PRC-3 · Chapter 11
Elasticity of Demand and Supply MCQs with Answers
57 multiple-choice questions on Elasticity of Demand and Supply for PRC-3 Business & Economic Insights. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
A supermarket lowers the price of its premium coffee from Rs. 500 to Rs. 400 (a 20% drop). In response, the quantity demanded surges from 1,000 bags to 1,500 bags (a 50% increase). How is the price elasticity of demand (PED) for this coffee categorized?
- A) Perfectly inelastic
- B) Relatively inelastic
- C) Unitary elastic
- D) Relatively elastic
Show answer & explanation
Answer: D) Relatively elastic
Because the percentage change in quantity demanded (50%) is much greater than the percentage change in price (20%), the demand is relatively elastic (PED > 1).
Question 2
A diabetic patient requires a specific daily dose of insulin to survive. Even when the pharmaceutical company doubles the price of the insulin, the patient continues to purchase the exact same quantity. What is the elasticity of demand for this insulin?
- A) Perfectly elastic
- B) Perfectly inelastic
- C) Unitary elastic
- D) Relatively elastic
Show answer & explanation
Answer: B) Perfectly inelastic
When the quantity demanded does not change at all regardless of price changes (PED = 0), the demand is completely unresponsive, or perfectly inelastic.
Question 3
If a firm lowers the price of its product, and as a result, its total revenue (total expenditure by consumers) remains exactly the same, what does this indicate about the product's price elasticity of demand?
- A) It is perfectly inelastic
- B) It is relatively elastic
- C) It is unitary elastic
- D) It is perfectly elastic
Show answer & explanation
Answer: C) It is unitary elastic
According to the total expenditure method, if a change in price causes a proportionate change in quantity such that total expenditure remains perfectly constant, demand is unit elastic (PED = 1).
Question 4
An economic analyst calculates the income elasticity of demand for a specific brand of instant noodles to be -1.5. This negative value mathematically classifies the instant noodles as a(n):
- A) Normal good
- B) Luxury good
- C) Substitute good
- D) Inferior good
Show answer & explanation
Answer: D) Inferior good
A negative income elasticity of demand indicates that as consumers' incomes rise, they buy less of the good, which is the defining characteristic of an inferior good.
Question 5
When the price of cinema tickets rises by 10%, the demand for streaming service subscriptions rises by 15%. This results in a positive Cross Elasticity of Demand (+1.5). What is the economic relationship between these two services?
- A) They are perfect complements
- B) They are unrelated goods
- C) They are substitute goods
- D) They are Giffen goods
Show answer & explanation
Answer: C) They are substitute goods
A positive cross price elasticity of demand means that as the price of one good rises, consumers switch to the other, making them substitutes.
Question 6
If the cross-price elasticity between 'Product X' and 'Product Y' is profoundly negative (-2.8), what does this mean practically for consumers?
- A) Consumers view them as interchangeable alternatives
- B) Consumers tend to use them together, like printers and ink cartridges
- C) The products are completely unrelated
- D) They are both inferior goods
Show answer & explanation
Answer: B) Consumers tend to use them together, like printers and ink cartridges
A negative cross price elasticity indicates that an increase in the price of X reduces the demand for Y. This happens when goods are complements and consumed together.
Question 7
Which of the following factors would make the demand for a specific consumer product highly price-elastic?
- A) The product is a basic necessity like water
- B) There are almost no alternatives available on the market
- C) The product takes up a very tiny fraction of the consumer's monthly income
- D) There is a vast number of close substitute brands available
Show answer & explanation
Answer: D) There is a vast number of close substitute brands available
The availability of close substitutes makes demand highly elastic because consumers can easily switch to a rival product if the price rises even slightly.
Question 8
A government imposes a heavy sales tax on a product whose demand is incredibly inelastic (like tobacco). Who will bear the majority of the tax burden (incidence of tax)?
