1) Demand is said to be inelastic ( PED < 1 , customers are not very sensitively on the price changes)

% change in Qd < % change in P

a. if the price of the good responds only slightly to changes in demand.
b. if demand shifts only slightly when the price of the good changes.
c. if buyers respond substantially to changes in the price of the good. => elastic
d. if the quantity demanded changes only slightly when the price of the good changes.

2) If a good is a necessity, demand for the good would tend to be

Necessity products : the customers respond very slightly on price changes

a. elastic. ( lots of substitute products, luxury products, narrowly defined goods, long run)
b. inelastic.
c. unit elastic. ( PED = 1)
d. horizontal. ( perfectly elastic demand PED = infinity)

3) If there are very few, if any, good substitutes for good A, then
a. the supply of good A would tend to be price elastic.
b. the demand for good A would tend to be price elastic.
c. the demand for good A would tend to be price inelastic.
d. the demand for good A would tend to be income elastic. Income elastic mentioned on normal goods and
inferior goods.

4) Holding all other forces constant, when the price of gasoline rises, the number of gallons of gasoline demanded
would fall substantially over a ten year period ( long time horizon) => more elastic of demand because customers
have time to prepare other scenarios due to long change of gasoline because
a. buyers tend to be much less sensitive to a change in price when given more time to react.
b. buyers will have substantially more income over a ten year period.
c. buyers tend to be much more sensitive to a change in price when given more time to react.
d. None of these answers are correct.

5) Suppose the price of product X is reduced from $1.45 to $1.25 and, as a result, the quantity of X demanded
increases from 2,000 to 2,200. Using the midpoint method, the price elasticity of demand for X in the given price
range is
a. 2.00.
b. 1.55.
c. 1.00.
d. .64.
Mid point = (end value + start value)/2
% change = 100% x (end value – start value) / midpoint

6) If the price elasticity of demand for a good is 4.0 PED > 1 => elastic , customers respond heavily on the price
changes then a 10 percent increase in price would result in a
a. 4.0 percent decrease in the quantity demanded.
b. 10 percent decrease in the quantity demanded.
c. 40 percent decrease in the quantity demanded.
d. 400 percent decrease in the quantity demanded.

PED >1 => [ % change in Qd / % change in P ] > 1 => 4 = % change in Qd / 10%

 7) The local pizza restaurant makes such great bread sticks that consumers do not respond much to a change in the
price ( inelastic) . If the owner is only interested in increasing revenue, he should
a. lower the price of the bread sticks.
b. raise the price of the bread sticks.
c. leave the price of the bread sticks alone.
d. reduce costs.
INELASTIC ( INCREASE IN PRICE => INCREASE IN TOTAL REVENUE) , P & TR SAME DIRECTIONS
ELASTIC ( INCREASE IN PRICE => REDUCE IN TOTAL REVENUE) , P & TR OPPOSITE DIRECTIONS

8) You produce jewelry boxes. If the demand for jewelry boxes is elastic and you want to increase your total
revenue, you should
a. decrease the price of your jewelry boxes.
b. increase the price of your jewelry boxes.
c. not change the price of your jewelry boxes.
d. None of the above answers are correct.

9) Suppose that 50 candy bars are demanded at a particular price. Using the midpoint method, if the price of candy
bars rises by 4 percent, the number of candy bars demanded falls to 46 candy bars. This means that
a. the demand for candy bars in this price range is elastic.
b. the demand for candy bars in this price range is inelastic.
c. the price elasticity of demand for candy bars is 0.
d. the demand for candy bars is unit elastic.
Mid point method :
% change in Qd = (50 – 46) / [(50 + 46)/2] = …….
% change in P = 4%
PED = % change in Qd/% change in P
PED > 1: elastic ; PED < 1: inelastic, PED =1 : unit elastic, PED = 0 : perfectly inelastic demand.

10) Assume that a 4 percent increase in income results in a 2 percent increase in the quantity demanded of a good.
The income elasticity of demand for the good = % change in Qd / % change in income is
a. negative and therefore the good is an inferior good.
b. negative and therefore the good is a normal good.
c. positive and therefore the good is an inferior good.
d. positive and therefore the good is a normal good.

 If income elasticity of demand is positive (YED > 0), it indicates that the good is a normal good. As
income rises, the quantity demanded of the good also rises.
 If income elasticity of demand is negative (YED < 0), it indicates that the good is an inferior good.
As income rises, the quantity demanded of the good decreases.
 If income elasticity of demand is zero (YED = 0), it indicates that the good is income inelastic.
Changes in income do not significantly affect the quantity demanded of the good.