Microeconomics

Problem set 7 - chapter 4

I. Choose the best answer for each of the following:

1) The price elasticity of demand measures

A) how often the price of a good changes.
B) the slope of a budget curve.
C) how sensitive the quantity demanded is to changes in demand.
D) the responsiveness of the quantity demanded to change in price.

2) The price elasticity of demand is calculated as the absolute value of the

A) percentage change in quantity demanded divided by the percentage change in price.
B) percentage change in price divided by the percentage change in quantity demanded.
C) change in quantity demanded divided by the change in price.
D) change in price divided by the change in quantity demanded.

3) The price elasticity of demand for oil is estimated at 0.05. This value means a 10 percent
increase in the
A) quantity of oil demanded will result from a 0.5 percent increase in the price of oil.
B) quantity of oil demanded will result from a 0.5 percent decrease in the price of oil.
C) price of oil will increase the quantity of oil demanded by 0.5 percent.
D) price of oil will decrease the quantity of oil demanded by 0.5 percent.

4) A fall in the price of cabbage from $10.50 to $9.50 per bushel increases the quantity
demanded from 18,800 to 21,200 bushels. The price elasticity of demand is (Use the Arc
Method)

A) 0.80.
B) 1.20.
C) 1.25.
D) 8.00.

5) Elasticity measures the

A) percentage change in a variable.
B) slope of a curve.
C) change in a variable.
D) responsiveness of a variable to a change in another variable.

6) The price elasticity of demand is 5.0 if a 10 percent increase in the price results in a ________
decrease in the quantity demanded.
A) 2 percent
B) 5 percent
C) 10 percent
D) 50 percent

7) If the price elasticity of demand for clothing is 0.64, this implies that
 Microeconomics

Problem set 7 - chapter 4

A) a 6.4 percent increase in price the price of clothing leads to a 10 percent decrease in the
quantity demanded.
B) a 10 percent increase in the price of clothing leads to a 6.4 percent decrease in the quantity
demanded.
C) if there is an increase in the price of clothing the total expenditures on clothing decreases.
D) Both answers A and C are correct.

8) The price elasticity of demand can range between

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

9) The price elasticity of demand for purses is measured in

A) dollars.
B) purses.
C) dollars per purse.
D) None of the above answers is correct because there are no units for an elasticity of demand.

10) If the price of a good goes up by 5% and, in response, the quantity demanded falls by 15%,
the price elasticity of demand would be equals to _____ and the demand is______.

A) 0.3333, inelastic.

B) 3, inelastic.

C) 3, elastic.

D) 0.3333, elastic.

11) If quantity demanded does not change when the price changes, the demand:

A) is elastic.

B) is inelastic.

C) has unit elasticity.

D) is perfectly inelastic.

12) If the elasticity of demand for restaurant meals is -2.27, the demand for restaurant meals is:
 Microeconomics

Problem set 7 - chapter 4

A) elastic.

B) inelastic.

C) unitary elastic.

D) perfectly inelastic.

13) If the elasticity of demand for electricity is -0.13, the demand for electricity is:

A) inelastic.

B) elastic.

C) perfectly inelastic.

D) unitary elastic.

14) In general, the greater the elasticity the:

A) smaller the responsiveness of price to changes in quantity.

B) smaller the responsiveness of quantity to changes in price.

C) larger the responsiveness of price to changes in quantity.

D) larger the responsiveness of quantity to changes in price.

15) If quantity demanded falls by 25 percent when price rises by 50 percent, demand is said to
be:

A) elastic.

B) inelastic.

C) proportional.

D) responsive.

16) For a perfectly vertical demand curve, the price elasticity of demand
A) equals 0. C) equals 1.0.

B) is greater than 0 but less than 1.0. D) is negative.

 Microeconomics

Problem set 7 - chapter 4

17) The demand for a good is more price inelastic if

A) Its price is higher.
B) The percentage of income spent on it is larger.
C) It is a luxury good.
D) It has no close substitutes.

18) Moving up along a linear demand curve past the midpoint, the demand becomes
a. inelastic.
b. unit elastic.
c. elastic.
d. first elastic and then inelastic.

II. Answer the following problems:

1) A decrease in the price of eggs from $1.50 to $1.30 per dozen resulted in an increase in egg
purchases in two cities. In Philadelphia, daily egg purchases increased from 6000 to 8000
dozens; in nearby Dover, Delaware, daily egg purchases increased from 300 to 400 dozens.
Calculate The price elasticity of demand in both cities (use Arc method)

2) Dan sells newspapers. Dan says that a 4 percent increase in the price of a newspaper will not
change the quantity of newspapers demanded. According to Dan, the price elasticity of demand
for newspapers is ________.

3) A 10 percent increase in the quantity of spinach demanded results from a 20 percent decline in
its price. The price elasticity of demand for spinach is?

4) If a 20 percent increase in the price of a used car results in a 10 percent decrease in the
quantity of used cars demanded, then the price elasticity of demand equals

5) Suppose that the quantity of pizza demanded decreased by 15 percent after an increase in price
of 10 percent. What is the price elasticity of demand for pizza?

6) Suppose a rise in the price of peaches from $5.50 to $6.50 per bushel decreases the quantity
demanded from 12,500 to 11,500 bushels. The price elasticity of demand is (Use the Arc
Method)

7) Using average price and average quantity calculate the price elasticity of demand if a price
rise from $8 to $10 and decreases the quantity demanded from 20 units to 15 units. The price
elasticity of demand equals
 Microeconomics

Problem set 7 - chapter 4

8) A shift of the supply curve of DVDs raises the price of a DVD from $9.50 to $10.50 a DVD
and reduces the quantity demanded from 41 million to 39 million DVDs a month. Calculate The
price elasticity of demand for DVDs at the initial point.

9) According to one study, the price elasticity of demand for cigarettes is 0.25. To decrease the
consumption of cigarettes by 8 percent, a tax on cigarettes must raise the price of cigarettes by ?

10) The original price and quantity demanded for coffee is £5 and 200 respectively, and there is
an increase in price to £6. If the elasticity of demand is –1.5, the new quantity demanded will
be?

11) Last year the price of corn was $3 per bushel and the quantity of corn demanded was 8
million bushels. This year the price of corn is $4 per bushel and the quantity of corn demanded is
7 million bushels. Assuming that the demand curve has not shifted, what is the price elasticity of
demand for corn using arc elasticity of demand?

12) The original price and quantity demanded for steel are £100 and 100 respectively, and due to
a change in price, demand falls to 95. If the elasticity of demand is –0.5, the new price must be?

III. State whether the following statements are true or false and justify your answer in
both cases:

1) If the price elasticity of demand is positive, the demand is elastic.

2) The price elasticity of demand ranges from 0 to infinity.

3) The more demanders respond to a price change, the larger the price elasticity of demand

IV. Show graphically the shape of the demand curve in the case of perfectly elastic,
perfectly inelastic and unitary elastic.
 Microeconomics

Problem set 7 - chapter 4