food
producers will increase. Which of the following is the possible reason for this?
A. Health food is a normal good.
B. The demand for health food is elastic.
C. The supply of health food is elastic.
Answer: D

Suppose both air ticket prices to Britain and the total expenditure on them fall sharply
after terrorist attacks. This is because
A. the supply of air tickets to Britain is elastic.
B. the supply of air tickets to Britain is inelastic.
C. passengers’ demand for air tickets to Britain is elastic.
D. passengers’ demand for air tickets to Britain has decreased.
Answer: D

After launching a promotional slogan of ‘We can help students get 5**s!’, a tutorial
school finds that its total revenue has increased by 50%. Which of the following is
correct?
A. Its supply is elastic.
B. Its supply is inelastic.
C. Its demand has increased.
D. Its demand is inelastic.
Answer: C

Suppose the number of tourists visiting Hong Kong increases sharply. Which of the
A. Hotels’ total revenue will increase as their demand increases.
B. Hotels’ total revenue will decrease if their supply is inelastic.
C. Hotels’ total revenue will decrease if their supply is elastic.
D. Hotels’ elasticity of supply will increase.
Answer: A
Which of the following statements is INCORRECT?
A. An increase in demand will lead to an increase in total revenue, regardless of the
elasticity of supply.
B. An increase in demand will lead to an increase in total revenue, regardless of the
elasticity of demand.
C. If a demand curve is a straight line, we can find a point on it with unitarily elastic
demand.
D. Producers’ total revenue cannot be increased if the demand is unitarily elastic.
Answer: D

* Because of snowstorms, the Longjing tea (主主主) crop has failed. However, the total
income for tea farmers in the mainland still remains unchanged. Which of the
following can be the possible reason(s)?
(1) The demand for Longjing is perfectly inelastic.
(2) The supply of Longjing is unitarily elastic.
(3) The percentage increase in the quantity transacted of Longjing is equal to the
percentage decrease in the price of Longjing.
A. (2) only
B. (1) and (3) only
C. (2) and (3) only
Answer: D

Suppose after a huge deposit of diamonds is found, the total revenue from diamonds
decreases. Which of the following about the diamond industry is correct?
A. The quantity demanded of diamonds decreases.
B. The price of diamonds increases.
C. The supply of diamonds is inelastic.
D. The demand for diamonds is inelastic.
Answer: D
Explanation:
 The discovery of a huge deposit of diamonds will increase the supply of
diamonds. When the supply increases, the price decreases. Moreover, quantity
transacted, which is equal to quantity demanded and quantity supplied at
equilibrium, increases. Options A and B are incorrect.
 Whether the total revenue will decrease or not depends on the elasticity of
demand. If the demand is inelastic, the percentage rise in quantity is smaller than
the percentage drop in price. As a result, total revenue will decrease. Option D is
the answer.

After a famous singer appears in an advertisement for a slimming treatment, total
revenue from the treatment increases. Which of the following can explain this?
A. The demand for the treatment is inelastic.
B. The supply of the treatment is inelastic.
C. The demand for the treatment has increased.
D. The supply of the treatment has increased.
Answer: C
Explanation:
When a famous singer appears in the advertisement, demand for the treatment
increases. Both the treatment’s price and quantity transacted increase. Total revenue
also increases, but this has nothing to do with the elasticity of demand or supply.

The supply of legal services is __________ elastic than the supply of catering services
because __________.
A. less … the cost of training lawyers is higher than the cost of training cooks
B. less … the price of legal services is usually much higher
C. more … the entry barrier of the legal industry is higher
D. more … people seldom need legal services
Answer: A

When the demand for Good Q decreases, the price and quantity transacted of Good Q
change by 2% and 6%, respectively. It is most likely that
A. Good Q is a luxury.
B. Good Q is addictive.
C. producing Good Q requires mainly unskilled workers.
D. it takes a long time for the sellers of Good Q to adjust the output level.
Answer: C
Which of the following will decrease the price elasticity of supply for Coca-Cola?
A. More substitutes are available.
B. The occupational mobility of the factors used to produce Coca-Cola increases.
C. The stock of Coca-Cola decreases sharply.
D. All of the above
Answer: C

Which of the following will increase labour’s elasticity of supply in Hong Kong?
A. More and more people follow the government’s advice to have more children.
B. People become more concerned about family life.
C. More and more jobs require professional qualifications.
D. Workers in the mainland can freely work in Hong Kong.
Answer: D

Suppose the production of a new medicine which can cure AIDS requires special raw
materials which can only be found in the Amazon Basin. Which of the following is
correct?
A. The supply of the medicine is elastic.
B. The price of the medicine will increase by a great amount if the demand for it
increases.
C. The supply of the medicine must be perfectly inelastic.
D. Government must provide subsidies to the producers.
Answer: B

Recently, the shortage of waiters has become more serious in Hong Kong. As a result,
A. the supply of waiters will be more inelastic.
B. the supply of waiters will be more elastic.
C. the supply of catering services (主主主主) will be more inelastic.
D. the supply of catering services will be more elastic.
Answer: C
Which of the following statements about the price elasticity of supply is correct?
A. An increase in demand for Good X will lead to a smaller increase in price if the
supply is more inelastic.
B. Whether an increase in supply will increase the total revenue of Good X or not has
nothing to do with the price elasticity of supply.
C. When the production process requires many special machines, its supply will be
more elastic.
Answer: B

The supply of ginseng (主主) tends to be inelastic because
A. its price is high.
B. it is a luxury.
C. it has many uses.
D. its production takes time and the producers cannot greatly increase production in a
short period of time.
Answer: D

Which of the following lowers the elasticity of supply of economics textbooks?
A. The government allows textbook publishers to recruit professionals from the
mainland.
B. Textbook publishers have already installed extra printing machines.
C. The government adopts a more stringent (主主主) supervision system for textbook
publishing.
D. Less initial capital is needed to start a publishing business.
Answer: C
Explanation:
 Option A increases factor mobility. Therefore, it will raise the elasticity of supply.
 Option B increases reserve capacity. Therefore, it will raise the elasticity of
supply.
 Option C reduces flexibility in production. Therefore, it will lower the elasticity of
supply.
 Option D makes entry easier. Therefore, it will raise the elasticity of supply.
Suppose the demand for laptops increases. When _______________, the increase in
demand will result in a greater increase in equilibrium quantity.
A. laptop producers have excess production capacity
B. it is more difficult to acquire required raw materials
C. there are more close substitutes for laptops
D. each laptop now takes up a smaller proportion of consumers’ income
Answer: A
Explanation:
 When the demand for laptops increases, if the supply is more elastic, the increase
in equilibrium quantity will be greater.
 Only Option A will lead to an increase in the elasticity of supply. Therefore,
Option A is the answer.

Suppose a prolonged rainstorm destroys a huge amount of local vegetables in Hong
Kong. When ___________________, this will result in a larger increase in Hong
Kong’s equilibrium price for vegetables.
A. more imported vegetables are available in Hong Kong
B. people prefer eating local vegetables over other vegetables,
C. idle land in the mainland can be converted into farmland
D. more Hong Kong people have acquired farming skills
Answer: B
Explanation:
 When the supply of local vegetables decreases and if the demand or supply is less
elastic, the increase in equilibrium price will be greater.
 Only Option B will lead to a decrease in the elasticity of demand. The other three
options will lead to an increase in the elasticity of supply. Therefore, Option B is
the answer.

The supply of poems written by Shakespeare (主主主主) is __________ the supply of the
‘Complete Works of Shakespeare’ (主主主主主主).
A. more elastic than
B. as elastic as
C. less elastic than
D. Uncertain
Answer: C
Explanation:
 Since Shakespeare has passed away, the supply of his poems is perfectly inelastic.
 However, the supply of the ‘Complete Works of Shakespeare’ is not perfectly
inelastic. People can still print it by using resources. The elasticity of supply must
be greater than zero.
 Although we are not certain whether the supply of the ‘Complete Works of
Shakespeare’ is elastic or not, we are certain that the supply of Shakespeare’s
poems is less elastic than that of the ‘Complete Works of Shakespeare’.
Short Questions

Refer to the following table.
Price ($) 10 20 30
Quantity demanded 100 75 60
(a) What is the price elasticity of demand? (2 marks)

(b) Calculate the price elasticity of demand between
(i) $10 and $20; (2 marks)
(ii) $20 and $30. (2 marks)
(a) After the MTR South Island Line (East) is completed, people can travel from
Admiralty to Ocean Park by MTR. With the aid of a diagram, explain the effect of
this new railway on the total revenue of buses operating on the same route.
(5 marks)
(b) How does the demand elasticity for the bus service on the above route change?
Explain your answer briefly. (2 marks)

Suppose there is a drastic increase in sewage charges. Under what condition will the
total revenue of local restaurants increase? Explain with the aid of a diagram.
(7 marks)