- A) The producers alone
- B) The consumers will bear most of the tax burden
- C) The government will pay it
- D) The tax burden will be split exactly 50/50
Show answer & explanation
Answer: B) The consumers will bear most of the tax burden
When demand is inelastic, consumers are unresponsive to price changes. Therefore, producers can safely pass most of the tax onto consumers in the form of higher prices without losing many sales.
Question 9
Why is the price elasticity of supply generally much higher (more elastic) in the 'Long Run' compared to the 'Very Short Run'?
- A) Because long-run consumer tastes change rapidly
- B) Because in the short run, firms cannot quickly build new factories or expand major capital to increase production
- C) Because the government bans short-run production
- D) Because marginal utility disappears over time
Show answer & explanation
Answer: B) Because in the short run, firms cannot quickly build new factories or expand major capital to increase production
Supply is highly inelastic in the immediate short run because firms are constrained by fixed capacity. In the long run, they can adjust all resources (build new plants), making supply much more elastic.
Question 10
A local farmer selling fresh strawberries in a perfectly competitive market can sell his entire harvest at the prevailing market price of Rs. 100/kg. If he tries to charge Rs. 101, his sales immediately drop to zero. The demand curve facing this individual farmer is:
- A) Perfectly inelastic (vertical)
- B) Unitary elastic (hyperbola)
- C) Perfectly elastic (horizontal)
- D) Relatively inelastic (steep)
Show answer & explanation
Answer: C) Perfectly elastic (horizontal)
In perfect competition, an individual firm faces a perfectly elastic (horizontal) demand curve because consumers will instantly switch to identical competitors if the firm raises its price even slightly.
Question 11
If a luxury car company calculates that its Income Elasticity of Demand is +2.5, what strategic expectation should the company have during a severe national economic recession?
- A) Sales will rise significantly as incomes drop
- B) Sales will drop proportionally more than the drop in average incomes
- C) Sales will remain completely unaffected
- D) Sales will drop, but by a smaller percentage than the income drop
Show answer & explanation
Answer: B) Sales will drop proportionally more than the drop in average incomes
An income elasticity > 1 indicates a luxury good. This means demand is highly sensitive to income; a drop in income during a recession will cause a massive, magnified drop in luxury sales.
Question 12
A manager notices that lowering the price of their software slightly caused a massive influx of new buyers, resulting in total revenue jumping from Rs. 1 million to Rs. 1.5 million. According to the total expenditure method, the demand is:
- A) Inelastic
- B) Elastic
- C) Unitary
- D) Zero
Show answer & explanation
Answer: B) Elastic
When a price decrease leads to an increase in total expenditure/revenue, the quantity effect outweighed the price effect, indicating that demand is elastic.
Question 13
A rare vintage stamp is being auctioned. There is only one in existence, and no more can ever be produced regardless of how high the bidding price goes. The supply curve for this stamp is:
- A) Perfectly elastic
- B) Unitary elastic
- C) Perfectly inelastic
- D) Relatively elastic
Show answer & explanation
Answer: C) Perfectly inelastic
When the quantity supplied is absolutely fixed and cannot respond to price changes (like a unique antique), the supply curve is a vertical line, representing perfectly inelastic supply.
Question 14
A firm wants to shift the tax burden of a new government levy almost entirely onto its customers. Under which specific market condition will the firm be most successful in doing this?
- A) When its supply is perfectly inelastic
- B) When the demand for its product is highly elastic
- C) When the demand for its product is highly inelastic
- D) When consumers have infinite substitutes
Show answer & explanation
Answer: C) When the demand for its product is highly inelastic
If demand is highly inelastic, consumers will not reduce their purchases much when the price goes up. This allows the firm to pass the tax burden to consumers via higher prices.
Question 15
What does a Price Elasticity of Demand (PED) value of exactly 0 imply?
