High School Economics Quiz: Income And Cross Price Elasticity
20 questions · exam conditions
0:00
Income And Cross Price ElasticityQuestion 1 of 20

A country is predicted to enter a period of significant economic growth, leading to a sustained rise in average real incomes. A financial analyst is advising clients on which industries are likely to see the largest proportional increase in demand.

The analyst would most likely recommend investing in firms that produce goods with:

a high negative income elasticity of demand.
a positive but low income elasticity of demand (between 0 and 1).
a high positive income elasticity of demand (greater than 1).
a cross-price elasticity of demand that is close to zero.
← Back to quizzes

High School Economics Quiz

High School Economics Quiz: Income And Cross Price Elasticity

Practice Income And Cross Price Elasticity in High School Economics with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

What this quiz covers

This quiz focuses on Income And Cross Price Elasticity, giving you a quick way to practice the rules, question types, and explanations that matter most for High School Economics.

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

All questions

Question 1

A country is predicted to enter a period of significant economic growth, leading to a sustained rise in average real incomes. A financial analyst is advising clients on which industries are likely to see the largest proportional increase in demand.

The analyst would most likely recommend investing in firms that produce goods with:

  1. a high negative income elasticity of demand.
  2. a positive but low income elasticity of demand (between 0 and 1).
  3. a high positive income elasticity of demand (greater than 1). (correct answer)
  4. a cross-price elasticity of demand that is close to zero.
Explanation: Rising incomes will most benefit firms producing luxury goods. Luxury goods are defined as having a high, positive income elasticity of demand (greater than 1), meaning that as income rises by a certain percentage, the demand for these goods rises by an even larger percentage. Negative income elasticity describes inferior goods, whose sales would fall. Low positive elasticity describes necessities, which would see sales grow, but not as rapidly as luxuries.

Question 2

An economic research firm observes that as average household incomes in a city rise by 10%, the quantity demanded of generic canned vegetables falls by 5%. What does this finding suggest about generic canned vegetables?

  1. They are an inferior good, as quantity demanded falls when consumer income rises. (correct answer)
  2. They are a Giffen good, because a change in income causes an opposite change in quantity demanded.
  3. They are a normal good, but a necessity, as shown by the negative relationship with income.
  4. Their demand is income elastic, as quantity demanded is responsive to a change in income.
Explanation: Income elasticity of demand measures how the quantity demanded of a good responds to a change in consumer income. A negative income elasticity (income up, quantity demanded down) indicates the good is an inferior good. Giffen goods relate to price changes, not income changes. Normal goods have a positive relationship with income. Income elasticity is calculated as (% change in quantity demanded) / (% change in income), which is (-5% / +10%) = -0.5. Since the absolute value is less than 1, demand is income inelastic, not elastic.

Question 3

A marketing study for a company that sells both video game consoles and video games finds that a 15% decrease in the price of its consoles leads to a 30% increase in the sales of its video games. Which of the following can be concluded from this data?

  1. The cross-price elasticity of demand is +2.0, indicating the goods are strong substitutes.
  2. The two goods are complements, as indicated by the negative cross-price elasticity of demand. (correct answer)
  3. The own-price elasticity of demand for video games is highly elastic.
  4. The two goods are inferior goods, as a price drop significantly boosts total sales.
Explanation: Cross-price elasticity of demand measures how the quantity demanded of one good responds to a price change in another. When the price of good A falls and the quantity demanded of good B rises, the goods are complements. The calculated elasticity is (+30% / -15%) = -2.0. The negative sign confirms they are complements. A positive sign indicates substitutes. The data is not about the own-price elasticity of games or about income effects (inferior goods).

Question 4

Two competing ride-sharing companies, RideFast and GoQuick, operate in the same city. To gain market share, RideFast cuts its average fare by 25%. Market analysts observe a subsequent significant decrease in the number of rides booked through GoQuick.

This market behavior suggests that the cross-price elasticity of demand for GoQuick rides with respect to the price of RideFast rides is:

  1. negative, because a price cut by one firm harms the other's sales.
  2. positive, because the two services are clear substitutes for consumers. (correct answer)
  3. zero, because the firms are separate entities operating independently.
  4. equal to the income elasticity of demand for ride-sharing services.
Explanation: The two services are substitutes. When the price of a substitute (RideFast) decreases, the demand for the original good (GoQuick) also decreases. Cross-price elasticity is calculated as (% change in quantity demanded of Good A) / (% change in price of Good B). Here, both the numerator (demand for GoQuick) and the denominator (price of RideFast) are negative, resulting in a positive elasticity. Positive cross-price elasticity is the definition of a substitute good. Distractor A confuses the negative business outcome with the sign of the elasticity.