Suppose the demand for bread is elastic. Explain, with separate diagrams, how the
increase in the price of bread affects the total expenditure on
(a) bread; (5 marks)
(b) butter. (5 marks)

In Country H, the price of books has decreased in recent years. With the aid of a
diagram, explain under what condition publishers’ total revenue from the sales of
books will decrease. (5 marks)
Answers:
Indicate on the diagram:
 Decrease in total revenue > Increase in total revenue (2 marks)
Price ($) Increase in total revenue
Decrease in total revenue
P1
P2
D
0 Quantity
Q1 Q2
Verbal elaboration:
If the demand for books is inelastic and the price decreases, the percentage increase in
the quantity demanded is smaller than the percentage decrease in the price.
(2 marks)
The gain in total revenue is smaller than the loss in total revenue. Therefore, the total
revenue will decrease. (1 mark)
Suppose the price of lemons decreases. With the aid of a diagram, explain under what
condition the total income of lemon tea producers will decrease. (7 marks)
Answers:
 Rightward shift in supply curve (1 mark)
 Gain in total income < Loss in total income (2 marks)
Price ($)
Gain in total income
Loss in total income

S0
S1
P0
P1
D
0 Quantity
Q0 Q1
Verbal elaboration:
As lemon is an input of lemon tea, a decrease in the price of lemons raises the supply
of lemon tea from S0 to S1. (1 mark)
Hence, the price decreases and the quantity demanded increases. (1 mark)
If the demand for lemon tea is inelastic, the percentage decrease in price will be
greater than the percentage increase in quantity transacted. Hence, producers’ total
income will decrease. (2 marks)

The following table shows information about the demand for timber and candles:
Change in price Change in quantity demanded

Timber -5% +10%
Candles +10% -4%
(a) Which good has a higher price elasticity of demand? Show your calculation.
(3 marks)
(b) Suggest ONE reason why the good in (a) has a higher elasticity. (2 marks)
Answers:
10%
(a) The elasticity of demand for timber  2 (1 mark)
5%
4%
The elasticity of demand for candles   0.4 (1 mark)
10%
So, the elasticity of demand for timber is higher. (1 mark)
(b) Timber has more uses than candles. (Accept other reasonable answer.) (2 marks)

(a) What does the price elasticity of demand measure? (2 marks)
(b) Mary said, ‘I like reading very much. Even if the prices of books double, I will
still spend the same amount on them.’
What is Mary’s price elasticity of demand for books? Explain. (4 marks)
Answers:
(a) The price elasticity of demand measures the responsiveness of quantity demanded
of a good to a change in its price. (2 marks)
(b)  Mary’s demand for books is unitarily elastic (Ed = 1). (2 marks)
 The percentage change in quantity demanded is the same as the percentage
change in price so that her total expenditure on books remains the same at all
prices. (2 marks)

(a) What is unitarily elastic demand? (2 marks)
* (b)The following table is about Ming’s demand for bananas:
Price ($) 1 2 3 4 5 6
Quantity demanded (units) 6 5 4 3 2 1
Explain Ming’s price elasticity of demand for bananas in the following price
ranges.
(i) Between $1 and $3 (2 marks)
(ii) Between $3 and $4 (2 marks)
(iii) Between $4 and $6 (2 marks)
Answers:
(a) Unitarily elastic demand: when the price rises (drops), the quantity demanded
drops (rises) by the same percentage. (2 marks)
(b) (i) At $1 to $3, Ming’s demand for bananas is inelastic. This is because his
expenditure on bananas increases as the price increases. (2 marks)
(ii) At $3 to $4, Ming’s demand for bananas is unitarily elastic. This is because his
expenditure on bananas remains unchanged as the price increases. (2 marks)
(iii) At $4 to $6, Ming’s demand for bananas is elastic. This is because his
expenditure on bananas decreases as the price increases. (2 marks)

The following table is about Alice’s demand for milk and rice:
Change in price Change in quantity demanded

Milk +10% -30%
Rice -20% +2%
(a) For which good does Alice have a higher price elasticity of demand? Show your
steps. (3 marks)
(b) Suggest ONE reason to explain your answer in (a). (2 marks)
Answers:
(a)  The price elasticity of demand for milk = -30%/10% = 3 (absolute value)
(1 mark)
 The price elasticity of demand for rice = 2%/-20% = 0.1 (absolute value)
(1 mark)
 So the price elasticity of demand for milk is more elastic. (1 mark)
(b) The demand for milk is more elastic because there are more substitutes for milk.
(2 marks)

A restaurant raises the price of its food, but its total revenue decreases as a result.
With the aid of a diagram, explain the reason behind the above phenomenon.(6 marks)
Answers:
 Price increases and quantity transacted decreases (1 mark)
 Decrease in revenue > Increase in revenue (2 marks)
$ Decrease in total revenue
P2
B + Increase in total revenue
P1 + A
0 Q
Q2 Q1
Verbal elaboration:
 The elasticity of demand for the food in the restaurant is greater than 1. (1 mark)
 The percentage decrease in the quantity demanded is greater than the percentage
increase in the price. Hence, total revenue decreases. (2 marks)

A fruit seller lowers the price of his fruit, but total revenue increases as a result.
(a) Does the above phenomenon support the law of demand? Explain. (3 marks)
(c) Is the price elasticity of demand for the fruit less than or greater than 1? Explain.
(3 marks)
Answers:
(a) The law of demand states that the lower the price of a good, the greater its
quantity demanded, other factors being constant. (1 mark)
The phenomenon shows that the quantity demanded of fruit increases when the
price decreases (when the price decreases, total revenue cannot increase if
quantity demanded does not increase), so it supports the law of demand. (2 marks)
(b) The increase in total revenue implies that the percentage increase in the quantity
demanded is greater than the percentage decrease in the price. Hence, the price
elasticity of demand is greater than 1. (3 marks)
Question code: B1C05Q313.

Suppose that MTR fares are fixed initially. With a decrease in the bus fares, the MTR
Corporation (MTRC) finds that its total revenue is falling.
(a) Explain why the total revenue for the MTRC is falling with the aid of a diagram.
(4 marks)
(b) To increase its revenue, the directors of the MTRC decided to raise MTR fares,
but the total revenue has turned out to be lower than before. Explain why this
happened with the help of a well-labelled diagram. (5 marks)
Answers:
(a)  MTR services and bus services are substitutes for each other. (1 mark)
 The decrease in bus fares reduces the demand for MTR services. (1 mark)
 If the fare remains at P0, the total revenue of MTR services must fall. (1 mark)
MTR fare ($)
P0 (1 mark)
Loss
D1 D0
MTR
0 Q1 Q0 services
(b) Suppose the MTR fare is increased from P0 to P1.

 The quantity demanded decreases from Q1 to Q2. (1 mark)
 If the demand for MTR services is elastic (Ed > 1), the loss in revenue (due to
the decrease in quantity demanded from Q1 to Q2) will be greater than the gain
in revenue (due to the increase in price from P0 to P1). The total revenue will
thus decrease. (2 marks)
MTR fare ($)
P1
Gain
P0 (2 marks)
Loss
D1
MTR services
0 Q2 Q1

Suppose owing to the discovery of bloodworms (主主) at public swimming pools.
(a) Suppose the admission fee at public swimming pools is fixed. Explain how the
discovery of bloodworms will affect the total revenue of public swimming pools.
(4 marks)
(b) In order to improve the service quality at public swimming pools, the government
decides to raise the requirements for lifeguards. The spokesperson for a lifeguard
organisation said that the policy can benefit lifeguards as a whole. Explain with
the aid of a diagram why the spokesperson is correct. (Assume that the wage rate
of lifeguards is determined by demand and supply.) (6 marks)
Answers:
(a)  The discovery of bloodworms will cause the demand for public swimming pool
services to decrease. (1 mark)
 Suppose the admission fee is fixed at P0. The total revenue of public swimming
pools will decrease as demand decreases. (1 mark)
Admission fee ($)
(2 marks)
P0
Loss
D1 D0
0 Public swimming pool
Q1 Q0 services
(b) Raising the requirements for lifeguards will lead to a decrease in the supply of
lifeguards. (1 mark)
 Supply decreases from S0 to S1. (1 mark)
 If public swimming pools’ demand for lifeguards is inelastic (Ed < 1), the loss
in total wage income (due to the decrease in employment from Q0 to Q1) will
be smaller than the gain in total wage income (due to the increase in wage
rates from P0 to P1), the total wage income of lifeguards will increase as supply
decreases. (2 marks)
Wage rate ($)
S1
P1 S0
Gain
(2 marks)
P0 Loss
D0 No. of lifeguards
0 Q1 Q0
Recently, a price war between two big supermarkets in Hong Kong has broken out.
The following is a conversation between the managers of one of the supermarkets.
Manager A: ‘A cut in prices will cause a drop in our total revenue.’
Manager B: ‘Our total revenue will decrease if we keep the price unchanged when the
other supermarket cuts its price.’
Explain the situations in which the statement by each manager is correct with the help
of separate diagrams. (10 marks)
Answers:
 Manager A is correct if the demand for the goods in that supermarket is inelastic
(Ed < 1). (1 mark)
 The loss in revenue (due to the decrease in price from P0 to P1) is larger than the
gain in revenue (due to the increase in quantity demanded from Q0 to Q1). So the
total revenue drops. (2 marks)
Price ($)
P0
Loss
P1
Gain D
Quantity
0 Q0 Q1
(2 marks)
 Manager B is right if the goods marketed by the two supermarkets are substitutes.
(1 mark)
 If the price of the goods marketed by the other supermarket decreases, the demand
for its goods will decrease from D0 to D1. (1 mark)
 Therefore, if the price remains at P0, the quantity demanded will decrease from Q0
to Q1 and the total revenue will fall. (1 mark)
Price ($)
P0
(2 marks)
Loss
D0
D1
Quantity
0 Q1 Q0

