CIMA BA1 · Chapter 6
Elasticity MCQs with Answers
10 multiple-choice questions on Elasticity for CIMA BA1 Fundamentals of Business Economics. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Price elasticity of demand is measured as:
- A) Percentage change in quantity demanded divided by percentage change in price
- B) Percentage change in price divided by percentage change in quantity demanded
- C) Change in quantity demanded divided by change in price
- D) Percentage change in quantity demanded divided by percentage change in income
Show answer & explanation
Answer: A) Percentage change in quantity demanded divided by percentage change in price
PED = % change in quantity demanded / % change in the good's own price. Using percentages makes the measure independent of units. Dividing by the percentage change in income gives income elasticity.
Question 2
When the price of a product rises from $20 to $22, quantity demanded falls from 5,000 to 4,400 units. Using the original price and quantity as the base, what is the price elasticity of demand (ignoring the minus sign)?
- A) 0.83, so demand is price inelastic
- B) 1.2, so demand is price inelastic
- C) 0.12, so demand is price inelastic
- D) 1.2, so demand is price elastic
Show answer & explanation
Answer: D) 1.2, so demand is price elastic
% change in quantity = (4,400 - 5,000) / 5,000 = -12%. % change in price = (22 - 20) / 20 = 10%. PED = -12% / 10% = -1.2. As the absolute value exceeds 1, demand is price elastic.
Question 3
Demand for a product is price elastic. If the firm reduces its price, what will happen to total revenue?
- A) Total revenue will fall
- B) Total revenue will stay the same
- C) Total revenue will rise
- D) Total revenue will fall to zero
Show answer & explanation
Answer: C) Total revenue will rise
When demand is elastic, the percentage increase in quantity demanded exceeds the percentage fall in price, so total revenue (price x quantity) rises when price is cut. With inelastic demand a price cut reduces revenue.
Question 4
Price rises from $8 to $10 and quantity demanded falls from 1,200 to 1,000 units. Using the midpoint (arc) method, what is the price elasticity of demand (ignoring the sign, to two decimal places)?
- A) 0.67
- B) 0.82
- C) 1.00
- D) 1.22
Show answer & explanation
Answer: B) 0.82
Midpoint method: % change in quantity = -200 / average quantity 1,100 = -18.18%. % change in price = 2 / average price 9 = 22.22%. PED = 18.18 / 22.22 = 0.82 (rounded to two decimal places). Using the original values instead gives 0.67.
Question 5
Which of the following is likely to make demand for a product more price elastic?
- A) The product has many close substitutes
- B) The product is a necessity with no alternatives
- C) Spending on the product is a very small part of consumers' income
- D) The product is habit-forming
Show answer & explanation
Answer: A) The product has many close substitutes
Demand is more elastic when consumers can easily switch to close substitutes. Necessities, habit-forming goods and goods taking a tiny share of income tend to have inelastic demand.
Question 6
The price of Product B rises by 5% and, as a result, demand for Product A rises by 8%. What is the cross elasticity of demand for A with respect to the price of B, and what does it indicate?
- A) -1.6, indicating that A and B are complements
- B) +0.625, indicating that A and B are substitutes
- C) +1.6, indicating that A and B are complements
- D) +1.6, indicating that A and B are substitutes
Show answer & explanation
Answer: D) +1.6, indicating that A and B are substitutes
Cross elasticity = % change in demand for A / % change in price of B = +8% / +5% = +1.6. A positive cross elasticity means that a rise in B's price increases demand for A, so the goods are substitutes.
Question 7
Consumers' real incomes rise by 4% and demand for a product falls by 2%. What is the income elasticity of demand and how is the product classified?
- A) +0.5, a normal necessity
- B) -2.0, an inferior good
- C) -0.5, an inferior good
- D) -0.5, a normal good that is a necessity
Show answer & explanation
Answer: C) -0.5, an inferior good
Income elasticity = % change in quantity demanded / % change in income = -2% / +4% = -0.5. A negative income elasticity indicates an inferior good. Ignoring the sign gives +0.5 and the wrong 'necessity' label, and classifying -0.5 as a necessity confuses the size of the value (below 1) with its sign; dividing income change by quantity change gives -2.0.
Question 8
Which of the following would make the supply of a product more price INELASTIC?
- A) Large stocks of finished goods held by producers
- B) A long production lead time and no spare capacity
- C) Factors of production that can easily be switched from other uses
- D) A longer time period being allowed for producers to respond
Show answer & explanation
Answer: B) A long production lead time and no spare capacity
Supply is inelastic when producers cannot quickly increase output in response to a price rise. Long lead times and full capacity restrict the response. Stocks, mobile factors and a longer time period all make supply more elastic.
Question 9
A firm sells 30,000 units a month at $15 each. Price elasticity of demand is 1.5 and is assumed constant over the relevant range. If the firm raises its price by 4%, what is the change in monthly total revenue?
- A) A fall of $10,080
- B) A rise of $18,000
- C) A fall of $27,000
- D) A fall of $9,000
Show answer & explanation
Answer: A) A fall of $10,080
Quantity falls by 1.5 x 4% = 6%, to 30,000 x 0.94 = 28,200 units. New price = $15 x 1.04 = $15.60. New revenue = 28,200 x $15.60 = $439,920. Original revenue = 30,000 x $15 = $450,000. Revenue falls by $10,080.
Question 10
If a demand curve has a price elasticity of exactly 1 (unitary elasticity) at every point, then:
- A) Total revenue rises as price is reduced
- B) Quantity demanded does not change when price changes
- C) The demand curve is a straight horizontal line
- D) Total revenue remains the same whatever price is charged
Show answer & explanation
Answer: D) Total revenue remains the same whatever price is charged
With unitary elasticity, a given percentage change in price causes an equal and opposite percentage change in quantity, so price x quantity is constant. Such a curve is a rectangular hyperbola. A horizontal line is perfectly elastic and an unchanging quantity is perfectly inelastic.