Understanding Price Elasticity of Demand

What does the Price Elasticity of Demand (PED) measure?

• The responsiveness of supply to price changes

• The responsiveness of quantity demanded to price changes

• The total revenue of a firm

• The cost of production

If demand is price elastic, how does a price decrease affect total revenue?

• Total revenue increases

• Total revenue decreases

• Total revenue remains unchanged

• Total revenue becomes negative

When demand is unitary elastic (PED = 1), how does a change in price affect total revenue?

• Total revenue increases

• Total revenue decreases

• Total revenue remains the same

• Total revenue falls to zero

If a product has inelastic demand (PED < 1), what happens to total revenue when the price increases?

• Total revenue decreases

• Total revenue remains the same

• Total revenue increases

• Total revenue fluctuates unpredictably

Which of the following goods is most likely to have an inelastic demand?

• Luxury watches

• Soft drinks

• Insulin for diabetics

• Video game consoles

A firm wants to increase its total revenue. If its product has an elastic demand, what should it do?

• Increase the price

• Decrease the price

• Keep the price unchanged

• Increase production costs

What is the typical PED value for a necessity good?

• Greater than 1

• Less than 1

• Equal to 1

• Always negative

If a company lowers the price of a product and total revenue decreases, what can be concluded about the demand for the product?

• Demand is elastic

• Demand is inelastic

• Demand is unitary elastic

• Demand is perfectly elastic

Which of the following best explains why total revenue falls when price is increased for an elastic good?

• Consumers buy significantly less, outweighing the price increase

• The cost of production rises

• The government imposes a price ceiling

• Consumers buy more due to the price increase

The PED for a product is -2. What does this imply about demand?

• Demand is inelastic

• Demand is unitary elastic

• Demand is elastic

• Demand is perfectly inelastic