Active Review Questions

Fill in the blank

1. When you drop by the only coffee shop in your neighborhood, you notice that the
price of a cup of coffee has increased considerably since last week. You decide
it’s not a big deal, since coffee isn’t a big part of your overall budget, and you buy
a cup of coffee anyway. Most of the other coffee drinkers who frequent the
coffee shop make a similar calculation. Thus, the demand for coffee in your
neighborhood is relatively inelastic .

2. You sell muffins for one dollar each. If you raise your price by even one penny,
you will lose all your customers. The demand curve for your muffins is thus
Elastic, and the movement of the demand curve will be downwards. .

3. The responsiveness of demand to income is known as the

4. The income elasticity of demand is negative for inferior goods

5. When demand is inelastic , revenue to the seller is unaffected by a

For Question #6, refer to the following graph:

SA

Quantity

6. For a given price range, which of the supply curves in the graph shown above is
characterized by a relatively greater elasticity of supply? SA

7. The elasticity of demand is calculated as the percent change in quantity

8. When quantity demanded does not respond at all to price, demand is perfectly
inelastic .
 9. If the price elasticity of demand is greater than one, then demand is
elastic .

10. Suppose tangerines are an inferior good. This means that if your income
decreases, you will buy (more/fewer) fewer tangerines.

True or False

11. Perfectly elastic demand refers to a situation in which any price change for the
good in question, no matter how small, will produce an "infinite" change in
quantity demanded. True

12. When the seller increases the price charged for a good with an elastic demand, the
seller’s revenues will go up. False

13. Elasticity is the same as the slope of the demand curve. True

14. Income elasticity of demand is always expressed as a positive number (absolute

15. When the income elasticity of demand is positive but less than 1, demand is called
“income elastic.” False

16. If a good is inferior and its price rises, the income effect will encourage greater
expenditures, at the same time as the substitution effect pushes toward lower
expenditures. False

Short Answer

17. Name the three main reasons why demand for a good or service might be
inelastic.
The first main reason that highlights the inelasticity of a product or demand is that if the product is
a need and a necessity in daily life. The second main reason is that the good lacks a proper substitute good that the
consumers can buy when the price of the original good increases. The third reason is that if the good is an inferior good.

18. You run the only lemonade stand in Central Park. If people don't buy lemonade
from you, their only other option is to buy orange juice from a nearby vendor.
One day, you decide to raise the price of your lemonade from $1 per glass to
$1.25 per glass. As a result, half of your usual customers decide to get orange
juice instead of lemonade that day. What does this experience tell you about the
demand for lemonade in Central Park?
From this incident, I learn that the demand for lemonade is elastic, since a small change in price has led half
of the consumers to buy from a substitute business. This is also because the change in quantity demanded is more than the
change in price.
 19. A 20% increase in the price of milk leads to a 10% reduction in the quantity of
milk demand. What is the price elasticity of demand for milk?

10/20 = 0.5
Therefore, the PED for milk is 0.5

For Question #20, refer to the graph below.

Sun hats

Beach balls
Price

Demand (beach balls)

Quantity

20. The graph shown above illustrates the demand curves for two goods: Sun hats and
beach balls. Which demand curve is relatively more elastic?
The demand for beach balls is relatively more elastic, because the slope of sun hats is greater and steeper,
making it relatively inelastic because the price there is a small change in quantity demanded.

Problems

1. Draw a diagram of a perfectly inelastic demand curve. Suggest an example of a

Luxury products and luxury trips, such as jewellery, holiday trips. Basically, luxurious
wants in our life.
2. A limited number of Civil War uniforms have been preserved. No matter how
much buyers are willing to pay for these uniforms as collectors items, there's no
way to increase the quantity of uniforms in existence. Show the supply curve for
authentic Civil War uniforms.
 For Problems #3 and #4, refer to the following graph:

6
B
5

4
A
3

1 Demand
0
0 1 2 3 4 5
Quantity of Pineapples

3. The graph above shows the demand curve for pineapples.

a. Calculate the amount of revenue the seller would receive if the price is set at $3.

Ans: The seller would receive $9 as his revenue, because revenue is price*quantity.

b. Calculate the amount of revenue the seller would receive if the price is set at $5.

Ans: The amount of revenue the seller would receive if the price is set at $5 is $10.

c. Reasoning from the results you just calculated, is the demand for bananas elastic or
inelastic, in this range of prices? How do you know?
From the above reasoning, it is true to say that the demand for bananas is price inelastic, because in this case the change in
price is more than the change in quantity demanded. This means that even though the price changed by $2, demand only
changed by 1. We can also determine whether the demand for bananas is elastic or inelastic by calculating the PED. The
PED for bananas is -0.5, which is less than 1. Therefore, bananas are inelastic.
4. Continuing with the above example of pineapples,

a. Calculate the percent change in price that occurs in moving from point A (the “base”
case) to point B, using the midpoint formula.

5−3 2
Ans: × 100 = × 100 = 66.67%
3 3

b. Calculate the percent change in quantity that occurs in moving from point A to point B,
using the midpoint formula.

2−3 −1
Ans: 3 × 100 = 3 × 100 = −33.33%
However, it would be suitable to say that there is a 33.33% decrease.

c. Calculate the price elasticity of demand for pineapples.

−33.33
Ans: = -0.5 or 0.5 in terms of PED.
66.67

5. Suppose the demand for oranges is more price elastic in the demand for
chocolate.On the graph below, indicate which line represents the demand for
oranges, and which represents the demand for chocolate.
Price

Oranges

Chocolate
Quantity
Which of the following demand curves is more elastic?
Price

Price
Demand

Quantity Quantity