Some people from the newspaper industry pointed out that free newspaper would
drive out some traditional newspapers which had limited capital.
Explain with the aid of a diagram if the above statement is related to the price
elasticity of demand of traditional newspapers. (6 marks)
Answers:
 The above statement implies that free newspapers will cause the demand for
traditional newspapers to fall sharply (D0D1). (1 mark)
 The total revenue of traditional newspapers will decrease as demand decreases,
irrespective of their elasticity of demand. (1 mark)
 The quantity transacted decreases from Q0 to Q1, leading to a decrease in total
revenue. (2 marks)
Price ($)
P0 (2 marks)
Loss
D1 D0
Traditional
0 Q1 Q0 newspapers
Due to an increase in labour costs, both the prices of chocolate and potato chips have
increased. However, the total revenue from chocolate increases but the total revenue
from potato chips decreases. With the aid of separate diagrams, explain this
phenomenon using the price elasticity of demand. (10 marks)
Answers:
 The revenue from chocolate increases since the demand for chocolate is inelastic
(Ed < 1): the percentage increase in price is greater than the percentage decrease in
quantity demanded. The gain from a higher price is greater than the loss from a
lower quantity demanded. Therefore, total revenue increases. (3 marks)
Price ($)
P2
Gain (2 marks)
Loss
P1
D
Quantity
0 Q2 Q1
 The revenue from potato chips decreases since the demand for potato chips is
elastic (Ed > 1): the percentage increase in price is smaller than the percentage
decrease in quantity demanded. The gain from a higher price is smaller than the
loss from a lower quantity demanded. Therefore, total revenue decreases.
(3 marks)
Price ($)
P2
Gain
P1 (2 marks)
Loss D
0 Quantity
Q2 Q1
When both the wage rate and the rental rate increase, a firm’s total labour cost
decreases but its total rental cost increases. Explain the phenomenon with the concept
of price elasticity of demand. (6 marks)
Answers:
 The total labour cost decreases as the wage rate increases because the demand for
labour is elastic (Ed > 1):
the percentage increase in the wage rate is smaller than the percentage decrease in
quantity demanded for labour. The increase in total labour cost brought by the
increase in the wage rate is smaller than the decrease in total labour cost brought
by the decrease in quantity demanded for labour. Therefore, total labour cost
 The total rental cost increases with the rental rate because the demand for factory
premises is inelastic (Ed < 1):
the percentage increase in the rental rate is greater than the percentage decrease in
quantity demanded for factory premises. The increase in total rental cost brought
by the increase in the rental rate is greater than the decrease in total rental cost
brought by the decrease in quantity demanded for factory premises. Therefore,
total rental cost increases. (3 marks)

The longan (主主) harvest is good this year and its price decreases sharply. Suppose the
demand for longan is inelastic.
(a) Explain with the aid of a diagram how consumers’ total expenditure on longan
changes. (5 marks)
(b) Explain how the price of dried longan changes. (3 marks)
Answers:
(a)  Since the demand for longan is inelastic (Ed < 1), the percentage decrease in
price is greater than the percentage increase in quantity demanded. (1 mark)
 The decrease in expenditure due to a lower price is greater than the increase in
expenditure from a higher quantity demanded. (1 mark)
 Therefore, total expenditure decreases. (1 mark)
Price ($)
P1
Decrease Increase
P2 (2 marks)
D
0 Quantity
Q1 Q2
(b) • The cost of producing dried longan will decrease when the price of longan
decreases. (1 mark)
• The supply of dried longan will increase. (1 mark)
• Therefore, the price of dried longan will decrease. (1 mark)

The price of local bananas has increased sharply due to bad weather. Suppose the
demand for local bananas is elastic.
(a) Explain how this will affect the total income of local banana growers. (3 marks)
(b) Explain how this will affect the total income of banana importers. (3 marks)
Answers:
(a)  Given that the demand for local bananas is elastic, the percentage increase in
price will be smaller than the percentage decrease in quantity demanded.
(1 mark)
 The increase in total income due to a higher price is smaller than the decrease
in total income due to a lower quantity demanded. (1 mark)
 Therefore, the total income of local banana growers decreases. (1 mark)
(b)  Foreign bananas are a close substitute for local bananas. (1 mark)
 The demand for foreign bananas will increase as the price of local bananas
increases. (1 mark)
 Therefore, the total income of banana importers will increase. (1 mark)
Mr Wong owns a restaurant, the maximum capacity of which is fixed. Business at Mr
Wong’s restaurant is so bad that it has many empty seats. He then launches a
promotion by providing free bird’s nest (主主) to customers. This results in a long queue
forming outside his restaurant.
(a) To which type of supply elasticity does the services provided by Mr Wong’s
restaurant belong? Explain. (2 marks)
(b) With a well-labelled diagram, explain why there is a long queue. (5 marks)
(c) In order to compensate for the expenditure he incurs by providing free bird’s nest,
Mr Wong increases the price of dishes and finds the queue outside the shop
becomes shorter. Will he be successful at increasing his total revenue? Explain
with the aid of a diagram. (6 marks)
Answers:
(a)  Perfectly inelastic (1 mark)
 Because the restaurant’s capacity is fixed. (1 mark)
(b)  Giving out free bird’s nest to customers largely increases the demand for food
at the restaurant (D0D1). (1 mark)
Price ($) S0
P1
(2 marks)
D1
D0
0 Services at Mr
Q0 Q1 Wong’s restaurant
 The demand increases to such an extent that the original price (P1) is lower
than the new equilibrium or market-clearing price. (1 mark)
 If the price of food is still fixed at P1, the quantity demanded will be greater
than the quantity supplied and there will be excess demand (Q1 – Q0). (1 mark)
(c)  Suppose the restaurant raises the price of food from P1 to P2. Since some
people are still queuing outside the restaurant, the new price is still lower than
the equilibrium price. (1 mark)
 Price increases (P1P2) but the quantity transacted remains at Q0. (2 marks)
Price ($) S0
P2
(2 marks)
P1
D1
0 Services at Mr
Q0 Q2 Q1 Wong’s restaurant
 Therefore, the increase in price will lead to an increase in total revenue.

(1 mark)

After a tutorial school launched a promotion emphasising classes taught by ‘famous
teachers’, the number of students who applied for tutorial classes at the school
increased drastically. The number of applicants also exceeded the limit set by the
government. Assume the places and the tuition fees for the classes are fixed.
(a) Explain to which type of supply elasticity the service of the tutorial school
belongs.
(2 marks)
(b) With the aid of a diagram, explain the above phenomenon. (5 marks)
(c) In order to reduce the financial burden on students and their parents, the tutorial
school reduces its tuition fee. With the aid of a diagram, explain how its total
revenue will change. (4 marks)
Answers:
(a)  The supply of the tutorial school’s services is perfectly inelastic (1 mark)
 Because the number of students it can serve is limited by the government.
(1 mark)
(b)  The promotion will lead to an increase in demand for the tutorial services
offered by the tutorial school (D0D1). (1 mark)
 Since both the supply of tutorial services (S0) and the tuition fee (P0) are fixed,
there will be excess demand (Q1 – Q0) as demand increases. (2 marks)
Tuition fee ($) S0
P0
D1
D0
Tutorial
0 Q0 Q1 services
(2 marks)
(c) Given the fixed supply and excess demand, the total revenue of the tutorial school
must decrease as the tuition fee decreases (P0  P1) and the quantity transacted
remains unchanged (Q0). (2 marks)
Tuition fee ($) S0
P0
P1
D1
Tutorial
0 Q0 Q1 Q2 services
(2 marks)
Suppose the public’s income greatly decreases and medical service is a normal good.
At the same time, Dr Chan and Dr Lee find that no patients queue outside their clinic
and they have to wait a longer time before the next patient comes.
(a) Explain why this happens with a well-labelled diagram. (6 marks)
(b) To attract more patients, they lower their price for general consultation (普普普普普).
However, their total revenue has decreased. Explain why. (5 marks)
Answers:
(a)
Price ($)
S0
P0
(2 marks)
D2 D1
0 Q2 Q0 Q1 Medical services
 Initially, the price (P0) is set below the equilibrium level so that there are
patients queuing outside the clinic. (1 mark)
 When the general public’s income decreases, the demand for medical services
falls. (1 mark)
 Assume the price at their clinic remains fixed at P0. If the decrease in demand
is so great that the original price is now higher than the equilibrium price,
(1 mark)
 the quantity demanded will be smaller than the quantity supplied. Therefore,
they have to wait a longer time before the next patient comes. (1 mark)
(b)
Price ($)
P0
Loss
P1 (2 marks)
Gain
D
0 Q2 Q3 Medical services
 Suppose they lower the price from P0 to P1.

