ECON 140: CHAPTER 6

REVIEW QUESTIONS

Tutorial session

MCQ

1- The price elasticity of demand coefficient measures:

A. buyer responsiveness to price changes.

B. the extent to which a demand curve shifts as incomes

change

C. the slope of the demand curve.

D. how far business executives can stretch their fixed costs

2- The basic formula for the price elasticity of demand coefficient is:

A. absolute decline in quantity demanded/absolute increase in price.

B. percentage change in quantity demanded/percentage change in

price.

C. absolute decline in price/absolute increase in quantity demanded.

D. percentage change in price/percentage change in quantity

demanded.
3- If a firm can sell 3,000 units of product A at $10 per unit and 5,000 at $8,
then:

A. the price elasticity of demand is 0.44.

B. A is a complementary good.

C. the price elasticity of demand is 2.25.

D. A is an inferior good.
10 (P1) 3000 (Q1)
8 (P2) 5000 (Q2)
2000/4000 = 0.5

2000/4000 = 2/4 = 0.5

-2/9 = 0.222

0.5/0.222 = 2.25

4- A perfectly inelastic demand schedule:

A. rises upward and to the right but has a constant slope.

B. can be represented by a line parallel to the vertical axis.

C. cannot be shown on a two-dimensional graph.

D. can be represented by a line parallel to the horizontal axis.

5- Suppose that as the price of Y falls from $2.00 to $1.90, the quantity of Y
demanded increases from 110 to 118. Then the price elasticity of demand is:

A. 4.00.

B. 2.09.

C. 1.36.

D. 3.94.
6- If the demand for product X is inelastic, a 4 percent increase in the price of
X will:

A. decrease the quantity of X demanded by more than 4 percent.

B. decrease the quantity of X demanded by less than 4 percent.

C. increase the quantity of X demanded by more than 4 percent.

D. increase the quantity of X demanded by less than 4 percent.

7- The price elasticity of demand of a straight-line demand curve is:

A. Elastic in high-price ranges and inelastic in low-price ranges.

B. elastic but does not change at various points on the curve.

C. inelastic but does not change at various points on the curve.

D. 1 at all points on the curve.

8- The price of product X is reduced from $100 to $90 and, as a result, the
quantity demanded increases from 50 to 60 units. Therefore, demand for X in
this price range:

A. has declined.

B. is of unit elasticity.

C. is inelastic.

D. is elastic.

9- Suppose we find that the price elasticity of demand for a product is 3.5
when its price is increased by 2 percent. We can conclude that quantity
demanded:

A. increased by 7 percent.

B. decreased by 7 percent.
C. decreased by 9 percent.

D. decreased by 1.75 percent.

10- If demand for a product is elastic, the value of the price elasticity
coefficient is:

A. zero.

B. greater than one.

C. equal to one.

D. less than one.

11 If the price of hand calculators falls from $10 to $9 and, as a result, the
- quantity demanded increases from 100 to 125, then:

A. demand is elastic.

B. demand is inelastic.

C. demand is of unit elasticity.

D. not enough information is given to make a statement about elasticity.

12 A firm can sell as much as it wants at a constant price. Demand is thus:

-
A. perfectly inelastic.

B. perfectly elastic.

C. relatively inelastic.

D. relatively elastic.

13 Which of the following is correct?

-
A. If demand is elastic, an increase in price will increase total revenue.

B. If demand is elastic, a decrease in price will decrease total revenue.

C. If demand is elastic, a decrease in price will increase total revenue.

D. If demand is inelastic, an increase in price will decrease total revenue.

14 A supply curve that is a vertical straight line indicates that:

-
A. production costs for this product cannot be calculated.

B. the relationship between price and quantity supplied is inverse.

C. a change in price will have no effect on the quantity supplied.

D. an unlimited amount of the product will be supplied at a constant price.

15 The larger the positive cross elasticity coefficient of demand between
- products X and Y, the:

A. stronger their complementariness.

B. greater their substitutability.

C. smaller the price elasticity of demand for both products.

D. the less sensitive purchases of each are to increases in

income.

16- We would expect the cross elasticity of demand between Pepsi and Coke
to be:

A. positive, indicating normal goods.

B. positive, indicating inferior goods.

C. positive, indicating substitute goods.

D. negative, indicating substitute goods.

17- We would expect the cross elasticity of demand between dress shirts and
ties to be:

A. positive, indicating normal goods.

B. positive, indicating complementary goods.

C. negative, indicating substitute goods.

D. negative, indicating complementary goods.

18- Assume that a 6 percent increase in income in the economy produces a 3

percent increase in the quantity demanded of good X. The coefficient of
income elasticity of demand is:

A. negative and therefore X is an inferior good.

B. positive but less than one; therefore X is an inferior good.

C. positive and therefore X is an inferior good.

D. positive and therefore X is a normal good.

Problems

1- The following is a straight-line demand curve that confronts a single

firm.

Price Quantity demanded

(3) TR (4) PED

$6 1

5 2

4 3

3 4

2 5

1 6

(a) In column 3, compute total revenue. In column 4, compute the

coefficient for the price elasticity of demand at each price using the
midpoints formula.

(b) Describe the character of elasticity across the prices based on the total
revenue test and the elasticity coefficient.

(c) Does a straight-line demand curve have constant elasticity?

