Question

1. Consider oil which has a PED of -0.4. What does this number mean?

A. Oil demand is elastic

B. Oil demand is inelastic

C. A 1% increase in the price of oil causes a 0.4% increase in the quantity demanded

D. An increase in the price of oil causes the demand for oil to shift right

E. Oil supply is highly responsive to changes in the price

2. Consider the market for gas. In the past decade, there has been the emergence of electricity as an alternative fuel source for cars. What do you think would be the effect of this new option for car fuel on the PED for gas?

A. Increase in magnitude

B. Decrease in magnitude

C. Unchanged

D. Unclear

E. None of the above

3. Consider a product known as Gaminos. Its PES has been calculated as 1.8. Which of the following is likely true about this product?

A. The supply curve is flat and upward sloping

B. The demand curve is flat and upward sloping

C. The supply curve is steep and upward sloping

D. The supply curve is steep and downward sloping

E. There is no such thing as supply and demand

4. Again, consider a product known as Gaminos whose PES has been calculated as 1.8. What happens if there is an increase in buyers’ incomes?

A. There will be a greater effect on price than quantity

B. There will be a greater effect on quantity than price

C. There will be no effect on quantity or price

D. There will be a decrease in the price of the good

E. The supply curve shifts left

5. According to the lecture slides, what is a major reason for why housing prices in California have increased so much?

A. The supply curve for housing is elastic

B. The supply curve for housing is inelastic

C. The demand curve for housing is elastic

D. The demand curve for housing is inelastic

E. The demand curve has shifted left over time

6. Why do gas prices vary so much from week to week?

A. Because gas station owners choose prices by throwing darts at a dart board

B. Because of the circular flow model

C. Because the supply curve for gas is so elastic

D. Because the demand curve for gas is so inelastic

E. Gas prices do not vary as they have remained at $2.00 per gallon for the past year

Answer 1

1

Answer: B- Oil demand is inelastic- Since PED(Price Elasticity of Demand) is -0.4 which is less than 1 when PED is less than 1 or ep < 1, demand is inelastic.

A- Oil demand cannot be elastic since when PED is elastic it should be greater than 1 but as per given question PED is -0.4

C- This option is also wrong since there is an inverse relationship between price and demand and that's why demand curve is downward sloping but in the option-C it is given as "A 1% increase in the price of oil causes a 0.4% increase in the quantity demanded", which is showing 1% increase in price increases quantity demand for oil by 0.4% which is showing there is a positive relationship between price and quantity demanded which is against the Law of Demand which says there is a inverse/negative relationship between price and quantity demanded and that's why demand curve is downward sloping.

Option D is also wrong since it says an increase in the price of oil causes the demand for oil to shift right which means after an increase in price, demand also increases accordingly since it says demand for oil shifts right which is against the Law of Demand which says an increase in price will decrease its quantity demanded and that's why demand for oil should shift leftward instead of rightward.

Option E is also wrong since Oil has very few direct substitutes and that's demand for oil is inelastic as given in option b that's why the option E which says Oil supply is highly responsive to changes in the price is wrong.