 If demand is inelastic (Ed < 1), the decrease in revenue due to a decrease in
price will be greater than the increase in revenue due to an increase in quantity
demanded. Therefore, total revenue will decrease. (3 marks)

In recent years, Hong Kong people have become fond of reading books.
(a) With the aid of a diagram, explain how the above situation will affect the total
revenue of publishers. (6 marks)
(b) In response, some foreign bookstore chains have set up branches in Hong Kong.
Suppose the demand for books is inelastic. With the aid of a diagram, explain how
the total expenditure on books will change. (7 marks)
Answers:
(a) Indicate on the diagram:
 Rightward shift in demand curve (1 mark)
 Increase in price and quantity transacted (1 mark)
Price ($)
S0
P1
P0
D0 D1
0 Q0 Q1 Books
Verbal elaboration:
 This will lead to an increase in the demand for books from D0 to D1. (1 mark)
 The price of books will increase from P0 to P1 and the quantity transacted will
increase from Q0 to Q1. (2 marks)
 Therefore, the total revenue of publishers will increase. (1 mark)
(b) Indicate on the diagram:
 Increase in total expenditure < Decrease in total expenditure (2 marks)
Price
S0 Decrease in TE
S1
Increase in TE
P0
P1
D
0 Q0 Q1 Books
Verbal elaboration:
 The increase in the number of bookstores will raise the supply of books from
S0 to S1. (1 mark)
 The price of books will decrease from P0 to P1 and the quantity transacted will
increase from Q0 to Q1. (1 mark)
 As the demand is inelastic, the percentage decrease in price is larger than the
percentage increase in quantity transacted. (1 mark)
 The total expenditure on books will decrease. (1 mark)
* Karen is the owner of a boutique. To increase the total revenue, Karen lowers the
prices of her products. Knowing this, the nearby boutiques also lower the price of
their products. Will Karen’s total revenue increase in this situation? Explain. (5 marks)
Answers:
Price ($)
Decrease in total revenue
P0
Increase in total revenue
P1
D0
D1
Quantity
0 Q0 Q1
(1 mark)
 Assume the price is lowered from P0 to P1.
 Since the clothes of other boutiques are close substitutes for the clothes in Karen’s
shop, a decrease in the prices of other boutiques’ clothes will cause a decrease in
the demand for the clothes in Karen’s shop. (2 marks)
 Whether the total revenue will increase or not depends on the percentage drop in
the price and the percentage rise in the quantity of Karen's clothes. (2 marks)

Patrick said, ‘When there is an increase in supply, the direction of change in total
revenue mainly depends on the demand elasticity.’
Anna said, ‘When there is an increase in demand, the direction of change in total
revenue mainly depends on the supply elasticity.’
Are they correct? Explain your answers. (8 marks)
Answers:
Patrick is correct. (1 mark)
When there is an increase in supply, there will be a decrease in price and an increase
in quantity transacted. The total revenue will increase when the percentage decrease in
price is smaller than the percentage increase in quantity transacted, and vice versa.
This depends on the demand elasticity. (3 marks)
Anna is incorrect. (1 mark)
When there is an increase in demand, both price and quantity transacted will increase.
Therefore, the total revenue must increase regardless of the supply elasticity.(3 marks)

Suppose Country G starts to import milk from other countries.
(a) Milk is the main ingredient of ice cream. Explain how the price elasticity of the
supply of ice cream will change in Country G under the above situation. (3 marks)
(b) How will the total expenditure on locally produced milk change? Does the
direction of change depend on the price elasticity of supply? Explain. (4 marks)
Answers:
(a) The supply of ice cream will become more elastic. (1 mark)
There are more sources of milk. Firms can adjust their output more easily.
(2 marks)
(b) The demand for locally produced milk decreases as people can also choose to
drink imported milk now. (1 mark)
Both the price and quantity transacted of locally produced milk will decrease.
(1 mark)
Hence, the total expenditure on locally produced milk will decrease. (1 mark)
The direction of change in the total expenditure does not depend on the price
elasticity of supply. (1 mark)

Business at Fun’s fruit juice shop has been so bad that she has been suffering losses
for a long time. In order to improve the situation, she has decided to adjust prices.
Explain whether Fun can increase income by adjusting prices only under the
following situations.
(a) The price elasticity of demand for fruit juices is equal to one. (3 marks)
(b) The price elasticity of demand for fruit juices is equal to two. (3 marks)
Answers:
(a)  If the price elasticity of demand for fruit juices is equal to one, Fun cannot
increase income by only adjusting prices. (1 mark)
 Since the percentage decrease (increase) in price is always equal to the
percentage increase (decrease) in quantity demanded, her total revenue will
not change when price changes. (2 marks)
(b)  If the price elasticity of demand for fruit juices is equal to 2, Fun can increase
total revenue by reducing prices. (1 mark)
 Since the percentage decrease in price will be smaller than the percentage
increase in quantity demanded, her total revenue will increase as price

(a) What does the price elasticity of supply measure? (2 marks)
* (b) Is the price elasticity of supply the same as the slope of the supply curve?
Explain with an example and the corresponding diagram. (3 marks)
Answers:
(a) The price elasticity of supply measures the responsiveness of the quantity supplied
of a good to a change in its price. (2 marks)
ΔQS
ES  QS ΔQS P
(b)    (1 mark)
ΔP ΔP QS
P
 So the price elasticity of supply is not the same as the slope of the supply
curve (i.e., ΔP ΔQ ) (1 mark)

S
 Any correct example with elaboration (3 marks)

e.g.
Price S
Quantity
The price elasticity of perfectly inelastic supply is zero while the slope of its
supply curve is infinity. Therefore, the slope of the supply curve is not the
same as the price elasticity of supply.
(a) What is unitarily elastic supply? (2 marks)
(b) The following table concerns Ming’s supply of bananas.
Price ($) 1 2 3 4 5 6
Quantity supplied (units) 10 20 30 40 50 60
Explain Ming’s price elasticity of supply of bananas. (2 marks)
Answers:
(a) Unitarily elastic supply: when the price rises (drops), the quantity supplied rises
(drops) by the same percentage. (2 marks)
(b) According to the above data, the percentage increase in price is the same as the
percentage increase in quantity supplied. Therefore, the supply exhibited in the
above data is unitarily elastic. (2 marks)

* Study the following table.
Change in price Change in quantity transacted

Good A +100% +30%
Good B +100% -30%
Suppose the above changes are caused either by a change in demand or a change in
supply. Find and explain the price elasticity of demand or supply for Good A and
Good B. (6 marks)
Answers:
Good A:
Since the price and the quantity transacted have changed in the same direction, the
changes have been brought by an increase in demand. Moreover, since the percentage
increase in price is greater than the percentage increase in quantity transacted, we can
deduce that the supply of Good A is inelastic. (3 marks)
Good B:
Since the price and the quantity transacted have changed in the opposite direction, the
changes have been brought by a decrease in supply. Moreover, since the percentage
increase in price is greater than the percentage decrease in quantity transacted, we can
deduce that the demand for Good B is inelastic. (3 marks)
Structured Questions

The Hong Kong Book Fair has become a popular event. Every year, tens of thousands
of people go to the Book Fair with many mainland visitors. Suppose the government
would like to reduce the number of non-local visitors to the Book Fair, and raise the
entrance fee for non-local people from $10 to $25. Despite this, the number of non-
local visitors decreases only by 10%.
(a) From the above information, what is the price elasticity of demand for the Book
Fair by non-local people within the mentioned price range? (2 marks)
(b) Give TWO factors to explain the elasticity of demand in (a). (4 marks)
(c) Based on your answer in (a), explain the effect of the price increase on non-local
visitors’ total expenditure on Book Fair tickets. (4 marks)
(d) A local student said, ‘My cost of going to the Book Fair is more than $10.’
Explain why this is possible. (2 marks)
Answers:
$10 - $25
(a) Percentage change in price = × 100% = -150%
$10
10%
Ed = = 0.067 (neglecting negative sign) (2 marks)
- 150%
(b)  The entrance fee only accounts for a small proportion of income.
 There are no other close substitutes. Since there is only one Book Fair in Hong
Kong, non-local visitors may want to experience the special event in Hong
Kong.
(Accept other reasonable answers. 2 marks × 2 = 4 marks)
(c) Indicate on the diagram:
 Increase in total expenditure > Decrease in total expenditure (2 marks)
Price ($) Increase in total expenditure
Decrease in total expenditure
25
10
D
0 Quantity
Q1 Q0
Verbal elaboration:
As non-local visitors’ demand for the Book Fair tickets is inelastic, when the price
of the tickets increases, total expenditure increases. (2 marks)
(d) In addition to the money cost (i.e., ticket price), his cost of going to the Book Fair
also includes the non-money cost, such as his income forgone for the time he
spent going to the fair. (2 marks)

