Question

7) A government wants to reduce electricity consumption by 20%. The price elasticity of demand for electricity is -5. The government must ________ the price of electricity by ________.

a) raise; 4.0%

b) raise; 0.25%

c) raise; 1.25%

d) lower; 0.25%

8) If the quantity demanded of Sony PS3 decreased by 8% when the price of Nintendo Wii decreases by 16%, the cross price elasticity of demand between PS3 and wii is

a) 0.5.

b) -5.

c) -2

d) 2

9) The All Smiles Greeting Card Company wants to increase the quantity of greeting cards it sells by 10%. If the price elasticity of demand is -2.5, the company must

a) increase price by 4.0%.

b) decrease price by 4.0%.

c) increase price by 0.25%.

d) decrease price by 0.25%.

10) If the cross-price elasticity of demand between shrimp and oysters is 4, then a 2% increase in the price of shrimp will result in a ________ in the quantity of oysters demanded.

a) 0.5% increase

b) 8% increase

c) 4% increase

d) 2% decrease

Answer 1

a) The price elasticity of the electricity is 5% then an increase in the price of the electricity by 4% will lead to a drop in the demand by 20%, the answer is "A", raise price by 4%.

b) "C"

8 /-16 = -2, the cross price elasticity of the tow goods in the market will be -2.

c) "B"

Price elasticity = % change in the demand / % change in the price.

-2.5 = 10 / (x) = 4%, the price need to be decreased by 4%.

d) "B"

it will lead to an 8% increase in the price of the oyster in the market.