1.2.3 short quiz

Which of the following is the correct formula for calculating Price Elasticity of Demand (PED)?

Answer explanation

The correct formula for Price Elasticity of Demand (PED) is \(\frac{\text{Percentage change in quantity demanded}}{\text{Percentage change in price}}\). This measures how much the quantity demanded changes in response to a price change.

If the income elasticity of demand (YED) for a product is negative, what type of good is it?

• Normal good

• Inferior good

• Luxury good

• Substitute good

Answer explanation

If the income elasticity of demand (YED) is negative, it indicates that as income increases, the demand for the product decreases. This characterizes it as an inferior good, which is the correct answer.

Which formula correctly represents Cross Elasticity of Demand (XED)?

Answer explanation

The correct formula for Cross Elasticity of Demand (XED) is \(\frac{\text{Percentage change in quantity demanded of Good A}}{\text{Percentage change in price of Good B}}\). This measures how the quantity demanded of one good responds to the price change of another.

Which of the following is NOT a determinant of price elasticity of demand?

• Availability of substitutes

• Proportion of income spent on the good

• Time period considered

• Cost of production

Answer explanation

Cost of production affects supply, not demand. The other options—availability of substitutes, proportion of income spent, and time period—directly influence how sensitive consumers are to price changes, making them determinants of price elasticity.

If a product has a price elasticity of demand of -0.3, how would you describe its demand?

• Perfectly elastic

• Elastic

• Inelastic

• Unitary elastic

Answer explanation

A price elasticity of demand of -0.3 indicates that demand is inelastic, meaning that a change in price will result in a proportionally smaller change in quantity demanded. Thus, the correct choice is 'Inelastic'.

A 10% increase in income leads to a 20% increase in demand for a product. What is the income elasticity of demand (YED) for this product?

• 0.5

• 1

• 2

• -2

Answer explanation

Income elasticity of demand (YED) is calculated as the percentage change in demand divided by the percentage change in income. Here, YED = 20% / 10% = 2, indicating that demand is highly responsive to income changes.

If the cross elasticity of demand (XED) between two goods is positive, what does this indicate about the relationship between the goods?

• They are complements

• They are substitutes

• They are unrelated

• They are inferior goods

Answer explanation

A positive cross elasticity of demand (XED) indicates that as the price of one good increases, the demand for the other good also increases. This relationship signifies that the goods are substitutes.

Which of the following best describes the effect on total revenue if demand is elastic and the price increases?

• Total revenue increases

• Total revenue decreases

• Total revenue remains unchanged

• Total revenue doubles

Answer explanation

When demand is elastic, a price increase leads to a proportionally larger decrease in quantity demanded. This results in total revenue decreasing, as the loss in sales outweighs the higher price.

Which of the following goods is most likely to have a high price elasticity of demand?

• Salt

• Petrol

• Designer trainers

• Tap water

Answer explanation

Designer trainers have a high price elasticity of demand because they are luxury items with many substitutes. In contrast, salt, petrol, and tap water are necessities with fewer alternatives, making their demand less sensitive to price changes.

Which of the following is an application of elasticity in government policy?

• Deciding the minimum wage

• Setting indirect taxes on goods

• Determining exchange rates

• Calculating GDP

Answer explanation

Setting indirect taxes on goods is influenced by elasticity, as it helps determine how changes in tax rates affect demand and supply, ensuring that the government can predict revenue and market behavior effectively.