Galaxy Park is a popular theme park in City K. It is now operating at its full capacity.
(a) To which type of price elasticity does the supply of the services of Galaxy Park
belong? Explain briefly. (3 marks)
(b) Galaxy Park decides to extend its service hours to midnight. If the demand for the
services of Galaxy Park is elastic, explain with the aid of a diagram how the total
ticket revenue of Galaxy Park will change. (6 marks)
(c) Several theme parks will be built in City K. Explain how this will affect the price
elasticity of demand for Galaxy Park. (3 marks)
Answers:
(a) Perfectly inelastic because (1 mark)
quantity supplied cannot change with the ticket prices. (2 marks)

 Rightward shift in the vertical supply curve (1 mark)
 Gain in total revenue > Loss in total revenue (2 marks)
Price ($)
S0 S1 Gain in total revenue
P0 Loss in total revenue
P1
D
0 Quantity
Q0 Q1
Verbal elaboration:
After the extension of service hours, the supply will increase from S0 to S1.
(1 mark)
Given that the demand is elastic, the percentage decrease in price is smaller than
the percentage increase in quantity. (1 mark)
Therefore, the total ticket revenue will increase. (1 mark)
(c) The services of other theme parks are substitutes for the services of Galaxy Park.
(1 mark)
As the number of substitutes will increase, the demand for the services of Galaxy
Park will be more elastic. (2 marks)

Suppose there is a breakthrough in the development of nuclear fusion (主主主) power.
Electricity can be generated in a cheaper and safer way.
(a) With the aid of a diagram, explain how the total revenue from oil will change
under the above situation. (5 marks)
(b) Suppose the demand for electricity is inelastic. After the breakthrough, the cost of
electricity generation will decrease. With the aid of a diagram, explain how the
total expenditure on electricity will change. (5 marks)
(c) Suggest TWO reasons to explain why the demand for electricity tends to be
inelastic. (2 marks)
Answers:
 Leftward shift in demand curve (1 mark)
 Decrease in price and quantity transacted (1 mark)
Price ($)
S
P0
P1
D1 D0
0 Quantity
Q1 Q0
Verbal elaboration:
The demand for oil (as energy source) decreases from D0 to D1 when the
technology of nuclear power generation improves. (1 mark)
Both price and quantity transacted decrease. (1 mark)
Therefore, the total revenue will decrease from P0 × Q0 to P1 × Q1. (1 mark)

 Increase in total expenditure < Decrease in total expenditure (1 mark)
Price ($)
Increase in total expenditure
Decrease in total expenditure

S0
S1
P0
P1
D
0 Quantity
Q0 Q1
Verbal elaboration:
As the cost of electricity generation decreases, the supply of electricity increases
from S0 to S1. (1 mark)
Given that the demand is inelastic, the percentage decrease in price will be larger
than the percentage increase in quantity transacted. (1 mark)
Therefore, the total expenditure on electricity will decrease. (1 mark)
(c)  Electricity is a necessity.
 There is no close substitute for electricity.
(Accept other reasonable answers. 1 mark × 2 = 2 marks)

Ka Ming has become addicted to cocaine (主主主). He keeps using a certain amount of
cocaine every day, no matter how the price of cocaine changes.
(a) To which price elasticity does Ka Ming’s demand for cocaine belong? Explain.
(3 marks)
(b) Suppose the government increases the punishment for cocaine sellers to the death
penalty. With the aid of a diagram, explain how Ka Ming’s total expenditure on
cocaine will change. (6 marks)
(c) Does Ka Ming only pay the price of cocaine as his cost of addiction? Explain
briefly with the concept of full cost. (3 marks)
Answers:
(a) Perfectly inelastic because (1 mark)
his quantity demanded remains unchanged when the price of cocaine changes.
(2 marks)

 Vertical demand curve (1 mark)
 Leftward shift in supply curve (1 mark)
 Increase in total expenditure (1 mark)
Price ($)
D Increase in total expenditure
S1
P1
S0
P0
0 Quantity
Q0
Verbal elaboration:
As the punishment for sellers becomes heavier, the supply of cocaine decreases
from S0 to S1. (1 mark)
The price increases from P0 to P1 while the quantity transacted remains at Q0.
(1 mark)
Therefore, the total expenditure will increase from P0 × Q0 to P1 × Q0. (1 mark)
(c) Full cost includes the money cost and the non-money cost. (1 mark)
Besides the price (i.e., money cost), Ka Ming also has to pay the health cost (i.e.,
non-money cost) as cocaine adversely affects health. (2 marks)

According to an article from the Daily Mail in April 2014, there is a growing taste for
chocolate in Asia, particularly China.
(a) With the aid of a supply-demand diagram, explain the effect of the growing
demand on the total expenditure for chocolate all over the world. (5 marks)
(b) With the aid of a supply-demand diagram, explain under what condition the total
expenditure on chocolate cake will increase. (7 marks)
Answer:
 Rightward shift in demand curve (1 mark)
 Increase in price and quantity transacted (1 mark)
Price ($) Chocolate
P2
P1
D2
D1
0 Quantity
Q1 Q2
Verbal elaboration:
With a growing taste for chocolate in Asia, the demand for chocolate as a whole
worldwide increases from D1 to D2. (1 mark)
The price increases from P1 to P2 and the quantity transacted increases from Q1 to
Q2. (1 mark)
The total expenditure on chocolate will increase from P1 × Q1 to P2 × Q2. (1 mark)

 Leftward shift in supply curve (1 mark)
Price ($) Chocolate cake Increase in total expenditure
S1 S0 Decrease in total expenditure
P1
P0
D
0 Quantity
Q1 Q0
Verbal elaboration:
As chocolate is an input of chocolate cake, the supply of chocolate cake decreases
from S0 to S1 when the price of chocolate increases. (1 mark)
The price of chocolate cake increases while the quantity transacted decreases.
(1 mark)
If the demand for chocolate cake is inelastic, the percentage increase in price will
be larger than the percentage decrease in quantity transacted. Hence, the total
expenditure will increase. (2 marks)
Legend of the Galactic Heroes is a 10-volume work of fiction. In the past, the first
volume sold $25 and each of the remaining volumes cost $75. Suppose the publisher
found that if it raised the price of the first volume, its total revenue would decrease,
but if it raised the price of the second volume, its total revenue would increase.
(a) Does the first volume or the second volume have a more elastic demand? Explain.
(5 marks)
(b) Suppose the day before the second volume was published, some students who
couldn’t wait to read the book queued up overnight outside bookstores. Explain
whether their cost of buying the second volume was $75. (3 marks)
(c) A game developer has produced a computer game based on the book. Suggest
ONE situation in which playing computer games belongs to consumption and
ONE situation that playing computer games belongs to production. (4 marks)
Answers:
(a)  Total revenue decreases when the price of the first volume increases. This
implies that the percentage change in quantity demanded is greater than the
percentage change in price, so demand for the first volume is elastic.
(2 marks)
 The total revenue increases when the price of the second volume increases.
This implies that the percentage change in quantity demanded is smaller than
the percentage change in price, so demand for the second volume is inelastic.
(2 marks)
 Therefore, demand for the first volume is more elastic. (1 mark)
(b)  No. Their full cost was greater than $75. (1 mark)
 Full cost includes their money cost and non-money cost. When the students
queued up overnight, they gave up the highest-valued alternative use of the
time, which was their non-money cost. (2 marks)
(c)  Consumption: A student plays computer games for recreation. (Accept other
reasonable answer.) (2 marks)
 Production: A programmer plays computer games to test the game programme.
(Accept other reasonable answer.) (2 marks)
Flooding in the mainland damaged many agricultural products. As a result, the price
of these products in Hong Kong rose.
(a) With the aid of a diagram, explain under what condition the total expenditure of
Hong Kong consumers on agricultural products will increase. (6 marks)
(b) The following table shows the quantity demanded of Choy-Sum (主主) at different
prices:
Price per unit ($) Quantity demanded per day (units)
8 20
6 30
4 40
2 50
How does consumers’ total expenditure change when the price increases from $4
to $8? What is the elasticity of demand within this price range? Explain your
answer. (5 marks)
(c) The world’s population has been increasing over the years. Explain its effect on
food prices. (2 marks)
Answers:
 Supply curve shifts leftwards. (1 mark)
Price ($) Decrease in total expenditure
+ Increase in total expenditure
S2
B S1
P2
+ A
P1
D
0 Quantity
Q2 Q1
Verbal elaboration:
 The supply of agricultural products decreases. (1 mark)
 If the demand for these products is inelastic, the percentage increase in price is
greater than the percentage decrease in quantity demanded; total expenditure
will increase. (2 marks)
(b) When the price is $4, total expenditure = $4 × 40 = $160 (1 mark)
When the price is $8, total expenditure = $8 × 20 = $160 (1 mark)
Hence, total expenditure remains unchanged. (1 mark)
Since total expenditure remains unchanged when the price increases, the
percentage change in quantity demanded is the same as the percentage change in
price. In this case, the elasticity of demand is equal to 1. / the demand is unitarily
elastic. (2 marks)
(c) The increase in population results in an increase in the demand for food.
Therefore, food prices tend to increase. (2 marks)