- A) Quantity demanded changes infinitely with any price change
- B) Quantity demanded does not change at all when the price changes
- C) The percentage change in quantity matches the percentage change in price
- D) The good is a luxury
Show answer & explanation
Answer: B) Quantity demanded does not change at all when the price changes
A PED of zero denotes perfectly inelastic demand; the demand curve is vertical, meaning consumers buy the exact same quantity regardless of price.
Question 16
A fashion retailer lowers the price of its jackets by 10%. As a direct result, the quantity demanded increases by 30%. How would an economist classify the price elasticity of demand for these jackets?
- A) Perfectly inelastic
- B) Relatively inelastic
- C) Unitary elastic
- D) Relatively elastic
Show answer & explanation
Answer: D) Relatively elastic
Demand is relatively elastic when the percentage change in quantity demanded (30%) is greater than the percentage change in price (10%), yielding a PED greater than 1.
Question 17
A patient with a severe allergy must buy a specific EpiPen to survive. Even if the pharmacy doubles the price, the patient buys the exact same quantity. What is the shape of the demand curve for this patient?
- A) A horizontal line
- B) A vertical line
- C) A downward sloping 45-degree line
- D) A U-shaped curve
Show answer & explanation
Answer: B) A vertical line
When demand is completely unresponsive to price changes (perfectly inelastic), the quantity remains fixed regardless of price, represented by a vertical demand curve.
Question 18
A cinema increases its ticket prices. Consequently, it notices that its total overall revenue (total expenditure by customers) has actually dropped. According to the total expenditure method, the demand for tickets is:
- A) Inelastic
- B) Unitary elastic
- C) Elastic
- D) Perfectly inelastic
Show answer & explanation
Answer: C) Elastic
If a price increase leads to a fall in total revenue, it means the percentage drop in customers was larger than the percentage rise in price, indicating elastic demand.
Question 19
Statistical analysis shows that the Income Elasticity of Demand (YED) for public bus transport in a city is -0.8. Based on this negative value, public bus transport is classified as a(n):
- A) Normal good
- B) Luxury good
- C) Inferior good
- D) Giffen good
Show answer & explanation
Answer: C) Inferior good
A negative income elasticity means that as consumers' incomes increase, they consume less of the good (switching to taxis or cars), which is the definition of an inferior good.
Question 20
The Cross Price Elasticity of Demand between Product A and Product B is firmly positive (+1.5). This indicates that when the price of A rises, the demand for B rises. Therefore, A and B are:
- A) Substitutes
- B) Complements
- C) Unrelated goods
- D) Jointly supplied goods
Show answer & explanation
Answer: A) Substitutes
A positive cross elasticity means consumers switch from the more expensive good to the other good, indicating they serve the same purpose and are substitutes.
Question 21
If the Cross Price Elasticity between smartphones and mobile data plans is negative (-2.0), this implies that if mobile data plans become very expensive, the demand for smartphones will:
- A) Increase significantly
- B) Decrease
- C) Remain perfectly constant
- D) Become perfectly elastic
Show answer & explanation
Answer: B) Decrease
A negative cross elasticity signifies complementary goods. If data plans (the complement) become too expensive, people will buy fewer smartphones to use them with.
Question 22
A government wants to raise massive tax revenue by placing a heavy excise tax on a specific consumer good. To ensure consumers keep buying it and paying the tax, the government should tax a good with:
- A) Highly elastic demand
- B) Highly inelastic demand
- C) Unitary elastic demand
- D) Infinite substitutes
Show answer & explanation
Answer: B) Highly inelastic demand
Goods with highly inelastic demand (like tobacco or fuel) suffer very little drop in quantity demanded when prices rise, ensuring steady and high tax revenues for the government.
Question 23
Which of the following factors would make the price elasticity of supply for a manufactured product highly elastic?
- A) The production process is extremely complex and takes 3 years
- B) The firm is operating at maximum, 100% capacity
- C) The firm has a large amount of spare, unused factory capacity
- D) The product is a rapidly decaying agricultural crop
Show answer & explanation
Answer: C) The firm has a large amount of spare, unused factory capacity
If a firm has spare capacity, it can rapidly and easily increase production in response to a price increase, making its supply highly elastic.
