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The MCQs below are drawn from the Economics subject category.
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3951
Given a price increase from 10 to 12 pence and a price elasticity of demand of -0.5, calculate the new quantity demanded if the initial quantity was 500 units.
The percentage change in price is 20% (2/10). With an elasticity of -0.5, the percentage change in quantity demanded is -0.5 * 20% = -10%. A 10% decrease from the initial 500 units is 50 units. Therefore, the new quantity demanded is 500 - 50 = 450 units. This demonstrates the inverse relationship between price and quantity demanded for normal goods.
3952
What concept describes the sensitivity of quantity demanded to changes in price?
Price elasticity of demand is a quantitative measure that indicates how much the quantity demanded of a good responds to a change in the price of that good. It is calculated as the percentage change in quantity demanded divided by the percentage change in price. If the absolute value is greater than one, demand is considered elastic; if less than one, it is inelastic.
3953
Assuming all other factors remain constant, what is the effect of an increase in the price of a good on its demand?
In economic terminology, a change in the price of the good itself causes a movement along the existing demand curve rather than a shift of the curve. An increase in price leads to a decrease in the quantity demanded, which is technically referred to as a contraction of demand.
3954
Which market condition typically exerts downward pressure on prices?
When demand is elastic, consumers are highly sensitive to price changes. If a firm attempts to raise prices, the quantity demanded drops significantly, forcing the firm to keep prices low or lower them to maintain market share. Conversely, in competitive markets, high elasticity often prevents price hikes, keeping prices closer to marginal cost.
3955
What does a linear supply curve passing through the origin indicate regarding the price elasticity of supply?
A supply curve that is a straight line passing through the origin has a constant price elasticity of supply equal to one. This is because the percentage change in quantity supplied is always proportional to the percentage change in price, regardless of the specific point chosen on the curve.
3956
How is price elasticity of demand formally defined?
Price elasticity of demand measures the responsiveness of the quantity demanded of a good to a change in its price. It is calculated as the ratio of the percentage change in quantity demanded to the percentage change in price, providing a unit-less measure of sensitivity.
3957
Using the midpoint method, what is the price elasticity of demand when the price increases from Rs 30 to Rs 40 and quantity decreases from 30,000 to 20,000?
The midpoint method formula is [(Q2-Q1)/((Q2+Q1)/2)] / [(P2-P1)/((P2+P1)/2)]. Here, the percentage change in quantity is -10,000 / 25,000 = -0.4, and the percentage change in price is 10 / 35 = 0.2857. Dividing -0.4 by 0.2857 gives an absolute value of approximately 1.4. Since the absolute value is greater than 1, the demand is considered elastic in this price range.
3958
Based on empirical evidence, how is the price elasticity of demand for motoring generally characterized?
Price elasticity of demand measures the sensitivity of quantity demanded to price changes. Unitary elasticity implies that the percentage change in quantity demanded is exactly proportional to the percentage change in price. In the context of motoring, empirical studies often suggest that consumer behavior adjusts in a way that maintains a relatively stable expenditure proportion, reflecting unit elasticity.
3959
When does a shift in demand result in a more significant impact on price than on quantity?
The provided answer 'D' suggests that infinite supply elasticity causes a greater impact on price. However, standard economic theory states that if supply is perfectly elastic (infinite), a shift in demand changes quantity but leaves price unchanged. This answer appears to conflict with standard microeconomic principles regarding price and quantity sensitivity to demand shifts.
3960
How does total revenue change when the demand for a product is price inelastic?
When demand is price inelastic, the percentage change in quantity demanded is smaller than the percentage change in price. Therefore, if a firm increases its price, the gain in revenue from the higher price per unit outweighs the loss in revenue from the reduction in quantity sold, leading to an overall increase in total revenue.