Newspaper A cuts its price by $1 in order to attract more customers. Suppose the
prices of other newspapers remain unchanged. Explain the following phenomena with
separate well-labelled diagrams:
(a) the total revenue of Newspaper A which cuts its price increases; and (6 marks)
(b) the total revenues of other newspapers drop. (6 marks)
Answers:
(a)  The total revenue of the newspaper which cuts its price increases since the
demand for it is elastic (Ed > 1): the percentage decrease in price is smaller
than the percentage increase in quantity demanded. (2 marks)
 The loss from a lower price is smaller than the gain from a higher quantity
demanded. Therefore, total revenue increases. (2 marks)
Price ($)
P1
Loss
P2
(2 marks)
Gain D
0 Quantity
Q1 Q2
(b)  Different newspapers are in competitive demand. (1 mark)

 When the price of Newspaper A drops, the demand for other newspapers
decreases. (1 mark)
 Their price remains unchanged at P1 but their quantity transacted decreases.
Therefore, their total revenues decrease. (2 marks)
Price ($)
P1
(2 marks)
D2 D1
0 Quantity
Q2 Q1

The total revenue of Magazine Company A increases when it raises its price in
response to an increase in costs. However, Magazine Company B, which follows
Company A in raising price, suffers a drastic decrease in total revenue. Explain the
above phenomenon with separate diagrams. (12 marks)
Answers:
 Company A’s total revenue increases with price because its demand is inelastic (Ed
< 1): the percentage increase in price is greater than the percentage decrease in
quantity demanded. (2 marks)
 The gain from the increase in price is greater than the loss from the decrease in
quantity demanded. Therefore, its total revenue increases. (2 marks)
Price ($)
P2
Gain
(2 marks)
P1
Loss D
0 Quantity
Q2 Q1
 Company B’s total revenue decreases as price increases because its demand is
elastic (Ed > 1): the percentage increase in price is smaller than the percentage
decrease in quantity demanded. (2 marks)
 The gain from the increase in price is smaller than the loss from the decrease in
quantity demanded. Therefore, its total revenue decreases. (2 marks)
Price ($)
P2
Gain
P1
(2 marks)
Loss
D
0 Quantity
Q2 Q1

After the disastrous tsunami that hit Japan in 2011, the number of tourists visiting
Japan decreased sharply due to fears about radiation leaks at Fukushima (主主).
(a) With a well-labelled diagram, explain why there was a sharp decrease in the
number of air passengers travelling to Japan. (5 marks)
(b) Explain why there was a decrease in the price of travel insurance after the
radiation leaks. (3 marks)
(c) Some airlines in Japan cut ticket prices between Hong Kong and Japan to attract
more passengers. After the price cut, the airlines noticed a rise in their total
revenue. With the aid of a diagram, explain why this would happen. (5 marks)
Answers:
 Leftward shift in demand curve (1 mark)
 Decrease in the number of air passengers visiting Japan (1 mark)
Ticket prices
P0
D1 D0
Number of air passengers

0 Q1 Q0 travelling to Japan
Verbal elaboration:
 Since tourists are concerned about travelling to Japan due to the fear of
radiation leaks, fewer people are travelling to Japan. Their demand for airline
services has decreased (D0  D1). (2 marks)
 The number of air passengers travelling to Japan has decreased (Q0  Q1).
(1 mark)
(b)  The demand for travel insurance is derived from the demand for travelling. A
fall in the number of people travelling to Japan led to a fall in the demand for
travel insurance. As a result, the price of travel insurance decreased. (3 marks)
(c) Indicate on the diagram:

 Gain in TR > Loss in TR (2 marks)
Price ($)
Gain in TR
P0
P1 Loss in TR
0 D
Quantity of air tickets
Q0 Q1
between Hong Kong
and Japan
Verbal elaboration:
 The decrease in price (P0 P1) led to an increase in quantity demanded (Q0 
Q1). (1 mark)
 If the demand for air tickets between Hong Kong and Japan is elastic, the
percentage decrease in price would be smaller than the percentage increase in
quantity demanded. Hence, the total revenue of the airlines would increase.
(2 marks)
During the 2014 World Cup in Brazil, many football fans went to Brazil to see the
matches.
(a) With the aid of a diagram, explain how the total revenue of Brazilian airlines
changed during the World Cup. (Assume that ticket prices were fixed.) (4 marks)
(b) During the World Cup, the Brazilian government improved public transport
systems. The frequency of bus and train services was increased. If the demand for
public transport services in Brazil is inelastic, use a diagram to explain how the
total revenue would change.. (6 marks)
*(c) A Brazilian football fan said, ‘I spend half of my income on football match
tickets every month.’ Explain briefly to which type of price elasticity his
demand for football match tickets belong. (3 marks)
Answers:
 Rightward shift in demand (1 mark)
 Increase in quantity (1 mark)
Price ($)
P0
D0 D1
0 Air tickets
Q0 Q1
Verbal elaboration:
 Since football fans travelled to Brazil, the demand for air tickets to Brazil
increased (D0  D1). (1 mark)
 The total revenue of Brazilian airlines increased (P0  Q0  P0  Q1). (1 mark)

 Rightward shift in supply (1 mark)
 Gain in total revenue < Loss in total revenue (2 marks)
Price ($)
Gain in TR
S0 S1
Loss in TR
P0
P1
D
0 Public transport services
Q0 Q1
Verbal elaboration:
 When the government improved public transport systems, the supply of public
transport services increased from S0 to S1. (1 mark)
 Given that the demand is inelastic, the percentage decrease in price would be
larger than the percentage increase in quantity. (1 mark)
 The total revenue would decrease. (1 mark)
(c)  As his total expenditure is fixed (i.e., half of his income) regardless of the
ticket price, his quantity demanded must decrease by the same percentage
whenever the price increases. (2 marks)
 Therefore, his demand is unitarily elastic. (1 mark)

Assume that the coffee price of Café X is fixed initially. After the opening of Café Y,
the total revenue of Café X decreases sharply.
(a) Explain how the opening of Café Y affects the total revenue of Café X. (3 marks)
(b) After increasing the coffee price, Café X finds that its revenue has decreased.
Explain this phenomenon with the aid of a diagram. (5 marks)
(c) Suppose the demand for Café Y’s coffee is elastic. With the aid of diagrams,
explain how the equilibrium price, quantity transacted and total revenue of Café
Y’s coffee will be affected in each of the following cases.
(i) Café X increases the price of its coffee. (5 marks)
(ii) The price of coffee beans increases sharply. (7 marks)
(d) Suppose Café Y plans to seek out more coffee bean sources. Explain how this plan
will affect the price elasticity of supply of Café Y’s coffee. (2 marks)
Answers:
(a)  After the opening of Café Y, the demand for Café X’s coffee decreased.
(1 mark)
 The equilibrium price and quantity transacted of Café X’s coffee decrease,
thus lowering the total revenue. (2 marks)
(b)  It is because the demand for Café X’s coffee is elastic. (1 mark)
 When the price is increased, the loss in revenue (due to the decrease in
quantity demanded) is larger than the gain in revenue (due to the increase in
price), resulting in a decrease in total revenue. (2 marks)
Price ($)
P1
Gain
P0 (2 marks)
Loss
0 Quantity
Q1 Q0
(c) (i)  Since Café Y’s coffee is a close substitute for Café X’s coffee, the demand
for Café Y’s coffee increases. (1 mark)
 The equilibrium price and quantity transacted of Café Y’s coffee increases.
(1 mark)
 The total revenue of Café Y increases. (1 mark)
Price ($)
S
P1
Gain (2 marks)
P0
D1
D0
0 Q0 Q1 Quantity
(ii)  The supply of Café Y’s coffee decreases. (1 mark)

 The equilibrium price of Café Y’s coffee increases. (1 mark)
 The quantity transacted of Café Y’s coffee decreases. (1 mark)
 Since the demand for Café Y’s coffee is elastic, the loss in revenue (due to
the decrease in quantity transacted) is larger than the gain in revenue (due
to the increase in price), the total revenue will decrease. (2 marks)
Price ($) S1
S0
P1
Gain
P0
(2 marks)
Loss
D
0 Quantity
Q1 Q0
(d)  When there are more coffee bean sources, the flexibility of production
increases. (1 mark)
 The price elasticity of supply of Café Y’s coffee increases. (1 mark)

