Question

1.) Suppose the price elasticity of demand for bread is 2.00. If the price of bread falls by 10%, the quantity demanded will increase by:

a. 2 percent and total expenditures on bread will rise.

b. 2 percent and total expenditures on bread will fall.

c. 20 percent and total expenditures on bread will rise.

d. 20 percent and total expenditures on bread will fall.

e. 20 percent and total expenditures on bread will be unchanged.

2.) Suppose that a 10% increase income causes a 20% increase in demand for good X. The coefficient of the income elasticity of demand is:

a. negative and therefore these goods are inferior goods.

b. negative and therefore these goods are complements.

c. positive and therefore these goods are substitutes.

d. positive and therefore these goods are normal goods.

3.) The price of a weekly magazine decreases from $1.90 to $1.50. The quantity demanded increases from 100,000 to 200,000 copies. The price elasticity of demand in this range is:

a. 0.39    

b. 0.5      

c. .89  

d. 1.0      

e. 1.75    

f. 2.83

4.) The income elasticity of demand for a good is 0.5. If demand decreased 5% as a result of a decrease in income, how much must income have declined?

a. 2.5%   

b. 8%      

c. 10%    

d. 15%    

e. 25%    

f. 40%

5.) Demand for X increases from 100 to 125 when the price of Y decreases from $6 to $5. The cross-price elasticity of demand is:

a. -3.67   

b. -1.22

c. 1.22

d. 1.44    

e. 3.67    

f. 4.33

Answer 1

Elasticity of demand = %change in quantity demanded / %change in price

1) Elasticity of demand = 2

Price fall by 10%

2 = (%change in quantity demanded / 10%)

%change in quantity demanded = 20%

As demand is elastic, fall in price will induce consumers to consume more of the bread which will raise total revenue.

Option C is correct.

2) Increase in income = 10%

Increase in demand = 20%

As both of them increased, coefficient is positive which says that goods are normal goods.

Option D is correct.

3) Price decreased from $1.9 to $1.5

Quantity demanded increased from 100,000 to 200,000

%change in price = [(1.5 - 1.9) / 1.9] * 100 = -21.05%

%change in quantity demanded = [(200,000 - 100,000) / 100,000] * 100 = 100%

Elasticity = [100% / (-21.05%)] = -4.75

4) Income elasticity = 0.5

Demand decreased by 5%

Income elasticity of demand = %change in quantity demanded / %change in income

0.5 = (5% / %change in income)

%change in income = 10%

Option C is correct.

5) Demand of X increased from 100 to 125

Price of Y decreased from $6 to $5

%change in demand of X = [(125 - 100) / 100] * 100 = 25%

%change in price of Y = [(5 - 6) / 6] * 100 = -16.66%

Cross price elasticity of demand = (%change in demand of X / %change in price of Y) = [25% / (-16.66%)] = -1.5