Question 24
An exclusive, historic painting by a deceased master artist goes up for auction. No matter how high the bidding goes, no more paintings can be created. The supply curve for this painting is:
- A) Perfectly elastic
- B) Relatively elastic
- C) Perfectly inelastic
- D) Unitary elastic
Show answer & explanation
Answer: C) Perfectly inelastic
Because the physical quantity is fixed at exactly one and cannot be increased regardless of price, the supply is perfectly inelastic (a vertical curve).
Question 25
If a 5% increase in the price of a good leads to exactly a 5% decrease in the quantity demanded, total revenue will remain unchanged. The Price Elasticity of Demand (PED) is:
- A) 0
- B) 0.5
- C) 1
- D) Infinity
Show answer & explanation
Answer: C) 1
When the percentage change in quantity perfectly matches the percentage change in price, the elasticity coefficient is 1 (unitary elastic).
Question 26
Why is the supply of fresh, perishable agricultural goods (like ripe tomatoes) generally highly inelastic in the very short run (e.g., market day)?
- A) Because they can be easily stored for years
- B) Because farmers can instantly grow new tomatoes in a few hours
- C) Because the goods must be sold immediately before they rot, regardless of price drops
- D) Because they are considered luxury goods
Show answer & explanation
Answer: C) Because the goods must be sold immediately before they rot, regardless of price drops
Perishable goods cannot be withheld from the market and stored for later when prices improve. They must be sold immediately, making short-run supply very inelastic.
Question 27
If a government imposes a new tax on a product, and the producers end up absorbing 90% of the tax burden while consumers only pay 10%, what must be true about the product's elasticity?
- A) Demand is highly inelastic
- B) Demand is highly elastic relative to supply
- C) Supply is perfectly inelastic
- D) Demand is perfectly inelastic
Show answer & explanation
Answer: B) Demand is highly elastic relative to supply
When demand is highly elastic, consumers will refuse to pay higher prices and will easily switch substitutes. Thus, producers are forced to absorb the tax burden to maintain sales.
Question 28
A retail store cuts the price of its backpacks by 10%. As a result, the quantity demanded surges by an impressive 40%. The price elasticity of demand for these backpacks is:
- A) Perfectly inelastic
- B) Relatively inelastic
- C) Unitary elastic
- D) Relatively elastic
Show answer & explanation
Answer: D) Relatively elastic
Demand is relatively elastic when the percentage change in quantity demanded (40%) is greater than the percentage change in price (10%), yielding an elasticity > 1.
Question 29
An individual requires a specific life-saving medication. Even if the price triples, they must buy the exact same dosage every month. What is the Price Elasticity of Demand (PED) for this patient?
- A) 1
- B) Greater than 1
- C) Exactly 0 (Perfectly inelastic)
- D) Infinity (Perfectly elastic)
Show answer & explanation
Answer: C) Exactly 0 (Perfectly inelastic)
When quantity demanded remains totally unchanged regardless of price fluctuations, the demand is perfectly inelastic, carrying a PED value of zero.
Question 30
If a cinema increases its ticket prices by 15%, and discovers that its total overall revenue remains exactly the same as before, the demand for tickets is:
- A) Inelastic
- B) Elastic
- C) Unitary elastic
- D) Perfectly inelastic
Show answer & explanation
Answer: C) Unitary elastic
According to the total outlay/expenditure method, if a change in price results in absolutely no change in total expenditure, the demand is unitary elastic (PED = 1).
Question 31
The Income Elasticity of Demand for a specific brand of fast food is calculated to be -0.6. Based on this negative coefficient, how is this fast food classified?
