Mechanic

Assume that Rajesh Singh’s income increased from $20,000 per year to $30,000 per year, and his demand for “store-brand” bread decreased from 80 loaves to 40 loaves per year. Which of the following most accurately describes Singh’s income elasticity for store-brand bread?

A) Income elasticity is -0.60 and store-brand bread is an inferior good.

B) Income elasticity is -1.67 and store-brand bread is an inferior good.

C) Income elasticity is +1.00 and store-brand bread is a complimentary good.

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Average income is ($20,000 + $30,000) / 2 = $25,000, so the percentage change in income is ($30,000 – $20,000) / $25,000 = 40.00%. The average quantity of bread demanded is (80 + 40) / 2 = 60 loaves, so the percentage change in the quantity of bread demanded is (40 – 80) / 60 = -66.67%. Income elasticity of store-brand bread is -66.67 / 40 = -1.67. Since Singh’s income elasticity of demand is negative, store-brand bread is an inferior good.

Mechanic

For a linear demand curve, at the price where elasticity is -2.0, reducing prices will:

A) increase total revenue and we are at the point of maximum total revenue.

B) increase total revenue and we are not at the point of maximum total revenue.

C) decrease total revenue and we are not at the point of maximum total revenue.

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If the price elasticity of demand is -2.0, this indicates that the percentage change in quantity demanded is twice the percentage change in price. Thus, a decrease in price will be more than offset by the increase in quantity, and total revenue will increase. We are not at the point of maximum total revenue which is where elasticity is -1.0—the point of unit elastic demand.

Mechanic

If quantity demanded increases 15% when the price drops 1%, demand for this good:

A) perfectly elastic.

B) inelastic, but not perfectly inelastic.

C) elastic, but not perfectly elastic.

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Whenever quantity demanded for a good changes by a greater percentage than price, the price elasticity of demand will be greater than 1.0 and demand for the product is considered to be elastic.

Mechanic

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

A) a larger increase in quantity demanded.

B) no change in the quantity demanded.

C) a larger decrease in the quantity demanded.

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If a good has elastic demand, a small price decrease will cause a larger increase in the quantity demanded.

Mechanic

If the demand curve for a given product is a straight line, this indicates that:

A) demand is more elastic at higher prices.

B) demand is unit elastic.

C) elasticity is constant along the demand curve.

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Elasticities will be greater (in absolute value) at higher prices.

Mechanic

Suppose that a given MP3 player now costs $300, and sales are now 5,000 units per month. The manufacturer has determined that if the price is reduced by $25, the demand will increase by 250 units per month. Calculate and describe the elasticity of demand.

A) -0.56, inelastic.

B) -10.0, elastic.

C) -0.56, elastic.

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Elasticity is the percentage change in quantity, divided by the percentage change in price. The percentage change in quantity is 250 / ((5,000 + 5,250)/2) = 0.049 or 4.9%. The percentage change in price is -25 / ((300 + 275)/2) = -0.087 or -8.7%. 4.9 / -8.7 = -0.56. Elasticity with an absolute value of less than 1 is considered inelastic.

Mechanic

If the number of widgets demanded changes from 51 to 49 when the price changes from $4 to $6, the price elasticity of demand is:

A) -0.10.

B) Elastic.

C) -2.00.

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Price elasticity of demand is calculated by dividing the percent change in quantity demanded by the percent change in price, using the average value of the variable in the computations. The percent change in quantity demanded is (51 – 49) / ((51 + 49) / 2) = 0.04. The percent change in price is (4 – 6) / (4 + 6) / 2 = -0.40. The price elasticity of demand is 0.04 / -0.4 = -0.10.

Mechanic

The price of product Z decreased from $2.50 per unit to $2.00 per unit.  Since the price decreased, demand has gone up from 3 million units to 4 million units.  Calculate the respective price elasticity of demand and determine the elasticity of demand.

A) −1.29; inelastic.

B) −1.29; elastic.

C) −2.00; elastic.

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percentage change in quantity = [(4 − 3)] / [(4 + 3) / 2] = 1 / 3.5 = 0.286 = 28.6%
percentage change in price = [(2 − 2.5)] / [(2 + 2.5) / 2] = -0.5 / 2.25 = -0.222 = -22.2%
28.6 % / -22.2% = -1.29
Since the price elasticity of demand is greater than 1 (ignore the sign), product Z is elastic

Mechanic

If the price elasticity of demand for a good is 4.0, then a 10% increase in price would result in a:

A) 4% decrease in the quantity demanded.

B) 10% decrease in the quantity demanded.

C) 40% decrease in the quantity demanded.

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Price elasticity of demand = (% change in Q demanded / % change in price). Given the price elasticity of demand and the percentage change in price, we can solve for the percentage change in Q demanded.

Mechanic

Income elasticity is defined as the:

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

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

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

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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 elasticities.