Price Elasticity of Demand - AP Microeconomics

Demand for which of the following products is likely to be the most price-inelastic?
Answer: A pack of chewing gum. Goods that constitute a very small proportion of a consumer's income tend to have highly inelastic demand. A price change for chewing gum will not significantly impact a consumer's budget, so their purchasing decision is less sensitive to price. The other items are expensive and make up a larger share of income, leading to more elastic demand.
A firm selling a product with a linear demand curve will maximize its total revenue by setting the price at the point on the demand curve where the price elasticity of demand is
Answer: equal to -1. Total revenue is maximized when price elasticity of demand is unit elastic, meaning the coefficient is equal to -1. At this point, the revenue gained from a price cut is exactly offset by the revenue lost, and vice versa. This corresponds to the midpoint of a linear demand curve.
The price elasticity of demand is likely to be greatest for which of the following?
Answer: A specific brand of sports car. Price elasticity of demand is higher when the market is more narrowly defined and there are more available substitutes. A specific brand of sports car has many substitutes (other brands, other types of cars), making its demand highly elastic compared to the broader, less substitutable categories of 'all automobiles' or 'all forms of transportation'. Heart medication is a necessity with few substitutes, making it highly inelastic.
The price elasticity of demand for a luxury good, such as a diamond necklace, is generally more elastic than the price elasticity of demand for a necessity, such as bread, because
Answer: the purchase of a luxury good can be easily postponed when its price rises. Luxury goods have more elastic demand because they are not essential for daily life. Consumers can easily choose not to buy them or delay the purchase if the price increases. Necessities like bread must be purchased regularly, making their demand less responsive to price changes.
When a university increases the price of a student parking pass from $200 to$ 220 per semester, the quantity of passes demanded falls from 5,000 to 4,500. Using the simple percentage change formula, the price elasticity of demand for these passes is
Answer: $-1.0$ The percentage change in price is (( $220 -$ 200) / $200) * 100% = 10%. The percentage change in quantity demanded is ((4,500 - 5,000) / 5,000) * 100% = -10%. The price elasticity of demand is ($ -10\% / 10\%) = -1.0$$.
Suppose the calculated price elasticity of demand for a particular brand of cereal is $-0.8$ . Which of the following statements is true?
Answer: Demand is price inelastic, so a decrease in price will lead to a decrease in total revenue. The absolute value of the elasticity is $0.8$ , which is less than 1, indicating that demand is price inelastic. According to the total revenue test, if demand is inelastic, price and total revenue move in the same direction. Therefore, a price decrease will cause total revenue to decrease.
In the immediate aftermath of a sharp increase in electricity prices, most households do not significantly reduce their electricity consumption. Over several years, however, people may install more energy-efficient appliances and insulation. This pattern implies that the price elasticity of demand for electricity is
Answer: more elastic in the long run than in the short run. One of the determinants of price elasticity is the time horizon. Consumers have more time to adjust their behavior and find substitutes or alternatives in the long run. Therefore, demand becomes more responsive to price changes, and thus more elastic, over a longer period.
For a typical straight-line, downward-sloping demand curve, which of the following is correct?
Answer: Demand is more elastic at higher prices and more inelastic at lower prices. On the upper portion of a linear demand curve, a given price change represents a small percentage change, while the corresponding quantity change is a large percentage change, making demand elastic. On the lower portion, the reverse is true, making demand inelastic. Elasticity changes continuously along the curve.
A diabetic must take a specific amount of insulin each day to live, regardless of the price. From the perspective of this consumer, the demand for insulin is
Answer: perfectly inelastic. Perfectly inelastic demand occurs when the quantity demanded remains constant regardless of any change in price. Since the patient must consume a fixed quantity, the demand is perfectly inelastic, represented by a vertical demand curve.
A local movie theater raises its ticket prices and discovers that its total revenue from ticket sales has increased. This indicates that the demand for its movie tickets is
Answer: price inelastic. The total revenue test states that if price and total revenue move in the same direction (both increase, in this case), the demand for the good is price inelastic. Consumers are not very responsive to the price change, so the higher price outweighs the small drop in quantity demanded.