- A) As a luxury good
- B) As a normal good
- C) As a Veblen good
- D) As an inferior good
Show answer & explanation
Answer: D) As an inferior good
A negative income elasticity of demand indicates that as consumers' incomes rise, they buy less of the product, which defines an inferior good.
Question 32
If the Cross Elasticity of Demand between Product X and Product Y is strongly positive (+2.5), what is the relationship between the two products?
- A) They are substitute goods
- B) They are complementary goods
- C) They are entirely unrelated
- D) They are both Giffen goods
Show answer & explanation
Answer: A) They are substitute goods
A positive cross elasticity means that when the price of one good rises, consumers buy more of the other good instead, proving they are substitutes.
Question 33
If the price of printers falls by 20%, the demand for printer ink cartridges rises by 40%. The Cross Elasticity of Demand is -2.0. This negative relationship proves the goods are:
- A) Substitutes
- B) Complements
- C) Inferior
- D) Unrelated
Show answer & explanation
Answer: B) Complements
A negative cross elasticity indicates that the goods are consumed together (complements); a drop in the price of one increases the demand for the other.
Question 34
The government wants to levy a heavy tax on a product to maximize tax revenue without destroying the industry. To ensure consumers keep buying the product despite the tax, they should tax a product with:
- A) Highly elastic demand
- B) Perfectly elastic demand
- C) Highly inelastic demand
- D) Infinite substitutes
Show answer & explanation
Answer: C) Highly inelastic demand
A highly inelastic demand (like cigarettes) means consumers are relatively unresponsive to price hikes, allowing the government to extract maximum tax revenue without heavily reducing sales.
Question 35
Which of the following scenarios would result in a product having a highly elastic demand?
- A) The product is a strict necessity like drinking water
- B) The product has no close substitutes available
- C) The product takes up a massive portion of a consumer's monthly income
- D) The product is deeply habit-forming or addictive
Show answer & explanation
Answer: C) The product takes up a massive portion of a consumer's monthly income
Goods that consume a large percentage of income force consumers to be very sensitive to price changes, making their demand highly elastic.
Question 36
Why is the price elasticity of supply (PES) usually much higher in the long run than in the short run?
- A) Because consumers change their minds over time
- B) Because the government eventually drops taxes
- C) Because in the long run, firms have time to build new factories and acquire more fixed capital
- D) Because marginal utility eventually becomes negative
Show answer & explanation
Answer: C) Because in the long run, firms have time to build new factories and acquire more fixed capital
Supply elasticity depends heavily on time. In the long run, firms can expand their physical production capacity, making supply highly responsive to price changes.
Question 37
A famous dead artist's masterpiece goes to auction. Because no more can ever be painted, the supply is fixed at one single unit. The supply curve is:
- A) A horizontal line
- B) A vertical line (perfectly inelastic)
- C) A downward sloping line
- D) Unitary elastic
Show answer & explanation
Answer: B) A vertical line (perfectly inelastic)
When supply is absolutely fixed and cannot respond to any price changes, the supply curve is vertical, meaning it is perfectly inelastic.
Question 38
If an upward-sloping straight-line supply curve passes exactly through the origin (0,0) of the graph, what is its Price Elasticity of Supply (PES) at all points?
- A) PES is greater than 1
- B) PES is less than 1
- C) PES is exactly 1 (Unitary elastic)
- D) PES is zero
Show answer & explanation
Answer: C) PES is exactly 1 (Unitary elastic)
A geometric rule of supply states that any straight-line supply curve passing directly through the origin has a unitary price elasticity of supply (PES = 1) at all points.
Question 39
When a firm lowers the price of its product, it experiences a massive surge in quantity demanded that completely overwhelms the price cut, causing total revenue to increase. The demand here is:
- A) Inelastic
- B) Elastic
- C) Unitary
- D) Perfectly inelastic
Show answer & explanation
Answer: B) Elastic
If a price cut leads to an increase in total expenditure/revenue, the percentage increase in quantity outpaced the percentage drop in price, meaning demand is elastic.
