CH 2.3 : Price Elasticity
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Questions and Answers

What does an inelastic supply indicate?

  • The supply is highly responsive to price changes
  • The supply is not affected by price changes
  • The capacity to increase production is high
  • The capacity to increase production is limited (correct)

    • What affects the price elasticity of supply?

  • Only time to respond
  • Only production capacity
  • Only consumer behavior
  • Production capacity, time to respond, and mobility of resources (correct)

    • What is measured by cross elasticity of demand?

  • The effect of income on demand
  • How the quantity supplied responds to a price change
  • How the quantity demanded responds to a price change of another good (correct)
  • The effect of price on supply

    • What is an example of complementary goods?

    <p>Cars and fuel</p> Signup and view all the answers

    What does a positive cross elasticity of demand indicate?

    <p>The goods are substitutes</p> Signup and view all the answers

    What is measured by income elasticity of demand?

    <p>How the quantity demanded responds to a change in consumer income</p> Signup and view all the answers

    What is an example of a normal good?

    <p>Quality clothing</p> Signup and view all the answers

    What is an example of an inferior good?

    <p>Generic brands</p> Signup and view all the answers

    Why is it important to understand elasticity in business and policymaking?

    <p>To make informed decisions regarding pricing, market entry, and policy formulations</p> Signup and view all the answers

    What can understanding elasticity of demand help businesses with?

    <p>Setting prices that optimize revenue</p> Signup and view all the answers

    What is price elasticity a measure of?

    <p>How the quantity demanded or supplied of a product changes in response to a price change</p> Signup and view all the answers

    How is price elasticity of demand calculated?

    <p>As the percentage change in quantity demanded divided by the percentage change in price</p> Signup and view all the answers

    What is elastic demand?

    <p>When the elasticity is greater than 1</p> Signup and view all the answers

    Which of the following factors makes demand more elastic?

    <p>More substitutes</p> Signup and view all the answers

    What is the characteristic of necessities in terms of price elasticity of demand?

    <p>They have inelastic demand</p> Signup and view all the answers

    What is price elasticity of supply a measure of?

    <p>The responsiveness of quantity supplied to a change in price</p> Signup and view all the answers

    What is the characteristic of elastic supply?

    <p>Suppliers can increase output without a significant rise in cost</p> Signup and view all the answers

    What happens to the demand for a product over a long period of time?

    <p>It becomes more elastic</p> Signup and view all the answers

    What is unit elastic demand?

    <p>When the elasticity is exactly 1</p> Signup and view all the answers

    Why do products that consume a larger portion of the consumer's income tend to have more elastic demand?

    <p>Because consumers are more sensitive to price changes</p> Signup and view all the answers

    When the elasticity of supply is less than 1, what can be inferred about the capacity to increase production?

    <p>It is limited</p> Signup and view all the answers

    Which of the following factors makes supply more inelastic?

    <p>Limited mobility of resources</p> Signup and view all the answers

    What is the relation between the quantity demanded of cars and the price of fuel?

    <p>Negative cross elasticity</p> Signup and view all the answers

    What can be inferred about a good with a negative income elasticity of demand?

    <p>It is an inferior good</p> Signup and view all the answers

    What is the primary goal of understanding elasticity in business and policymaking?

    <p>To make informed decisions</p> Signup and view all the answers

    Which of the following types of goods is likely to have a positive income elasticity of demand?

    <p>Normal goods</p> Signup and view all the answers

    What happens to the supply of a good when its production resources can be easily allocated to different uses?

    <p>It becomes more elastic</p> Signup and view all the answers

    What can businesses do with the knowledge of elasticity of supply?

    <p>Plan production levels</p> Signup and view all the answers

    What can be inferred about two goods with a positive cross elasticity of demand?

    <p>They are substitute goods</p> Signup and view all the answers

    Over a longer period, what happens to the elasticity of supply?

    <p>It becomes more elastic</p> Signup and view all the answers

    What is the primary difference between price elasticity of demand and price elasticity of supply?

    <p>One measures the responsiveness of consumers and the other measures the responsiveness of suppliers</p> Signup and view all the answers

    What happens to the elasticity of demand for a product when there are more substitutes available?

