Mechanic

If the price elasticity of demand is 1.5 and a change in the price of the product increases the quantity demanded by 4%, then what is the percent change in price?

A) −2.667%.

B) +2.667%.

C) –0.375%.

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Price elasticity of demand is calculated by dividing the percent change in quantity demanded by the percent change in price. The percent change in price is, therefore, the percent change in quantity demanded divided by the price elasticity of demand = 4 / 1.5 = 2.667.
Because of the inverse relationship between quantity demanded and price, the price elasticity is always going to be negative although economists usually ignore the negative sign and just use the absolute value. To properly predict the price change a negative sign needs to be added to the price elasticity before the calculation or to the answer after the calculation.
Using the latter case, the 2.667% will become -2.667%, showing that an increase in quantity demanded of 4% will cause a decrease in the price of 2.667% when the price elasticity is 1.5 (-1.5).

Mechanic

When demand for a good is inelastic, a higher price will:

A) fail to reduce the quantity demanded for the good.

B) have no impact on the demand for the good.

C) lead to an increase in total expenditures for the good.

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When demand is relatively inelastic, consumers do not reduce their quantity demanded very much when the price increases. That is, a given percentage increase in price results in a smaller percentage reduction in quantity demanded. Thus, total expenditures on the good increase. "Fail to reduce the quantity demanded for the good" is inaccurate because that would only be true if demand was perfectly inelastic.

Mechanic

If the number of ice cream bars demanded increases from 19 to 21 when the price decreases from $1.50 to $0.50, the price elasticity of demand is:

A) −0.1.

B) −0.2.

C) −5.

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If the number of ice cream bars demanded changes from 19 to 21 when the price changes from $1.50 to $0.50, the percentage change in quantity is (21 − 19) / [(21 + 19) / 2] = 10%, and the percentage change in price is (0.50 − 1.50) / [(1.50 + 0.50) / 2] = −100%. Thus, price elasticity = 10% / −100% = −0.1.

Mechanic

If quantity demanded increases 20% when the price drops 2%, this good exhibits:

A) inelastic, but not perfectly inelastic, demand.

B) perfectly inelastic demand.

C) elastic, but not perfectly elastic, demand.

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If quantity demanded increases 20% when the price drops 2%, this good exhibits elastic demand. Whenever demand changes by a greater percentage than price, demand is considered to be elastic.

Mechanic

The primary factors that influence the price elasticity of demand for a product are:

A) changes in consumers' incomes, the time since the price change occurred, and the availability of substitute goods.

B) the availability of substitute goods, the time that has elapsed since the price of the good changed, and the proportions of consumers' budgets spent on the product.

C) the proportions of consumers' budgets spent on the product, the size of the shift in the demand curve for a product, and changes in consumers' price expectations.

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The three primary factors influencing the price elasticity of demand for a good are the availability of substitute goods, the proportions of consumers' budgets spent on the good, and the time since the price change. If there are good substitutes, when the price of the good goes up, some customers will switch to substitute goods. For goods that represent a relatively small proportion of consumers' budgets, a change in price will have little effect on the quantity demanded. For most goods, the price elasticity of demand is greater in the long run than in the short run.

Mechanic

If a good has elastic demand, a small percentage price increase will cause:

A) a larger percentage decrease in the quantity demanded.

B) a larger percentage increase in the quantity demanded.

C) a smaller percentage increase in the quantity demanded.

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If a good has elastic demand, a small price increase will cause a larger decrease in the quantity demanded. Demand is elastic when the percentage change in quantity demanded is larger than the percentage change in price.

Mechanic

The cross price elasticity of demand for a substitute good and the income elasticity for an inferior good are:

Cross elasticity

Income elasticity

A) < 0 > 0

B) < 0 < 0

C) > 0 < 0

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The cross price elasticity of substitutes is positive, and the income elasticity of an inferior good is negative.

Mechanic

Income elasticity is defined as the percentage change in:

A) quantity demanded divided by the percentage change in income.

B) income divided by the percentage change in the quantity demanded.

C) quantity demanded divided by the percentage change in the price of the product.

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Income elasticity is defined as the percentage change in quantity demanded divided by the percentage change in income. Normal goods have positive values for income elasticity, and inferior goods have negative income elasticity.

Mechanic

If the price elasticity of demand is −2 and the price of the product decreases by 5%, the quantity demanded will:

A) increase 5%.

B) decrease 2%.

C) increase 10%.

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If the price elasticity of demand is −2, and the price of the product decreases by 5%, the quantity demanded will increase 10%. The value, −2, indicates that the percentage increase in the quantity demanded will be twice the percentage decrease in price.

Mechanic

If the price elasticity of a linear demand curve is −1 at the current price, an increase in price will lead to:

A) no change in total revenue.

B) an increase in total revenue.

C) a decrease in total revenue.

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On a linear demand curve, demand is elastic at prices above the point of unitary elasticity, so a price increase will decrease total revenue.