Question

1.If price rises by 20% and quantity demanded of rice falls by 100 pounds, the elasticity of demand is : (1 point)

a. greater than 1

b. equal to -5

c. equal to -20

d. cannot be determined without additional information.

2.If quantity supplied responds only slightly to a change in price, then: (1 point)

a. Supply is elastic

b. An increase in price will shift the supply curve to a large extent

c. Supply is inelastic

d. Supply is perfectly elastic

3.Demand is said to be inelastic if: (2 points)

a. Percentage change in quantity demanded is less than the percentage change in price (in terms of their absolute values )

b. There are only a few substitutes for the particular good in question

c. The opportunity cost of producing the good increases at a very fast rate

4.A frost kills a significant amount of the apple trees in country X. We can expect which of the following events to occur? (2 points)

a. The price of apples to rise.

b. The price of oranges to rise, if apples and oranges are substitutes

c. The supply of apples to decrease

d. All of the above

d. All of the above

e. Only a and b

5. The apple growers (in relation the above problem) want to increase their Total Revenue by increasing the price of apples. In which of the following cases will the total revenue actually increase as a result of the price rise? (Hint: Is the demand elastic or inelastic in each of the following cases?) (2 points)

a. Elasticity of demand is 0.6

b. Elasticity of demand is 4.6

c. Elasticity of demand is 100

d. There is not enough information to answer.

Answer 1

1. Option d

Price elasticity of demand = % change in quantity demanded/% change in price

= -100/20%

Change in quantity demanded is needed in percentage change

2. Option c

As supply doesn't respond to changes in price

3. Option a

As quantity demanded doesn't respond much for changes in price

4. Option d

All of the reasons would contribute to reduced supply and increase in price

5. Option a

Total Revenue would increase when the demand is inelastic as quantity demanded doesn't change much for the increase in price.