Elasticity

Multiple Choice Questions

After watching the Elasticity video lecture, consider the question(s) below. Then “submit” your response.

Question

1. When an airline company raises the price of tickets for a certain flight by 10%, it experiences an 8% decline in the number of passengers on that flight. The price elasticity of demand for the tickets on this particular flight is:

A.
B.
C.
D.

Question

2. The price elasticity of demand the figure is:
image

A.
B.
C.
D.

Question

3. A certain brand of breakfast cereal increases its price by 20%, while other brands keep their prices unchanged. The quantity of cereal sold by the brand that increases its price declines, and the quantity sold by the other brands increases. In this case, the cross price elasticity of demand between the cereal of the brand that increases its price and the cereals produced by other brands is:

A.
B.
C.
D.

Question

4. If the price elasticity of demand for a good is inelastic and the price of the good rises, the revenue of the firm selling the good will:

A.
B.
C.
D.

Question

5. The cross price elasticity of demand measures:

A.
B.
C.
D.

Question

6. If the cross price elasticity of demand is positive for a given pair of goods, they are _____ and if it is negative, they are _____

A.
B.
C.
D.

Question

7. A(n) _____ good is a good for which the amount consumed declines as a consumer’s income increases.

A.
B.
C.
D.

True/False Questions

After watching the Elasticity video lecture, consider the question(s) below. Then “submit” your response.

Question

1. Price elasticity of demand measures how responsive consumers are to changes in price.

A.
B.

Question

2. A normal good is one for which the quantity demanded increases as income increases.

A.
B.

Question

3. The price elasticity of supply measures the relationship between changes in quantity demanded of a good and changes in its quantity supplied.

A.
B.

Short Answer/Discussion Questions

After watching the Elasticity video lecture, consider the question(s) below. Then “submit” your response.

Question

1. One of the determinants of the price elasticity of demand is time. If gasoline prices increase substantially, what adjustments might consumers make over the long run that would increase their responsiveness to changes in the price of gasoline?
Suggested solution: Consumers have very little ability to respond to a gasoline price increase in the short run. While they may be able to cut down on driving slightly, their day-to-day life, driving to work, school, and so on, will continue, with the consumption of gas remaining about the same. This means that the responsiveness of consumers to the price change is relatively low. A low responsiveness results in the price increase being greater than the reduction in quantity demanded Consequently, in the short run, the price elasticity of demand is less than one or inelastic. Over the long run, consumers can buy more fuel efficient cars, move closer to work, or start using mass transit. These actions will reduce fuel consumption and increase consumers’ responsiveness to changes in the price of gasoline. Therefore, demand for gasoline may become price elastic in the long run. (Answers may vary.)

Question

2. How does knowledge of price elasticity of demand for a firm’s products help a firm make decisions regarding price increases?
Suggested solution: If a firm is considering a price increase, it would be interested in understanding the impact of the price increase on its revenue. If a firm knows that the demand for its product is price inelastic, it can conclude that the percentage change in the quantity demanded of its product will be less than the percentage change in its price. Hence, in such cases, an increase in the price of the product will lead to an increase in the revenue of the firm. (Answers will vary)

Question

3. How is the concept of cross price elasticity of demand relevant for a business owner?
Suggested solution: Since cross price elasticity measures the responsiveness of quantity demanded of one good to changes in the price of another good, a business owner can use this knowledge to anticipate changes in the demand for his products in response to changes in the price of other goods. For example, ketchup and hamburgers are complements so cross elasticity of demand is negative. If the price of beef goes up, say due to a drought, the price of hamburgers will also go up, and people will consume less of them. As a result, people would also buy less ketchup. Hence, the ketchup producer should plan to produce less when he/she expects beef prices to rise. (Answers may vary.)