(d) Of what practical significance is your answer to (c)?

2- Use the information in the table below to identify the type of cross
elasticity relationship between products X and Y in each of the
following five cases, A to E.

Percent Percent change Cross elasticity type

Cases change in in
price of Y quantity
demanded of X

A 5 7
B 9 6
C 5 −5
D 3 0
E −2 10

3- For the following three cases, use a midpoints formula to calculate the
coefficient for the cross elasticity of demand and identify the type of
relationship between the two products.

(a) The quantity demanded for product A increases from 30 to 40 as the price of
product B increases from $0.10 to $0.20.

Coefficient: ____________ Relationship: _______________

(b) The quantity demanded for product A decreases from 3000 to 1500 as the price
of good B increases from $5 to $10.

Coefficient: ____________Relationship: _______________

(c) The quantity demanded for product A remains 400 units as the price of product
B increases from $25 to $30.

Coefficient: ____________Relationship: _______________

 4- Use the information in the table below to identify the income elasticity
type of each of the following products, A to E.

Percent Percent change in Income elasticity type

Product change in quantity demanded
income (I)

A 9 12

B −6 6

C 3 3

D 6 −3

E 2 1

Answers:
MCQ:

1. A 2. B 3. C 4. B 5. C 6. B 7. A 8. D 9. B
10. B 11. A 12. B 13. C 14. C 15. B 16. C 17. D 18. D

Problems:

1- The following is a straight-line demand curve that confronts a single

firm.

Price Quantity demanded TR = Price Elasticity of Demand =

Q*P

$6 1 Change∈quantity Change∈ price

6 Ed = ÷
∑ of quqntiti/2 ∑ of prices /2
5 2 10 2−1
÷
5−6
=−3.67 (elastic)
[ ][ ]
2+1
2
3−2
5+6
2
4−5
4 3 12 ÷ =−1.8(elastic)
[ ][ ]
3+ 2
2
4 +5
2
3 4 12 4−3 3−4
÷ =−1(unit elastic)

2 5 10
[ ][ ]
4+3
2
5−4
÷
3+ 4
2
2−3
=−0.56 (inelastic)

1 6 6
[ ][ ]
5+ 4
2
2+3
2
6−5 1−2
÷ =−0. 27(inelastic)
6+5
2
1+2
2 [ ][ ]
(a) In column 3, compute total revenue. In column 4, compute the
coefficient for the price elasticity of demand at each price using the
midpoints formula.

(b) Describe the character of elasticity across the prices based on the total
revenue test and the elasticity coefficient.

• If PED > 1
• If price decreases , TR will increase ,
• If PED <1
• If price decreases , TR will decrease
• If PED = 1
 (c) Does a straight-line demand curve have constant elasticity?

No

(d) Of what practical significance is your answer to (c)?

Because of that, the seller will prefer to sell at elastic part where
decreasing the price will increases TR , and MR is positive.

2- Use the information in the table below to identify the type of cross
elasticity relationship between products X and Y in each of the
following five cases, A to E.
 Percent Percent change Cross elasticity type
Cases change in in % ∆ Qdx
price of Y quantity Exy=
% ∆ Py
demanded of X

A 5 7 7/5= + 1.4 substitutes

B 9 6 6/9 = +0.66 substitutes
C 5 −5 -5/5= -1 Complements
D 3 0 0/3 = 0 Independents
E −2 10 10/-2= -5 Complements

3- For the following three cases, use a midpoints formula to calculate the
coefficient for the cross elasticity of demand and identify the type of
relationship between the two products.

(a) The quantity demanded for product A increases from 30 to 40 as the price of
product B increases from $0.10 to $0.20.
Q2 X −Q1 X P2 Y −P1 Y
Exy= ÷
[
Q2 X +Q1 X
2 ][
P2 Y + P1 Y
2 ]
40−30 0.2−0.1
Exy= ÷ =0.42 ( ¿ ) , so they are substitutes

2 [
40+30
][
0.2+0.1
2 ]
(b) The quantity demanded for product A decreases from 3000 to 1500 as the price
of good B increases from $5 to $10.
Q2 X −Q1 X P2 Y −P1 Y
Exy= ÷
[ Q2 X +Q1 X
2 ][ P2 Y + P1 Y
2 ]
1500−3000 10−5
Exy=
(c) The quantity demanded for ÷ product A=−1 , so they
remains areunits
400 complements
as the price of product
[
1500+3000
B increases from $25 2to $30.
10+5
2 ][ ]
Q2 X −Q1 X P2 Y −P1 Y
Exy= ÷
[ Q2 X +Q1 X
2 ][ P2 Y + P1 Y
2 ]
400−400 30−25
Exy= ÷ =0 , so they are not related∨independent
[ 400+ 400
2 ][30+25
2 ]
4- Use the information in the table below to identify the income elasticity
type of each of the following products, A to E.

Percent Percent change in Income elasticity type

Product change in quantity demanded % ∆ Qdx
Ei=
income (I) (X) %∆I

A 9 12 12/9 = 1.33 Luxury good

B −6 6 6/-6= -1 Inferior good
C 3 3 3/3 = 1 Normal good
D 6 −3 -3/6= -0.5 Inferior good
E 2 1 1/ 2 = 0.5 Normal good

END OF REVIEW QUESTIONS