    <p>It becomes more elastic</p> Signup and view all the answers

    Which of the following products is likely to have inelastic demand?

    <p>Bread</p> Signup and view all the answers

    What is the characteristic of elastic supply?

    <p>Suppliers can increase output without a significant rise in cost</p> Signup and view all the answers

    Why do businesses need to understand price elasticity of demand?

    <p>To make informed decisions about production and pricing</p> Signup and view all the answers

    What is the effect of a longer time period on the elasticity of demand?

    <p>It becomes more elastic</p> Signup and view all the answers

    What is the primary difference between elasticity of demand and elasticity of supply?

    <p>One measures the responsiveness of consumers and the other measures the responsiveness of suppliers</p> Signup and view all the answers

    What is the likely outcome when the price of a product with elastic demand increases?

    <p>Quantity demanded will decrease significantly</p> Signup and view all the answers

    What is the characteristic of a product with unit elastic demand?

    <p>The percentage change in quantity demanded is equal to the percentage change in price</p> Signup and view all the answers

    What is the likely outcome when the price of a product with elastic supply decreases?

    <p>Quantity supplied will increase</p> Signup and view all the answers

    If a company has a highly elastic supply of labor, which of the following is likely to occur?

    <p>The company will be able to increase production rapidly in response to price changes.</p> Signup and view all the answers

    What is the likely outcome when the price of a good with a high cross elasticity of demand with another good increases?

    <p>The demand for the other good will decrease.</p> Signup and view all the answers

    Which of the following is an example of a good with a high income elasticity of demand?

    <p>Luxury cars</p> Signup and view all the answers

    What is the likely outcome when a company operates in a market with a low cross elasticity of demand?

    <p>The company will be unaffected by changes in prices of other goods.</p> Signup and view all the answers

    If a company has an inelastic supply of a good, what is the likely outcome when the market price increases?

    <p>The company will not change its production level.</p> Signup and view all the answers

    What is the likely outcome when the government imposes a tax on a good with an elastic demand?

    <p>The demand for the good will decrease significantly.</p> Signup and view all the answers

    If two goods have a negative cross elasticity of demand, what can be inferred about the goods?

    <p>The goods are complementary.</p> Signup and view all the answers

    What is the likely outcome when a company has a highly elastic demand for its good?

    <p>The company will be sensitive to changes in price.</p> Signup and view all the answers

    If a company operates in a market with a high income elasticity of demand, what is the likely outcome when consumer income increases?

    <p>The demand for the good will increase significantly.</p> Signup and view all the answers

    What is the likely outcome when a company has a highly inelastic supply of a good?

    <p>The company's production level will be insensitive to changes in price.</p> Signup and view all the answers

    If the price of a product with a price elasticity of demand of 2 increases by 10%, what will be the approximate percentage change in the quantity demanded?

    <p>20%</p> Signup and view all the answers

    A product has a price elasticity of supply of 1.5. If the price of the product increases by 20%, what will be the approximate percentage change in the quantity supplied?

    <p>30%</p> Signup and view all the answers

    Which of the following is a characteristic of a product with an elastic demand?

    <p>A small change in price leads to a large change in quantity demanded</p> Signup and view all the answers

    If the price of a product with a price elasticity of demand of 0.5 decreases by 15%, what will be the approximate percentage change in the quantity demanded?

    <p>7.5%</p> Signup and view all the answers

    What happens to the elasticity of demand for a product when the time period is increased?

    <p>It becomes more elastic</p> Signup and view all the answers

    Which of the following products is likely to have a more elastic demand, a luxury car or a needed medicine?

    <p>Luxury car</p> Signup and view all the answers

    What happens to the quantity demanded of a product when the price of a close substitute decreases?

    <p>It decreases</p> Signup and view all the answers

    What is the effect of a decrease in the price of a product with an elastic supply?

    <p>A large increase in quantity supplied</p> Signup and view all the answers

    If the price elasticity of demand for a product is 3, what will be the effect of a 10% increase in price on the quantity demanded?

    <p>A 30% decrease in quantity demanded</p> Signup and view all the answers

    What is the effect of an increase in the proportion of income spent on a product on its elasticity of demand?

    <p>It becomes more elastic</p> Signup and view all the answers

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