2.6 PED Progress Check (25 MCQ's)

A business decides to reduce the selling price of its product by 5%. Identify the effect this would have.

• If the price elasticity of demand is greater than 1, the total revenue would increase.

• If the price elasticity of demand is less than 1, the quantity sold would decrease.

• If the price elasticity of demand is greater than 1, the business would make more profit.

• If the price elasticity of demand is greater than 1, the business’ costs would decrease.

Answer explanation

Explanation

If the price elasticity of demand is greater than 1, the demand for the product is price elastic, so the decrease in selling price will mean relatively more of the product will be sold.

revenue = selling price × quantity of products sold

With an increase in the quantity of products sold, the revenue would increase.

Kognity Question

If PED of a good or service is inelastic, what pricing decisions should businesses take?

• Businesses should decrease their prices

• Businesses should make no changes to prices

• Businesses should increase their prices

• Businesses should decrease their price and supply

Answer explanation

Explanation

Option #1 is correct as if PED of a good or service is inelastic, the quantity demanded is less responsive to increase in price. An increase in price causes a relatively smaller decrease in quantity demanded, hence sales/total revenues will increase, so options #2 and #4 are incorrect. Option #3 is also incorrect, as it is important for businesses to increase their prices if the product is inelastic to generate greater revenue.

Kognity

PED calculations show us that demand for water bottles is price elastic. What will be the impact on total revenue if the price of water bottles increases?

• Total revenue will decrease

• Total revenue will increase

• Total revenue will not be impacted

• Total revenue will indefinitely increase

Answer explanation

Option #1 is correct, as if PED for water bottles is price elastic this means that quantity demanded is more responsive to increase in price. An increase in price causes a relatively larger decrease in quantity demanded, hence sales/total revenues will fall, thus the other options are incorrect.

What is the product of price and quantity?

• Total revenue

• Total tax

• Supply

• Income

Answer explanation

Option #1 is correct, as total revenue is the amount of money received by a business from selling its goods and services. The formula to calculate sales revenue is as follows:

What is the price elasticity of demand for a product that is highly sought after and has many close substitutes?

• Equal to 0

• Equal to 1

• Less than 1

• More than 1

Answer explanation

Option #1 is correct, as when PED > 1 we say that demand is price elastic, as demand is relatively responsive to price. It means that consumers are relatively sensitive to price changes, thus options #3 and #4 are incorrect. Option #2 is for inelastic goods, as they have a PED of less than 1

Medicines are considered to be necessities. What is the price elasticity of demand for medicines?

• Elastic

• Unit elastic

• Inelastic

• Unit inelastic

Answer explanation

Necessities are goods or services important and essential in our lives. Demand for goods such as medicines tends to be inelastic, which is why option #1 is correct. Medication drugs such as insulin for diabetes patients are a necessity. If the price of insulin increases, there will be a relatively small impact on quantity demanded for that good. Demand will be less responsive to an increase in the price of insulin. The proportionate decrease in demand will be smaller than the proportionate increase in the price of insulin, thus the other options are incorrect.       

What factor is likely to make the demand for a product elastic?

• Availability of substitutes
• Low income of consumers
• Low price of the product
• High price of the product

Which of the following is a determinant of PED?

• Brand loyalty
• Color of the product
• Proportion of income spent on the good

• Price of the complementary good

Price of textbooks increased by 10%, the quantity demanded for textbooks decreased by 25%. Calculate the PED.

• 0.5
• 1.5
• 3.5
• -2.5

Demand for a product is elastic. What impact will an increase in price have on total revenue?

• Total revenue will increase
• Total revenue will decrease
• Total revenue will remain the same
• Total revenue will fluctuate