Question 40
Which type of goods generally possess a 'more elastic' supply curve because they can be easily stored in warehouses without rotting while waiting for better prices?
- A) Fresh agricultural vegetables
- B) Perishable dairy products
- C) Manufactured durable goods (like electronics)
- D) Live livestock
Show answer & explanation
Answer: C) Manufactured durable goods (like electronics)
Durable manufactured goods have highly elastic supply because they can be stockpiled and released quickly into the market when prices rise, unlike perishables.
Question 41
If the government imposes a new tax on a good with highly elastic demand, who will bear the majority of the tax burden (incidence)?
- A) The consumers
- B) The government
- C) The producers (suppliers)
- D) The burden is shared exactly 50/50
Show answer & explanation
Answer: C) The producers (suppliers)
If demand is highly elastic, consumers will refuse to pay higher prices and will switch products. To retain sales, producers must absorb the majority of the tax burden.
Question 42
If a 5% increase in price causes absolutely no change in the quantity supplied of a good, the elasticity of supply is:
- A) Unitary
- B) Zero (Perfectly inelastic)
- C) Infinite (Perfectly elastic)
- D) Relatively elastic
Show answer & explanation
Answer: B) Zero (Perfectly inelastic)
When quantity supplied does not respond at all to a price change, the elasticity coefficient is zero, denoting perfectly inelastic supply.
Question 43
Which of the following products is likely to have the lowest price elasticity of demand?
- A) Luxury cars
- B) Salt
- C) Houses
- D) Fresh organic apples
Show answer & explanation
Answer: B) Salt
Salt is a basic necessity with practically no close substitutes and takes up a tiny fraction of a consumer's income, making its demand highly inelastic.
Question 44
What is the shape of a demand curve that has a strictly constant slope throughout?
- A) A rectangular hyperbola
- B) A U-shaped curve
- C) A straight line
- D) A convex curve
Show answer & explanation
Answer: C) A straight line
A curve with a constant mathematical slope is by definition a straight line.
Question 45
If a geometric supply schedule has a price elasticity of supply exactly equal to 1 at all points, its graph will be:
- A) A straight line passing directly through the origin
- B) A horizontal line
- C) A vertical line
- D) A U-shaped curve
Show answer & explanation
Answer: A) A straight line passing directly through the origin
Any straight-line supply curve that passes exactly through the origin (0,0) possesses a unitary price elasticity of supply (PES = 1) at every single point.
Question 46
The elasticity of supply for highly perishable agricultural goods (like fresh milk or ripe strawberries) on market day is generally:
- A) Unitary elastic
- B) Highly elastic
- C) Perfectly elastic
- D) Inelastic
Show answer & explanation
Answer: D) Inelastic
Perishable goods cannot be stored for later sale. They must be sold immediately regardless of price, making their short-run supply highly inelastic.
Question 47
Because durable manufactured goods (like televisions) can be easily stored in warehouses without spoiling while waiting for prices to rise, their supply is generally:
- A) More elastic
- B) Less elastic
- C) Perfectly inelastic
- D) Unitary inelastic
Show answer & explanation
Answer: A) More elastic
Durable goods can be stockpiled and released to the market quickly in response to price increases, giving them a more elastic supply than perishable goods.
Question 48
What specific term describes the measurement of how sensitive the demand for a good is to a change in the consumers' money income?
- A) Price elasticity of demand
- B) Income elasticity of demand
- C) Cross elasticity of demand
- D) Promotional elasticity
Show answer & explanation
Answer: B) Income elasticity of demand
Income elasticity of demand (YED) precisely measures the responsiveness of the quantity demanded of a good to a change in the real income of consumers.
Question 49
If the price of a specific good falls, and as a direct result, the total expenditure by consumers on that good also falls, the demand for the good is:
- A) Elastic
- B) Unitary elastic
- C) Inelastic
- D) Perfectly elastic
Show answer & explanation
Answer: C) Inelastic
According to the total outlay method, if price and total expenditure move in the same direction (both fall), it means the percentage increase in quantity was smaller than the price drop, indicating inelastic demand.
