AP Micro AP Micro Elasticity 2 — Questions and Answers
Question 1: Along a linear demand curve, as price falls from a high level toward zero, price elasticity of demand:
- Remains constant
- Increases then decreases
- Decreases from elastic to inelastic (Correct answer)
- Increases from inelastic to elastic
Correct answer: Decreases from elastic to inelastic
Along a linear demand curve, the upper portion is elastic and the lower portion is inelastic, so elasticity decreases as price falls.
Question 2: If a firm raises its price and total revenue increases, demand for its product is:
- Elastic
- Unit elastic
- Inelastic (Correct answer)
- Perfectly elastic
Correct answer: Inelastic
When demand is inelastic (PED < 1), a price increase raises total revenue because the quantity drop is proportionally smaller.
Question 3: The price elasticity of supply measures:
- How producer costs change with output
- How quantity supplied responds to a price change (Correct answer)
- How consumer income affects supply
- How supply shifts with technology
Correct answer: How quantity supplied responds to a price change
Price elasticity of supply = % change in quantity supplied / % change in price.
Question 4: Supply tends to be more elastic when:
- Production requires specialized inputs
- Producers have a longer time horizon (Correct answer)
- Storage of the good is impossible
- The industry is at full capacity
Correct answer: Producers have a longer time horizon
Over longer time periods, producers can adjust inputs and capacity, making supply more responsive to price changes.
Question 5: Which factor tends to make demand more elastic?
- Fewer close substitutes available
- The good is a necessity
- A longer time period for adjustment (Correct answer)
- A small share of consumer income spent on the good
Correct answer: A longer time period for adjustment
Over longer time periods, consumers can find alternatives and adjust behavior, increasing elasticity.
Question 6: If cross-price elasticity of demand between two goods is −1.5, the goods are:
- Substitutes
- Independent goods
- Inferior goods
- Complements (Correct answer)
Correct answer: Complements
A negative cross-price elasticity indicates complements; when the price of one rises, demand for the other falls.
AP Micro AP Micro Elasticity 2
Along a linear demand curve, as price falls from a high level toward zero, price elasticity of demand: