TUTORIAL /ECO162/TOPIC 3/ODL

TOPIC 3: ELASTICITY
PART A
1. The larger the proportion of income spent on a good

A. the less elastic is the good’s demand curve.

B. the more elastic is the good’s demand curve.
C. the more inelastic is the good’s demand curve.
D. no effect on the good’s demand curve

2. A family with an income of RM20,000 per annum purchases 100 units of a good per
month. The family’s income rises to RM 25,000 per annum and income elasticity of
demand is -2 for this good. What is the new quantity purchased each month?

A. 50.
B. 75.
C. 125.
D. 200.

3. If service stations raise the price of petrol and experience a decrease in demand for
automobile tyres, then petrol and tyres are

A. substitutes
B. unrelated goods.
C. inferior goods.
D. complements.

4. A state government wants to increase tax on cigarettes to increase revenue. This tax
would only be effective in raising new tax revenues if the price elasticity of demand is

A. unity.
B. elastic.
C. inelastic.
D. perfectly elastic.

5. If the cross price elasticity of demand between fish and chicken is 2, then a 2 %
increase in the price of wish will result in

A. a 1% increase in quantity of chicken demanded.

B. a 20% increase in quantity of chicken demanded.
C. a 10% increase in quantity of chicken demanded.
D. a 4% increase in quantity of chicken demanded.

6. If the price elasticity of demand is perfectly elastic, any increase in the price of a
good may causes the quantity demanded to be

A. negative.
B. increase.
C. zero.
D. infinite.

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7. A steel mill raises the price of steel by 5 percent, which results in a 4 percent
reduction in the quantity of steel demanded. The demand curve facing this firm is

A. elastic.
B. inelastic.
C. equal to one.
D. perfectly elastic.

8. The value of elasticity of demand for a good will __________________ as the

availability of substitutes ___________________.

A. increase; decrease.
B. increase; increases.
C. remain positive; decreases.
D. decrease; increases.

9. When income changes, the quantity demanded for a commodity remains the same.
Therefore the income elasticity of demand for the good is

A. infinity.
B. zero.
C. one.
D. negative one.

10. The demand curve for good M is unit elastic. At price of RM6, quantity demanded is
2,000 units. At what price will the quantity demanded increase to 10,000 units?

A. RM30.00
B. RM10.00
C. RM1.00
D. RM1.20

12. Price elasticity of demand for good H is perfectly elastic. If the price of good H
increases by 10%, what will happen to quantity demanded for good H?

A. It will reduce by 10%

B. It will remain unchanged
C. It will be zero
D. It cannot be determined

13. If the price elasticity of demand for a good is -0.8, the demand for the good can be
described as

A. perfectly elastic
B. elastic
C. unitary elastic
D. inelastic

17. Which of the following statements 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
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D. If demand is inelastic, an increase in price will decrease total revenue

18. Which of the following causes demand to be more elastic with respect to price?

A. longer periods of time to adjust to a change in price

B. a lower ratio of price to income
C. fewer substitutes
D. all of the above

19. If the price elasticity of demand is -1.0, and a firm raises its price by 10%, the quantity
sold will:

a. fall by 10%
b. fall by 2%
c. rise by 10%
d. rise by 100%

20. The coefficient of the price elasticity of supply for good H is estimated to be equal
to 2.5. A two percent decrease in price would cause

A. a 5 percent increase in the quantity demanded for good H.

B. a 5 percent increase in the quantity supplied of good H.
C. a 5 percent decrease in the quantity demanded for good H.
D. a 5 percent decrease in the quantity supplied of good H.

21. The elasticity of demand for product Z will be high when

A. it is difficult to get substitute for the product Z.

B. the proportion of income spent on product Z is small.
C. product Z is categorized as an essential good.
D. product Z is categorized as a luxury good.

22. If the supply of a commodity is price inelastic, then a small percentage increase in p
rice leads to

A. a larger percentage increase in quantity.

B. a smaller percentage increase in quantity.
C. no change in quantity.
D. a proportionate change in quantity

PART B

1. The table below shows the quantity demanded for Good L and Good M. Based on
the table answer the questions below

Price of Good Qty. demanded for Qty. demanded for

M Good L Good M
(RM) (units) (units)
15 100 500
20 80 350
25 50 200
30 20 150
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a) Define price elasticity of demand and calculate the price elasticity of demand for
Good M if the price increases from Rm20 to RM25.
(2 marks)

b) Calculate the cross elasticity of demand for Good L if price of Good M decreases
from RM25 to RM20. Determine the relationship between the two goods.
(2 marks)

c) Assume the income elasticity of demand for Good M is +3.0. What does it mean?
(1 mark)
2. The following table shows the amount of good H and Z demanded by the citizens of a
particular country at different prices and consumer

Price of good Quantity Quantity Income of

H (RM per demanded for demanded for consumers (RM)
unit) good H (unit) good Z (unit)
60,000 100,000 20,000 4,500
65,000 90,000 30,000 3,500
70,000 70,000 50,000 2,500
75,000 40,000 70,000 1,500
80,000 10,000 85,000 500

a) Calculate the price elasticity of demand for good H if the price of good H increases
from RM70,000 to RM75,000. Is the demand elastic or inelastic?
(2 marks)

b) Calculate the cross elasticity of demand for good Z when the price of good H
decreases from RM80,000 to RM70,000. What is the relationship between the two
goods?
(2 marks)

c) If the consumers’ income level increases from RM500 to RM4,500, determine the
income elasticity of demand for
i) Good H.
ii) Good Z.

Based on your answer in (i) and (ii), state the type of good.
(3 marks)
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d) State two (2) factors that influence the price elasticity of demand for a good.
(2 marks)

3. The schedule below shows the demand for goods A, B and C in year 2000 and 2001.

Year Quantity Demanded Consumers

Income
A B C (RM)
2000 40 25 45 2000
2001 36 30 45 2500

a. Calculate the income elasticity of demand for the three goods when income
increases from RM2000 to RM2500

b. State the type of each good and give an example for each.

c. Given that the price of good A is RM2 and RM4 in year 2000 and 2001
respectively. Calculate the cross elasticity between good A and good B when
price of good A increases from RM 2 to RM4. State the relationship between the
two goods.

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4. Indicate what will happen to the total revenue (whether increase, decrease or
constant) by filling up the last column.

Price Quantity Price elasticity of Total Revenue

Demanded demand
Increase Decrease More than 1
Decrease Increase More than 1
Increase Decrease Less than 1
Decrease Increase One

5. The schedule below shows the relationship between the price of good X and the
quantity demanded for goods X and Y.

Price of Good X Quantity Demanded for Quantity Demanded for

(RM) Good X (kg) Good Y (kg)
5 160 100
10 140 120
15 120 140
20 100 160

a. Calculate the price elasticity of demand for good X if the price of good X falls
from RM10.00 to RM5.00 per kg. State whether it is elastic or inelastic.

b. Calculate the cross elasticity of demand of good Y when price of good X

increase from RM10.00 to RM20.00. State whether good X and good Y are
complements or substitutes

c. Draw a diagram to show what will happen to the demand for good Y when the
price of good X increases

d. When the income of consumer increases from RM1000 to RM1400, the

demand for good X increases from 40 to 80 units. Calculate the income
elasticity of demand for good X and identify the type of good X.

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