Question 5

An analyst finds that the cross-price elasticity of demand for product X with respect to the price of product Y is exactly +1.0. Which statement provides the most accurate and complete interpretation of this finding?

  1. Products X and Y are perfect complements.
  2. For every dollar increase in the price of Y, the quantity of X demanded increases by one unit.
  3. The own-price elasticity of demand for product X is unit elastic.
  4. Products X and Y are substitutes, and a 1% increase in the price of Y leads to a 1% increase in the quantity demanded of X. (correct answer)
Explanation: The positive sign indicates X and Y are substitutes. The value of +1.0 means that the percentage change in the quantity demanded of X is equal to the percentage change in the price of Y. Elasticity measures the relationship between percentage changes, not absolute unit or dollar changes, which makes distractor D incorrect. Distractor C incorrectly confuses cross-price elasticity with own-price elasticity.

Question 6

A company sells premium leather hiking boots. Its marketing department reports two key findings: (1) During a recent recession when average incomes fell 5%, the company's sales fell by 15%. (2) A competitor's 10% price increase on similar synthetic hiking boots was associated with a 5% increase in the company's sales.

What do these two findings imply about the premium leather hiking boots?

  1. They are an inferior good and a complement to synthetic boots.
  2. Their demand is income inelastic, and they are unrelated to synthetic boots.
  3. They are a normal good (a necessity) and a complement to synthetic boots.
  4. They are a normal good (a luxury) and a substitute for synthetic boots. (correct answer)
Explanation: Finding (1) relates to income elasticity. Since income fell and sales fell, they are a normal good (positive relationship). The income elasticity is (% change in Q) / (% change in I) = (-15%) / (-5%) = +3.0. Since Ei > 1, they are a luxury. Finding (2) relates to cross-price elasticity. Since the competitor's price rose and the company's sales rose, the goods are substitutes. The cross-price elasticity is (+5%) / (+10%) = +0.5, a positive value indicating substitutes.

Question 7

The quantity of coffee a consumer purchases from a local cafe decreases. An economist explains this using two separate theories. Theory 1 cites the coffee's negative income elasticity. Theory 2 cites a positive cross-price elasticity between the cafe's coffee and another product.

Which pair of events corresponds to Theory 1 and Theory 2, respectively?

  1. (Theory 1) The consumer received a raise at work; (Theory 2) A rival cafe offered a discount on its coffee. (correct answer)
  2. (Theory 1) The consumer lost their job; (Theory 2) The price of muffins at the cafe went up.
  3. (Theory 1) The price of coffee beans increased; (Theory 2) The consumer developed a new taste for tea.
  4. (Theory 1) The consumer received a raise at work; (Theory 2) The price of sugar, a complement, increased.
Explanation: Theory 1 (negative income elasticity) implies the good is inferior. A decrease in demand for an inferior good is caused by an increase in income (a raise). Theory 2 (positive cross-price elasticity) implies the other product is a substitute. A decrease in demand for the cafe's coffee would be caused by a decrease in the price of a substitute (a rival's discount).

Question 8

A consumer's income increases. Following this change, the consumer moderately increases their purchases of basic groceries but significantly increases their spending on international vacations.

This behavior implies that for this consumer:

  1. international vacations are an inferior good and basic groceries are a normal good.
  2. both goods are normal, but international vacations have a higher income elasticity of demand than basic groceries. (correct answer)
  3. both goods are substitutes, as the consumer chooses to allocate their new income between them.
  4. basic groceries have an income elasticity greater than 1, while international vacations have an elasticity less than 1.
Explanation: Normal goods are those for which demand increases as income increases. Both groceries and vacations fit this description. However, goods for which demand increases more than proportionally with income (significant increase) are called luxuries and have an income elasticity greater than 1. Goods for which demand increases less than proportionally (moderate increase) are necessities and have an income elasticity between 0 and 1. Therefore, vacations have a higher income elasticity.

Question 9

A market researcher is tasked with determining whether a new brand of gourmet ice cream is a 'luxury' item. Which of the following elasticity measures would be most useful for this determination, and what value would support the 'luxury' classification?

  1. Cross-price elasticity of demand; a large negative value.
  2. Price elasticity of demand; a value less than 1.
  3. Income elasticity of demand; a positive value greater than 1. (correct answer)
  4. Income elasticity of demand; a positive value between 0 and 1.
Explanation: The classification of a good as a luxury or a necessity is determined by its income elasticity of demand. This measures how demand changes as consumer income changes. A luxury good is a type of normal good with an income elasticity greater than 1, meaning demand increases more than proportionally with income. A value between 0 and 1 would classify it as a necessity.

