Question

1. The owner of a local hot dog stand has $4 estimated that if he lowers the price of hot dogs from $2.00 to $1.50, he will increase sales from 400 to 500 hot dogs per day. Using the midpoint formula, the demand for hot dogs is A) elastic. B) inelastic. C) unit elastic. D) perfectly elastic. P P2 P2 P& Demand Number of milkshakes Figure 1 5. Refer to Figure 1. The demand for milkshakes isunit elastic at Point C. If a store reduces the price of a milkshake from P3 to P4, its total revenue will A) increase. B) decrease. C) remain constant. D) either increase or decrease. 2. When there are more substitutes for a for the product is product, the A) demand; less price elastic B) demand; more price elastic C) income elasticity; greater D) income elasticity; smaller

Answer 1

1. B) Inelastic

Price	Quantity
P1 = $2.00	Q1 = 400
P2 = $1.50	Q2 = 500

$Elasticity \: of\: demand = \frac{\frac{Q2 - Q1}{(Q2+Q1)/2}}{\frac{P2 - P1}{(P2+P1)/2}} = \frac{\frac{500 - 400}{(500+400)/2}}{\frac{1.50-2.00}{(1.50+2.00)/2}} = \frac{\frac{100}{450}}{\frac{-0.50}{1.75}} = \frac{0.22}{-0.28}$

Elasticity of demand = (-) 0.78

(Less than 1, so demand is inelastic)

2. B) Demand; more price elastic

The more good substitutes there are, the more elastic the demand will be.

5. B) Decrease

There is a direct relationship between price and revenue. If the price decreases, revenue decreases and vice versa.