Question

1.) Economists for McDonalds estimate that the price elasticity of demand for their french fries is 0.8. So, if McDonalds raises the price of its french fries by 20 percent, the quantity demanded will decrease by ____ percent.

20

8

6

2.) Elasticity is likely to be highest for goods that:

have many substitutes and are not necessary for basic living

have few substitutes and are not necessary for basic living

have few substitutes and are necessities

3.) If the price elasticity for bowling is 1.5 and the manager of the bowling alley decides to raise the price of a game by 5%. By what percentage will quantity demand change?

decline by 3%

decline by 7.5%

rise by 7.5%

Answer 1

(1) 16%

Price elasticity = % Decrease in quantity demanded / % Increase in price

0.8 = % Decrease in quantity demanded / 20%

% Decrease in quantity demanded = 0.8 x 20% = 16%

(2) Option (A)

The more the number of substitutes, the more elastic the good. Also, non-necessity good are more elastic.

(3) Option (B)

Price elasticity = % Decrease in quantity demanded / % Increase in price

1.5 = % Decrease in quantity demanded / 5%

% Decrease in quantity demanded = 1.5 x 5% = 7.5%