Question 10

A study finds that a 20% increase in the price of gasoline has no discernible effect on the quantity demanded of premium coffee. The cross-price elasticity of demand between gasoline and premium coffee is likely:

  1. a large positive number, as consumers must choose between the two goods.
  2. a large negative number, as they are consumed independently of each other.
  3. approximately zero, indicating the two goods are effectively unrelated in consumption. (correct answer)
  4. perfectly inelastic, meaning consumers must purchase both regardless of price changes.
Explanation: Cross-price elasticity measures the relationship between two goods. If a price change in one good has no effect on the quantity demanded of another, their cross-price elasticity is zero. This indicates the goods are unrelated. Positive elasticity implies substitutes, and negative implies complements. 'Perfectly inelastic' refers to own-price elasticity of demand, not cross-price elasticity.

Question 11

The cross-price elasticity of demand for Coca-Cola with respect to the price of Pepsi is estimated to be +0.8. The cross-price elasticity of demand for Coca-Cola with respect to the price of orange juice is estimated to be +0.2.

What is the best interpretation of these two figures?

  1. Pepsi is a complement to Coca-Cola, while orange juice is a substitute for it.
  2. Both Pepsi and orange juice are substitutes for Coca-Cola, but Pepsi is considered a closer substitute. (correct answer)
  3. Both Pepsi and orange juice are complements to Coca-Cola, but Pepsi is a stronger complement.
  4. An increase in the price of Coca-Cola will have a larger percentage effect on Pepsi sales than on orange juice sales.
Explanation: A positive cross-price elasticity indicates that goods are substitutes. Since both values are positive, both Pepsi and orange juice are substitutes for Coca-Cola. The magnitude of the elasticity indicates the strength of the relationship. A higher value (+0.8 for Pepsi vs. +0.2 for orange juice) means a closer substitute. Distractor D incorrectly reverses the cause and effect measured by the elasticity.

Question 12

In a developing nation, a large-scale infrastructure project creates thousands of jobs, significantly boosting the average income of workers in a specific region. A local merchant who primarily sells dried beans and rice, staple foods for low-income families, notices a surprising decline in sales despite the local economic boom.

The merchant's observation suggests that, for the workers in this region, dried beans and rice are:

  1. luxury goods, because their price has likely not changed.
  2. Giffen goods, because the economic boom effectively lowered their relative price.
  3. complementary goods to the new jobs created by the project.
  4. inferior goods, because as income increased, consumers substituted towards more preferred foods. (correct answer)
Explanation: The scenario describes a rise in income followed by a decrease in the quantity demanded for dried beans and rice. By definition, a good for which demand falls as income rises is an inferior good. The workers are using their higher incomes to purchase other, more desirable types of food. The concept of Giffen goods relates to price changes, not income changes.

Question 13

The price of brand A peanut butter increases by 10%. As a result, the quantity demanded of brand B peanut butter increases by 8%, and the quantity demanded of brand C jelly decreases by 5%.

Based on these changes, which statement is most accurate?

  1. Both brand B peanut butter and brand C jelly are complements to brand A peanut butter.
  2. Brand B peanut butter is a substitute for brand A, while brand C jelly is a complement to brand A. (correct answer)
  3. Brand A peanut butter is an inferior good, while brand C jelly is a normal good.
  4. The cross-price elasticity between brands A and B is negative, while between A and C it is positive.
Explanation: When the price of brand A rises and demand for brand B rises, they are substitutes (positive cross-price elasticity: +8%/+10% = +0.8). When the price of brand A rises and demand for brand C falls, they are complements (negative cross-price elasticity: -5%/+10% = -0.5). The information given is about price changes, not income changes, so we cannot determine if the goods are normal or inferior.

Question 14

A technological breakthrough significantly lowers the cost of producing electric vehicles (EVs), leading to a sharp drop in their market price.

Which of the following describes the most likely secondary effects, given that gasoline-powered cars are substitutes for EVs and home charging stations are complements to EVs?

  1. A decrease in the demand for both gasoline-powered cars and home charging stations.
  2. An increase in the demand for gasoline-powered cars and a decrease in demand for home charging stations.
  3. A decrease in the demand for gasoline-powered cars and an increase in the demand for home charging stations. (correct answer)
  4. An increase in the demand for both gasoline-powered cars and home charging stations.
Explanation: A drop in the price of EVs will affect related markets. Since gasoline cars are substitutes, a lower EV price will decrease the demand for them (a leftward shift of the demand curve). Since home charging stations are complements, a lower EV price will increase the demand for them (a rightward shift of the demand curve).

