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Tackle the Test: Free-Response Questions

  1. Question

    Refer to the table below to answer the following questions.




















    Price of Good AQuantity of Good A DemandedQuantity of Good B Demanded
    $101005
    811010



    1. Using the midpoint method, calculate the price elasticity of demand for good A.



    2. Give the formula for calculating the cross-price elasticity of demand between good B and good A.



    3. Using the midpoint method, calculate the cross-price elasticity of demand between good A and good B.



    4. What does your answer for part c tell you about the relationship between the two goods? Explain.

    Rubric for FRQ 1 (5 points)

    1 point: 0.43

    1 point: % change in quantity of good B/% change in price of good A or (change in QB/average QB)/(change in PA/average PA)

    1 point: āˆ’3

    1 point: They are complements.

    1 point: Cross-price elasticity is negativeā€”when the price of good A goes down, in addition to buying more of good A, people buy more of good B to go along with it.

  2. Question

    Assume the price of corn rises by 20% and this causes suppliers to increase the quantity of corn supplied by 40%.



    1. Calculate the price elasticity of supply.



    2. In this case, is supply elastic or inelastic?



    3. Draw a correctly labeled graph of a supply curve illustrating the most extreme case of the category of elasticity you found in part b (either perfectly elastic or perfectly inelastic supply).



    4. What would likely be true of the availability of inputs for a firm with the supply curve you drew in part c? Explain. (5 points)

    Rubric for FRQ 2 (5 points)

    1 point: 40%/20% = 2

    1 point: Elastic

    1 point: Horizontal supply curve on correctly labeled graph, as shown in the figure.

    1 point: Inputs are readily available.

    1 point: When inputs are available to be shifted into or out of production at a low cost, firms can easily expand the quantity of output supplied.

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