Elasticity

Question 1

What does Price Elasticity of Demand measure?

Answer 1

Measures the responsiveness of quantity demanded (Qd) to changes in price (P)

Question 2

How do you calculate Price Elasticity of Demand?

Answer 2

ED = %ΔQd / %ΔP

Question 3

What is the relationship between Price Elasticity of Demand and the slope of Demand?

Answer 3

Price Elasticity of Demand relates to the relative changes in Qd and P, while slope captures absolute changes.

Question 4

What determines whether demand is price elastic or price inelastic?

Answer 4

Availability of substitutes, time, necessities versus luxuries, and definition of the market

Question 5

What does Price Elasticity of Demand tell us about how changes in price affect revenue?

Answer 5

It indicates whether an increase or decrease in price will raise or lower total revenue (TR).

Question 6

What does Income Elasticity of Demand measure?

Answer 6

Measures the responsiveness of quantity demanded (Qd) to changes in income (Y)

Question 7

What does Cross-Price Elasticity of Demand measure?

Answer 7

Measures how the quantity demanded of one good responds to changes in the price of another related good.

Question 8

What does Price Elasticity of Supply measure?

Answer 8

Measures the responsiveness of quantity supplied to changes in price.

Question 9

What is the formula for calculating elasticity?

Answer 9

E = %ΔY / %ΔX

Question 10

What are the four key types of elasticity?

Answer 10

• Price Elasticity of Demand (PED or ED) * Income Elasticity of Demand (YED or EY) * Cross-Price Elasticity of Demand (XED or EX) * Price Elasticity of Supply (PES or ES)

Question 11

What indicates perfectly inelastic demand?

Answer 11

|ED| = 0; demand is fixed regardless of price changes

Question 12

What indicates elastic demand?

Answer 12

|ED| > 1; consumers are sensitive to price changes

Question 13

What indicates unit elastic demand?

Answer 13

|ED| = 1; change in price yields exactly proportionate change in quantity demanded

Question 14

What is the effect of a price increase on total revenue if demand is elastic?

Answer 14

Total revenue will decrease.

Question 15

What is the effect of a price decrease on total revenue if demand is inelastic?

Answer 15

Total revenue will decrease.

Question 16

What is a characteristic of inferior goods in terms of income elasticity?

Answer 16

EY < 0; quantity demanded decreases as income increases.

Question 17

What is a characteristic of normal goods in terms of income elasticity?

Answer 17

0 < EY < 1; quantity demanded moderately responds to changes in income.

Question 18

What is a characteristic of luxury goods in terms of income elasticity?

Answer 18

EY > 1; quantity demanded strongly responds to changes in income.

Question 19

What is the relationship between substitutes and cross-price elasticity?

Answer 19

EX > 0; an increase in the price of one leads to an increase in the quantity demanded of the other.

Question 20

What is the relationship between complements and cross-price elasticity?

Answer 20

EX < 0; an increase in the price of one leads to a decrease in the quantity demanded of the other.

Question 21

Fill in the blank: The formula for calculating the midpoint elasticity is E = (________).

Answer 21

(ΔQ / Q) / (ΔP / P)

Question 22

True or False: If Ed = 1, changes in price will not affect total revenue.

Answer 22

True

Question 23

What does EX represent in the context of goods/services?

Answer 23

The cross-price elasticity of demand

EX measures the responsiveness of the quantity demanded of one good to a change in the price of another good.

Question 24

What is the relationship between QdA and PB for substitute goods?

Answer 24

EX > 0

For substitutes, an increase in the price of good B leads to a decrease in quantity demanded of good A.

Question 25

What is the relationship between QdA and PB for complementary goods?

Answer 25

EX < 0 ## Footnote For complements, an increase in the price of good B leads to a decrease in quantity demanded of good A.

Question 26

What does price elasticity of supply (Es) measure?

Answer 26

How the quantity supplied of a good responds to a change in the price of that good.

Question 27

What is the formula for price elasticity of supply (Es)?

Answer 27

Es = %ΔQS / %ΔP

Question 28

What does an Es value of 0 indicate?

Answer 28

Perfectly inelastic supply

Question 29

What does an Es value greater than 1 indicate?

Answer 29

Relatively elastic supply

Question 30

What factors determine the price elasticity of supply?

Answer 30

* Time * Cost of inputs

Question 31

How does time affect price elasticity of supply?

Answer 31

Longer time frames generally make supply more price elastic.

Question 32

What happens to supply when production costs increase due to input scarcity?

Answer 32

Supply becomes relatively more price inelastic.

Question 33

What is a quota in the context of government intervention?

Answer 33

A direct restriction on consumption to a certain amount of alcohol per person.

Question 34

What is a price ceiling?

Answer 34

A maximum price set below equilibrium price to restrict quantity supplied.

Question 35

What is a price floor?

Answer 35

A minimum price set above equilibrium price to restrict quantity demanded.

Question 36

What effect does a tax have on the price paid by buyers and the price received by sellers?

Answer 36

Taxes increase prices for buyers and lower them for sellers.

Question 37

How does a tax on alcohol affect quantity demanded and supplied?

Answer 37

Both quantity demanded and supplied would decrease.

Question 38

What are the welfare implications of a tax?

Answer 38

Changes in marginal benefit (MB) and marginal cost (MC) affect allocative efficiency.

Question 39

True or False: A tax on alcohol would likely create surpluses.

Answer 39

False

Question 40

What happens to the equilibrium price and quantity when a $5 tax is imposed on alcohol?

Answer 40

Price paid by buyers increases and quantity decreases.

Question 41

What is the consequence of a tax compared to a price floor in terms of quantity supplied?

Answer 41

A tax can achieve the same reduction in quantity demanded without surplus issues.

Question 42

What happens to demand for alco-pops if a tax is applied specifically to them?

Answer 42

Demand is likely to be elastic.

Question 43

Fill in the blank: Price elasticity of demand informs us about the effect of price changes on firms’ total _______.

Answer 43

revenue

Question 44

What are the commonly used elasticity measures?

Answer 44

* Price elasticity of demand * Income elasticity of demand * Cross-price elasticity of demand * Price elasticity of supply

Question 45

What distinguishes normal goods from inferior goods?

Answer 45

Normal goods have positive income elasticity, while inferior goods have negative income elasticity.

Question 46

What is the impact of price elasticity of demand on welfare consequences of market dynamics?

Answer 46

It influences how consumers and producers respond to price changes and thus affects total surplus.