Suppose after a report is published stating that drinking lemon tea can help prevent
cancer,, the prices of lemons and lemon tea, as well as the total revenue of a
restaurant, increase drastically.
* (a) Explain the change in the restaurant’s total revenue. (5 marks)
(b) Explain how the following situations will affect the total sales revenue for lemon
tea:
(i) The harvest of lemons is good and the demand for lemon tea is elastic.
(4 marks)
(ii) The harvest of tea is bad and the demand for lemon tea is inelastic.. (4 marks)
Answers:
(a)  The report will lead to an increase in demand for lemon tea. (1 mark)
 Since lemon tea is a substitute for other drinks such as coffee, the restaurant’s
income from selling other drinks will decrease. (2 marks)
 According to information provided, the restaurant’s total revenue increases as
the demand for lemon tea increases. This means that the loss in total revenue
due to the decrease in demand for other drinks is smaller than the gain in total
revenue due to the increase in demand for lemon tea. (2 marks)
(b) (i)  When there is a good harvest of lemons, the price of lemons will decrease,
resulting in a decrease in the production cost and price of lemon tea.
(2 marks)
 Since the demand for lemon tea is elastic, the loss in total revenue (due to
the decrease in price) will be smaller than the gain in total revenue (due to
the increase in quantity demanded). Therefore, total sales of lemon tea
will increase. (2 marks)
(ii)  When there is a bad tea harvest, the price of tea will increase, resulting in
an increase in production costs and the price of lemon tea.
(2 marks)
 Since the demand for lemon tea is inelastic, the loss in total revenue (due
to the decrease in quantity demanded) is smaller than the gain in total
revenue (due to the increase in price). Therefore, the total sales revenue of
lemon tea will increase. (2 marks)

In recent years, more and more mainlanders have come to Hong Kong to buy luxury
products. As the Renminbi has appreciated, it has become cheaper for mainlanders to
shop in Hong Kong.
(a) The sales revenue of luxury retailers in the mainland cities, such as Beijing and
Shanghai, has greatly decreased over the same period.
(i) With the aid of a diagram, explain why this has happened. (5 marks)
(ii) What is the impact on the equilibrium rental rate of the shops in those cities
and the total rental income from them? Explain with the aid of a diagram.
(6 marks)
(b) In order to compete with retailers in Hong Kong, retailers in the mainland have
lowered the price of their goods. With the aid of a diagram, explain under what
conditions their attempt to raise total revenue will be successful. (6 marks)
Answers:
(a) (i)  Since luxury products sold in Hong Kong and similar goods sold in the
mainland are close substitutes, the demand for the mainland goods will
decrease (D0D1). (2 marks)
Price ($)
P0 (2 marks)
D1 D0
0 Q1 Q0 Quantity
 If the price of goods sold in the mainland is fixed at P0, the decrease in
demand will lead to a decrease in total revenue. (1 mark)
(ii)  Since the demand for rented shops in the mainland is derived from the
demand for goods sold at the shops, the decrease in demand for their goods
will lead to a decrease in the demand for the rented shops. (2 marks)
Rental rate ($) S0
P0
P1
D1 D0
0 Number of shops
Q0
(2 marks)
 The equilibrium rental rate will decrease. (1 mark)
 Since the number of shops is fixed at Q0, a decrease in the equilibrium
rental rate will lead to a decrease in total rental income. (1 mark)
(b)
Price ($)
P0
Loss
P1
(2 marks)
Gain
D1
0 Quantity
Q0 Q1
 If the demand for the goods is elastic (Ed > 1), the percentage increase in
quantity demanded will be greater than the percentage decrease in price.
(2 marks)
 Then the gain in total revenue (due to an increase in quantity demanded) will
be greater than the loss in total revenue (due to a decrease in price), resulting
in a higher total revenue. (2 marks)

In recent years, more and more parents have let their children go on overseas study
tours during the summer holidays.
(a) The number of participants in summer activities in Hong Kong has fallen
drastically.
(i) Suppose the price of those summer activities is fixed. Explain the above
phenomenon with the aid of a diagram. (4 marks)
(ii) Explain how this will affect the total revenue for organisers of summer
activities in Hong Kong. (2 marks)
(b) Several travel agencies in Hong Kong plan to increase the price of study tours.
Explain under what situation(s) they can increase their total revenue by increasing
prices. (6 marks)
Answers:
(a) (i) Since more and more children go on overseas study tours during the summer
holidays, the demand for summer activities in Hong Kong will decrease
(D0D1). Thus, the number of participants decreases from Q0 to Q1. (2 marks)
Price ($)
Summer activities in Hong
Kong
P0
(2 marks)
D1 D0
0 Number of
Q1 Q0
participants
(ii) Since the price is fixed, the total revenue for organisers of summer activities
in Hong Kong will decrease as the number of participants decreases.
(2 marks)
(b)
Price ($)
(2 marks)
P1
Gain
P0
Loss
D
0 Study tours
Q1 Q0
 If the demand for study tours is inelastic (Ed < 1), the percentage increase in
price will be greater than the percentage decrease in quantity demanded.
(2 marks)
 Therefore, travel agencies’ gain in total revenue (due to the increase in price)
will be greater than their loss in total revenue (due to the decrease in quantity
demanded), and their total revenue will increase. (2 marks)
Pizza Hut and Spaghetti House are two restaurant chains that sell Italian dishes in
Hong Kong. Suppose Hong Kong suffers from an economic downturn and the total
revenue for Pizza Hut falls.
(a) (i) Suppose the prices at Pizza Hut remain unchanged initially. Explain why its
total revenue has fallen. (4 marks)
* (ii)In order to attract more customers, Pizza Hut later cuts its food prices (e.g.,
the lower-price set meals). But the sales manager still finds the sales revenue
lower than the period before the economic downturn. Explain with a well-
labelled diagram why this happened. (6 marks)
(b) (i) After Pizza Hut cuts its food prices, the Spaghetti House also experiences a
decrease in its sales revenue. Explain with a diagram. (5 marks)
(ii) Suppose the sales manager of Spaghetti House cuts the prices of its food. Will
he be successful in increasing the total revenue of his company? Explain with
the aid of a diagram. (6 marks)
Answers:
(a) (i)  Since Italian food is a superior good (or normal good), a reduction in
income will lead to a decrease in the demand for it (D0D1). (1 mark)
Price ($)
P0
(2 marks)
D1 D0
0 Food
Q1 Q0
 Assume the price was initially fixed at P0, the total revenue has now
decreased from P0 × Q0 to P0 × Q1. (1 mark)
(ii)
Price ($)
P0
(2 marks)
P1
D1 D0
0 Food
Q1 Q2 Q0
 Suppose Pizza Hut lowers its food price from P0 to P1.

 When the price decreases from P0 to P1, the quantity demanded of its food
increases from Q1 to Q2. (1 mark)
 However, the quantity demanded is still lower than that before the
economic downturn, Q0. (1 mark)
 Since both price and quantity demanded are lower than those before the
economic downturn, the total revenue of Pizza Hut (P1 × Q2) is lower than
that before. (2 marks)
(b) (i)  Since food and services provided by Pizza Hut and Spaghetti House are
similar, they are close substitutes for each other. (1 mark)
 When the food prices offered by Pizza Hut decrease, people will buy more
food from Pizza Hut and less food from Spaghetti House. Hence, the
demand for food at Spaghetti House will decrease (D0D1). (1 mark)
 If the price of food at Spaghetti House is fixed at P0, total revenue will be
lower. (1 mark)
Price ($)
P0
(2 marks)
D1 D0
Food
0 Q1 Q0
(b) (ii)
Price ($)
P0
Loss (2 marks)
P1
Gain D1
0 Food
Q1 Q2
 Whether he will be successful is uncertain, depending on the demand

elasticity. (1 mark)
Suppose the price is lowered from P0 to P1.
 Successful if the demand is elastic (Ed > 1). The gain in revenue due to an
increase in quantity demanded is larger than the loss in revenue due to a
decrease in price, which means the total revenue will increase.
 Not successful if the demand is inelastic (Ed < 1). The gain in revenue due
to an increase in quantity demanded is smaller than the loss in revenue due
to a decrease in price, which means the total revenue will fall.
 Not successful if the demand is unitarily elastic (Ed = 1). The gain in
revenue due to an increase in quantity demanded is equal to the loss in
revenue due to a decrease in price, which means the total revenue will
remain unchanged.
(Either ONE of the above situations, 3 marks)

