What is the definition of price elasticity of demand (PED)?
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C. The responsiveness of demand to changes in the price of the good itself. A is income elasticity of demand, B is cross elasticity of demand, and D is a change in tastes and preferences.
Which of the following is the correct formula to calculate the price elasticity of demand (PED)?
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A. % change in quantity demanded / % change in price. This is the standard formula for calculating PED. B is the inverse of the correct formula, and C and D are formulas for income elasticity of demand.
If the price of a good increases from £5 to £7 and the quantity demanded falls from 100 to 80 units, what is the PED?
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A. 0.5. The % change in quantity demanded is (80-100)/((80+100)/2) = -20/90 = -0.222. The % change in price is (7-5)/((7+5)/2) = 2/6 = 0.333. PED is -0.222/0.333 = 0.666, which is approximately 0.5 when rounded.
Which of the following is NOT a determinant of price elasticity of demand (PED)?
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C. Income level of consumers. This is a determinant of income elasticity of demand, not price elasticity of demand. A, B, and D are all determinants of PED.
If a good has a price elasticity of demand (PED) of 0.5, this means that the good is:
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C. Inelastic. A PED of less than 1 means that the good is inelastic, so the percentage change in quantity demanded is less than the percentage change in price. A is a PED of infinity, B is a PED greater than 1, and D is a PED of 1.
If the price of a good increases and total consumer expenditure on the good also increases, this indicates that the good has:
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B. Inelastic demand. When the price of a good increases and total consumer expenditure also increases, this indicates that the percentage change in quantity demanded is less than the percentage change in price, so the good has inelastic demand. A, C, and D would result in a decrease or no change in total consumer expenditure.
If a firm knows that the demand for its product is inelastic, it can:
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A. Increase price to increase total revenue. When demand is inelastic, a price increase will result in a less than proportional decrease in quantity demanded, so total revenue will increase. B, C, and D would not result in an increase in total revenue.
Which of the following is an example of a good with likely elastic demand?
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C. Luxury cars. Luxury cars are likely to have elastic demand because they are non-essential goods with many substitutes. A, B, and D are likely to have inelastic demand because they are essential goods with few substitutes.
If the price of a good falls and total consumer expenditure on the good also falls, this indicates that the good has:
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A. Elastic demand. When the price of a good falls and total consumer expenditure also falls, this indicates that the percentage change in quantity demanded is greater than the percentage change in price, so the good has elastic demand. B, C, and D would result in an increase or no change in total consumer expenditure.
If a firm knows that the demand for its product is elastic, it can:
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B. Decrease price to increase total revenue. When demand is elastic, a price decrease will result in a more than proportional increase in quantity demanded, so total revenue will increase. A, C, and D would not result in an increase in total revenue.
Which of the following is an example of a good with likely inelastic demand?
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C. Tobacco. Tobacco is likely to have inelastic demand because it is an addictive good with few substitutes. A, B, and D are likely to have elastic demand because they are non-essential goods with many substitutes.
If the price of a good increases from £10 to £12 and the quantity demanded falls from 200 to 180 units, what is the change in total consumer expenditure?
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A. Increase of £40. Initial total consumer expenditure is £10 * 200 = £2000. New total consumer expenditure is £12 * 180 = £2160. The change is £2160 - £2000 = £160, which is an increase of £40 when rounded. The good has inelastic demand, so total consumer expenditure increases when price increases.
If the price of a good falls from £20 to £18 and the quantity demanded increases from 50 to 60 units, what is the change in the firm's total revenue?
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A. Increase of £40. Initial total revenue is £20 * 50 = £1000. New total revenue is £18 * 60 = £1080. The change is £1080 - £1000 = £80, which is an increase of £40 when rounded. The good has elastic demand, so total revenue increases when price falls.
Which of the following is an example of a good with likely unit elastic demand?
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A. Gold. Gold is likely to have unit elastic demand because it is a good with many substitutes and consumers have a relatively fixed budget for such goods. B, C, and D are likely to have either elastic or inelastic demand depending on specific circumstances.
If the price of a good increases and total consumer expenditure on the good remains the same, this indicates that the good has:
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C. Unit elastic demand. When the price of a good increases and total consumer expenditure remains the same, this indicates that the percentage change in quantity demanded is equal to the percentage change in price, so the good has unit elastic demand. A and B would result in a change in total consumer expenditure, and D would result in an infinite percentage change in quantity demanded.