The fundamental concept measured by the price elasticity of demand is the
Answer: responsiveness of quantity demanded to a change in price. Price elasticity of demand is a measure of sensitivity or responsiveness. It quantifies how much the quantity demanded of a good changes in percentage terms in response to a one percent change in its price. It is distinct from slope, which measures absolute changes.
The owner of a local bookstore wants to increase total revenue. An economic consultant has estimated that the price elasticity of demand for books at this store is -1.8. The consultant should advise the owner to
Answer: decrease the price of books. Since the price elasticity of demand is elastic ( $|-1.8| > 1$ ), price and total revenue move in opposite directions. To increase total revenue, the owner must decrease the price. The resulting percentage increase in quantity sold will be larger than the percentage decrease in price.
When a pizza parlor's price is $10 per pizza, it sells 200 pizzas a day. When it lowers the price to$ 8, it sells 300 pizzas a day. Based on this information, the demand for its pizza is
Answer: elastic, and its total revenue has increased. First, calculate total revenue at both prices. Initial total revenue was $10 \times 200 = \$2,000$ . New total revenue is $8 \times 300 = \$2,400$ . Since the price decreased and total revenue increased, the demand must be elastic according to the total revenue test.
If a 10% increase in the price of a smartphone leads to a 20% decrease in the quantity demanded, the price elasticity of demand for smartphones is
Answer: $-2.0$ , and demand is elastic. Price elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in price. In this case, $(-20\%) / (10\%) = -2.0$ . Since the absolute value of the elasticity ( $2.0$ ) is greater than 1, demand is elastic.
Which of the following explains why the price elasticity of demand for fresh green beans is likely greater than the price elasticity of demand for all vegetables?
Answer: Fresh green beans are a more narrowly defined category with more direct substitutes. The availability of substitutes is a key determinant of elasticity. A narrowly defined market (fresh green beans) has many substitutes (broccoli, carrots, etc.), making its demand more elastic. A broadly defined market (all vegetables) has fewer substitutes, making its demand more inelastic.
A corn farmer operates in a perfectly competitive market and can sell any quantity of corn at the prevailing market price of $4 per bushel. The demand curve faced by this individual farmer is
Answer: perfectly elastic. In a perfectly competitive market, individual firms are price takers. This means they face a horizontal demand curve at the market price. A horizontal demand curve signifies perfectly elastic demand, as the firm would sell zero units if it charged a higher price and can sell all it wants at the market price.
If the demand for a product is unit elastic, a 5 percent decrease in its price will cause the quantity demanded to increase by
Answer: 5 percent, leaving total revenue unchanged. Unit elasticity means the magnitude of the percentage change in quantity demanded is equal to the percentage change in price. A 5% price decrease will lead to a 5% quantity increase. These changes exactly offset each other, so total revenue ( $P \times Q$ ) remains constant.
A coffee shop lowers the price of its lattes from $5.00 to$ 4.50 and finds that its total revenue from lattes increases. This outcome suggests that over this price range, the demand for its lattes is
Answer: elastic. According to the total revenue test, if price and total revenue move in opposite directions (price decreased while total revenue increased), the demand for the good must be elastic. The percentage increase in quantity demanded was greater than the percentage decrease in price.
A government wishes to place an excise tax on a good to raise the most tax revenue possible while causing the smallest decrease in the equilibrium quantity. The government should choose a good for which the demand is
Answer: relatively inelastic. If demand is inelastic, consumers are not very responsive to price changes. A tax increases the price paid by consumers, but the quantity demanded will fall by a relatively small percentage. This allows the government to collect substantial revenue from the large quantity of the good still being sold.
Along a downward-sloping, linear demand curve, the price elasticity of demand varies, while the slope of the curve is constant. This is because elasticity
Answer: is calculated using percentage changes, and the base values for price and quantity change along the curve. Slope is the ratio of absolute changes ( $\Delta P / \Delta Q$ ), which is constant for a line. Elasticity is the ratio of percentage changes ( $(\%\Delta Q) / (\%\Delta P)$ ). The percentage change depends on the initial price and quantity, which are different at every point on the demand curve, causing elasticity to vary.

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