In recent years, several pay TV operators have entered the market for pay TV in Hong
Kong. They have offered various promotional packages to attract customers.
(a) Suppose the fee for Cable TV services remains unchanged. Explain how the above
phenomenon will affect its total revenue. (4 marks)
(b) Suppose that Cable TV plans to integrate with TVB to produce and provide more
TV programmes in order to raise competitiveness. Explain under what situation(s)
the total expenditure on pay TV services in Hong Kong will increase. (7 marks)
Answers:
(a)  The increase in the number of pay TV operators will lead to a decrease in the
demand for Cable TV services (D0D1). (1 mark)
Price ($)
P0
(2 marks)
D1 D0
0 Cable TV
Q1 Q0 services
 Since the fee for Cable TV services remains unchanged, its total revenue will
decrease from P0 × Q0 to P0 × Q1. (1 mark)
(b)
Price ($)
S0
P0
S1
Decrease
(2 marks)
P1
Increase
D0
0 Pay TV
Q0 Q1 services
 The integration will lead to an increase in the supply of pay TV services

(S0S1). (1 mark)
 The price of pay TV services will decrease from P0 to P1. The quantity
transacted will increase from Q0 to Q1. (2 marks)
 If the demand for pay TV services is elastic (Ed > 1), total expenditure on pay
TV services will increase. (2 marks)
Suppose the government has decided to permanently reduce the supply of public
housing in the future. This will be achieved by reducing the supply of public rental
housing and suspending the Home Ownership Scheme (HOS) (主主主主主主主).
(a) (i) What will be the immediate effect of this policy on the demand for private
housing units? (3 marks)
(ii) Assume the supply of private housing is fixed. What are the immediate effects
on the equilibrium price, the quantity transacted and the total revenue from
private housing units? Explain with the aid of a diagram. (5 marks)
(b) Suppose the government converts the unsold HOS flats into public rental housing
instead. It also increases the amount of housing loans to the public.
What will be the change in your answer in (a)(ii)? Explain. (6 marks)
(c) Suppose the government auctions off more land to private property developers.
Under what situation will the total expenditure on private housing units decrease?
Explain with the aid of a diagram. (8 marks)
Answers:
(a) (i)  Since the future supply of housing units in Hong Kong will decrease,
people expect the prices of housing units to increase in the near future.
(2 marks)
 Therefore, the present demand for private housing units will increase.
(1 mark)
(ii)
Price ($) S0
P1
P0
D1
D0
0 Q0 Private housing units
(2 marks)
Since the demand for private housing increases (D0  D1),

 The equilibrium price will increase (P0  P1). (1 mark)
 The quantity transacted will remain unchanged since the supply of
existing private housing units is fixed. (1 mark)
 The total revenue from private housing units will increase. (1 mark)
(b)  The increase in the amount of housing loans will increase the demand for
private housing. (1 mark)
Price S0
P2
Increase in
TR
P1
(2 marks)
P0
D2
D1
D0
Private housing
0 Q0 units
 The quantity transacted will remain at Q0 as there is no change in the fixed

supply. (1 mark)
 The equilibrium price will further increase to P2, a level higher than P1.
(1 mark)
 The total revenue will increase by the shaded area. (1 mark)
Price ($)
S0 S1
(c)
P0
Loss
P1
Gain D
0 Q0 Q1 Private housing units
(3 marks)
 The supply of private housing will increase (S1  S2) as developers have more
land upon which to build. (1 mark)
 The quantity transacted will increase from Q0 to Q1. (1 mark)
 The equilibrium price will decrease from P0 to P1. (1 mark)
 If the demand is inelastic, the percentage decrease in price will be larger than
the percentage increase in quantity transacted. Therefore, total expenditure
will decrease. (2 marks)

Suppose the government decides to reclaim the whole of Victoria Harbour to build
more housing units to resolve Hong Kong’s housing problems.
(a) (i) What are the immediate effects of this policy on the demand for private
housing units? (3 marks)
(ii) Explain with the aid of a diagram the immediate effects of this policy on the
total revenue of private developers. (5 marks)
(b) Suppose the government sets the rental rate of public housing units according to
demand and supply. Apart from the reclamation of Victoria Harbour, the
government also decides to reclaim Victoria Peak to provide more public housing
units. Explain under what situation(s) this policy will lead to an increase in the
government’s rental income. (6 marks)
(c) Apart from your answer in (b), suggest ONE method the government can use to
increase rental income. (2 marks)
Answers:
(a) (i)  Since the future supply of housing units in Hong Kong will increase,
people expect property prices to decrease in the future. (2 marks)
 Therefore, the present demand for private housing will decrease. (1 mark)
(ii)
Price ($)
S0
P0
P1
D0
D1
0
Q1 Q0 Private housing
units
(2 marks)
Since the demand for private housing units decreases (D0  D1),
 the equilibrium price decreases (P0  P1). (1 mark)
 the quantity transacted decreases (Q0 Q1). (1 mark)
 the total revenue of private developers decreases. (1 mark)
(b)  If the demand for public housing units is elastic (Ed > 1), the government can
increase its rental income by increasing the supply of public housing units.
(2 marks)
Rental rate
S0
R0 S1
Loss
R1 (2 marks)
Gain D0
0 Public housing
Q0 Q1 units
 The percentage increase in quantity transacted will be greater than the

percentage decrease in rental rate. (1 mark)
 The gain in rental income will be greater than the loss in rental income.
(1 mark)
(c) The government can raise the maximum income restriction on public housing
applicants to stimulate demand. (2 marks)
(Accept other reasonable answers.)

In recent years, the number of people using 4G mobile phones has been increasing.
(a) Explain how this will affect the total revenue from 3G mobile phones. (6 marks)
(b) Suppose the cost of producing 4G mobile phones increases.
(i) Explain with the aid of a diagram how this will affect the total revenue from
3G mobile phones. (6 marks)
(ii) Explain how this will affect the total revenue from 4G mobile phones.
(4 marks)
(c) Must the demand for mobile phones increase with income? (3 marks)
Answers:
(a) This will cause the demand for 3G mobile phones to decrease (D0D1). Since
both the price and quantity transacted decrease (P0P1; Q0Q1), the producers’
total revenue will decrease (P0 × Q0P1 × Q1). (4 marks)
Price ($)
S0
P0
P1
D0
D1
0 3G mobile phones
Q1 Q0
(2 marks)
(b) (i) This will cause the price of 4G mobile phones to increase. Since 3G mobile
phones and 4G mobile phones are substitutes, the demand for 3G mobile
phones will increase (D0D1). Both the price and quantity transacted increase
(P0P1; Q0Q1); the producers’ total revenue will increase (P0×Q0P1×Q1).
(4 marks)
Price ($)
S0
P1
P0
D1
D0
0 3G mobile phones
Q0 Q1
(2 marks)
(ii)  This will cause the price of 4G mobile phones to increase. The change in
the producers’ total revenue is uncertain, depending on the demand
elasticity of 4G mobile phones. (2 marks)
 If the demand is elastic (Ed > 1), the increase in price will cause the
producers’ total revenue to decrease. / If the demand is inelastic (Ed < 1),
the increase in price will cause the producers’ total revenue to increase. / If
the demand is unitarily elastic (Ed = 1), the price increase will have no
effect on the producers’ total revenue. (Any ONE, 2 marks)
(c) Not necessarily. The demand for mobile phones will increase with income only
when mobile phones are normal goods. (3 marks)

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Chapter 5 Price elasticity of demand and supply

Multiple Choice Questions

Question code: B1C05Q001 (new)

Question code: B1C05Q002

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Question code: B1C05Q017

Question code: B1C05Q019 (new)

Question code: B1C05Q020

Question code: B1C05Q022

Question code: B1C05Q023 ***

Unit price ($)

Question code: B1C05Q025

Unit price ($)

If segment AB is above the mid-point of the demand curve, X must be

Question code: B1C05Q026 (new)

Question code: B1C05Q027 (new)

Question code: B1C05Q028 (new)

Question code: B1C05Q030 (new)

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Question code: B1C05Q039

Question code: B1C05Q041 (new)

Question code: B1C05Q042

Question code: B1C05Q044

Question code: B1C05Q045

Price of Good X ($) 2 3 4

Which of the following statements about Good X is correct?

Question code: B1C05Q046

Price of grapefruit ($) 3 6 9

Question code: B1C05Q047

Question code: B1C05Q48

Question code: B1C05Q050

Question code: B1C05Q051 (new)

Question code: B1C05Q053 (new)

Question code: B1C05Q055

Unit price ($) 3 4 5 6 7 8 9

Question code: B1C05Q057

Question code: B1C05Q058 (new)

Question code: B1C05Q060

Question code: B1C05Q061

Price ($) 100 110 120 130 140

According to the above table,

% change in quantity demanded

 % change in quantity demanded = Ed × % change in price

Question code: B1C05Q063

Rental of comic Total expenditure on

Question code: B1C05Q064

Question code: B1C05Q065

What is his elasticity of demand for food at Fairwood?

Question code: B1C05Q066

Question code: B1C05Q067 (new)

Question code: B1C05Q069(new)

Question code: B1C05Q070

Question code: B1C05Q072