Question 15

A city government imposes a new tax on sugary soft drinks, causing their average price to rise by 20%. In the following months, local grocery stores report a 10% increase in sales of bottled water and a 5% decrease in sales of sweet snacks typically consumed with soft drinks.

This data suggests that, with respect to the price of sugary soft drinks:

  1. bottled water and sweet snacks are both complements.
  2. the cross-price elasticity of demand is positive for bottled water and negative for sweet snacks. (correct answer)
  3. the own-price elasticity of demand for sugary soft drinks is inelastic.
  4. sugary soft drinks are an inferior good, while bottled water is a normal good.
Explanation: When the price of soft drinks rose, demand for bottled water rose, indicating they are substitutes (positive cross-price elasticity). When the price of soft drinks rose, demand for sweet snacks fell, indicating they are complements (negative cross-price elasticity). We cannot determine the own-price elasticity of soft drinks without knowing how much their quantity demanded changed, nor can we determine if they are normal/inferior without income data.

Question 16

An economist states that, for most consumers, demand for generic-brand paper towels is 'income inelastic' and has a negative income elasticity. What does this statement imply?

  1. As income falls, consumers buy significantly more generic paper towels.
  2. As income rises, consumers buy a slightly smaller quantity of generic paper towels. (correct answer)
  3. Consumers' demand for this product does not change at all when their income changes.
  4. The product is a normal good, but consumers are not very responsive to income changes.
Explanation: 'Negative income elasticity' means the good is inferior, so as income rises, quantity demanded falls. 'Income inelastic' means the absolute value of the elasticity is less than 1, so the percentage change in quantity is smaller than the percentage change in income. Therefore, a rise in income leads to a proportionally smaller (slight) decrease in the quantity purchased.

Question 17

A product's income elasticity of demand is -0.5. Another product's income elasticity is +0.5. Which of the following statements correctly compares these two products?

  1. The first product is an inferior good and the second is a normal good; the responsiveness of quantity demanded to income changes is the same for both. (correct answer)
  2. Both products are inferior goods, but the first is more responsive to income changes than the second.
  3. The first product is a normal good, while the second is an inferior good, and both are income inelastic.
  4. The demand for both products is income elastic because the absolute values are greater than zero.
Explanation: The sign of income elasticity determines the type of good: negative for inferior, positive for normal. Thus, the first is inferior and the second is normal. The magnitude (absolute value) indicates responsiveness. Since both have an absolute value of 0.5, which is less than 1, they are both considered income inelastic, and the magnitude of their responsiveness to a percentage change in income is the same.

Question 18

If the income elasticity of demand for a product is calculated to be +1.8, which of the following is the most accurate interpretation?

  1. The product is an inferior good because the elasticity value is greater than one.
  2. The product is a normal good, and likely a luxury, because demand increases more than proportionally with income. (correct answer)
  3. The product is a normal good, and likely a necessity, because the demand response to income is positive.
  4. The product is a substitute for other goods, as indicated by the positive elasticity value.
Explanation: A positive income elasticity indicates a normal good. An income elasticity greater than 1 indicates a luxury good, meaning a 1% increase in income leads to a more than 1% (in this case, 1.8%) increase in quantity demanded. A necessity is a normal good with an income elasticity between 0 and 1. An inferior good would have a negative value. A positive value for cross-price elasticity, not income elasticity, indicates a substitute.

Question 19

A calculated cross-price elasticity of demand between smartphones and smartphone cases is -0.7. What is the primary conclusion that can be drawn from this value?

  1. The two goods are substitutes, but the relationship is weak since the value is less than one.
  2. The two goods are complements, as the negative sign indicates an inverse relationship between one's price and the other's demand. (correct answer)
  3. The demand for smartphone cases is price inelastic with respect to its own price.
  4. Smartphones are a normal good, while smartphone cases are an inferior good.
Explanation: A negative cross-price elasticity of demand indicates that two goods are complements. This means that as the price of one good (smartphones) falls, the quantity demanded of the other good (cases) rises. The other choices confuse cross-price elasticity with other concepts: substitutes have positive cross-price elasticity, inelasticity refers to own-price elasticity, and normal/inferior classifications relate to income elasticity.

Question 20

If a good is determined to be a 'normal good,' what can be definitively concluded about its income elasticity of demand (Ei)?

  1. Ei must be greater than 1.
  2. Ei must be equal to zero.
  3. Ei must be less than 1 but greater than 0.
  4. Ei must be a positive number. (correct answer)
Explanation: The definition of a normal good is any good for which demand increases when income increases. This corresponds to a positive income elasticity of demand (Ei > 0). Normal goods can be further subdivided into necessities (0 < Ei < 1) and luxuries (Ei > 1). Therefore, the only definitive conclusion for all normal goods is that Ei is positive.