Question 50
In a timeframe defined as the 'Very Short Run', producers cannot alter their output at all because all factors of production are fixed. Consequently, the supply curve is:
- A) A horizontal line
- B) A downward sloping line
- C) Perfectly inelastic (vertical)
- D) Perfectly elastic
Show answer & explanation
Answer: C) Perfectly inelastic (vertical)
In the very short run (immediate market period), output is completely restricted to existing stock, rendering supply perfectly inelastic regardless of demand or price spikes.
Question 51
If an increase in the price of cooking oil causes total consumer expenditure on cooking oil to rapidly increase, this indicates that the demand for cooking oil is:
- A) Inelastic
- B) Elastic
- C) Unitary
- D) Infinite
Show answer & explanation
Answer: A) Inelastic
When price rises and total revenue/expenditure also rises, it shows consumers did not significantly cut back their consumption, proving demand is inelastic.
Question 52
If the Cross Elasticity of Demand between Product X and Product Y is exactly zero, what is the economic relationship between the two products?
- A) They are perfect substitutes
- B) They are strong complements
- C) They are completely unrelated independent goods
- D) They are both inferior goods
Show answer & explanation
Answer: C) They are completely unrelated independent goods
A cross elasticity of zero means a change in the price of one good has absolutely no effect on the demand for the other, indicating they are totally unrelated.
Question 53
In the short run, a factory's physical plant capacity is fixed, but it can slightly increase production by paying workers overtime. Therefore, the price elasticity of supply in the short run is:
- A) Relatively elastic
- B) Relatively inelastic
- C) Perfectly elastic
- D) Unitary elastic
Show answer & explanation
Answer: B) Relatively inelastic
Because firms are constrained by fixed factory sizes in the short run, they cannot massively scale up supply in response to price spikes, making supply relatively unresponsive (inelastic).
Question 54
A business sells 20,000 units of its product monthly. The price elasticity of demand is exactly -0.8. If the firm raises its price by 5%, what will be the new sales volume?
- A) 21,000 units
- B) 19,200 units
- C) 20,800 units
- D) 19,000 units
Show answer & explanation
Answer: B) 19,200 units
Since Elasticity = %changeQ / %changeP. -0.8 = %changeQ / 5%. Thus %changeQ = -4%. A 4% drop on 20,000 units is 800 units, leaving 19,200 units.
Question 55
Even if a downward-sloping demand curve is a perfectly straight line with a constant mathematical slope, its price elasticity of demand will continuously change along the curve.
- A) True
- B) False
Show answer & explanation
Answer: A) True
Slope is absolute change, but elasticity measures percentage change. As you move down a straight-line demand curve, the base price and quantity values change, causing elasticity to fall continuously.
Question 56
A shopkeeper raises the price of his premium notebooks. However, he subsequently notices that his Total Revenue has actually fallen. This indicates that the demand for the notebooks was:
- A) Relatively inelastic
- B) Unit elastic
- C) Relatively elastic
- D) Perfectly inelastic
Show answer & explanation
Answer: C) Relatively elastic
If raising the price causes total revenue to fall, it means consumers aggressively abandoned the product (quantity fell by a massive percentage), proving demand is elastic.
Question 57
Which of the following statements about the elasticity of supply is fundamentally UNTRUE?
- A) It tends to vary heavily with the passage of time
- B) It measures the responsiveness of supply to changes in market price
- C) It is a measure of changes in supply caused by adopting greater operational efficiency
- D) It tends to be higher for durable manufactured goods than for perishable goods
Show answer & explanation
Answer: C) It is a measure of changes in supply caused by adopting greater operational efficiency
Price elasticity of supply specifically measures responsiveness to price, not the impact of technological efficiency (which causes a shift in the curve, not elasticity).