Question

1) Point A at $8 Q is 2

Point B at $10 Q is 1

Going from $8 to $10...this will be positive.

The % change in price (using midpoint formula) is

0.33

.222

3.5

2) The larger a portion an item represents of the buyer's budget, the

more price elastic is the demand for the product.

smaller the income elasticity of demand for the product.

greater the income elasticity of demand for a product.

less price elastic is the demand for the product.

3) A government wants to reduce electricity consumption by 5%. The price elasticity of demand for electricity is -0.5. The government must ________ the price of electricity by ________.

raise; 0.1%

raise; 10.0%

lower; 0.5%

raise; 1.0%

4) Total revenue decreases if price ________ and demand is ________.

rises; unit elastic

falls; inelastic

rises; inelastic

falls; elastic

Answer 1

Q1.) 0.222

Midpoint formula for percentage change in price = [(10-8) ÷ {(10+8)/2}] = (2 ÷ 9) = 0.222

Q2.) More price elastic is the demand for the product

Q3.) Rises, 10%

% change in price of electricity = (-5)/(-0.5) = 10%

Since elasticity is inelastic therefore, according to expenditure measure of elasticity, government must raise the price.

Q4.) Falls ; inelastic

Since less responsiveness of demand to changes in price level often leads to decrease in revenues when prices are reduced.