AP Micro Microeconomics: Supply and Demand 3 — Questions and Answers
Question 1: Price elasticity of demand is defined as:
- The change in quantity demanded divided by the change in price
- The percentage change in quantity demanded divided by the percentage change in price (Correct answer)
- The change in price divided by the change in quantity demanded
- The slope of the demand curve
Correct answer: The percentage change in quantity demanded divided by the percentage change in price
Price elasticity of demand measures the responsiveness of quantity demanded to a price change, expressed as the ratio of percentage changes.
Question 2: A good with many close substitutes available will tend to have:
- Inelastic demand
- Elastic demand (Correct answer)
- Perfectly inelastic demand
- Unit elastic demand
Correct answer: Elastic demand
When close substitutes are available, consumers can easily switch to alternatives when price rises, making demand more elastic.
Question 3: If a 10% increase in price leads to a 10% decrease in quantity demanded, the price elasticity of demand equals:
- -10
- 0
- -1 (Correct answer)
- -0.1
Correct answer: -1
Elasticity = % change in Qd / % change in P = -10% / 10% = -1, indicating unit elastic demand.
Question 4: Along a linear downward-sloping demand curve, as you move from higher to lower prices:
- Elasticity remains constant throughout
- Elasticity increases (becomes more elastic)
- Elasticity decreases (becomes more inelastic) (Correct answer)
- Elasticity first increases then decreases
Correct answer: Elasticity decreases (becomes more inelastic)
Along a linear demand curve, elasticity falls as you move to lower prices because the same absolute price change becomes a smaller percentage of a larger base quantity.
Question 5: If demand for a good is perfectly inelastic, a tax placed on the good will be borne:
- Entirely by producers
- Entirely by consumers (Correct answer)
- Equally between producers and consumers
- Mostly by producers
Correct answer: Entirely by consumers
With perfectly inelastic demand, consumers do not reduce quantity no matter the price, so they absorb the full tax burden.
Question 6: Cross-price elasticity of demand between goods A and B is positive. This indicates that A and B are:
- Complements
- Substitutes (Correct answer)
- Inferior goods
- Normal goods
Correct answer: Substitutes
A positive cross-price elasticity means a price increase for B leads to an increase in demand for A, indicating the goods are substitutes.
Question 7: Income elasticity of demand for a good equals -0.5. This means the good is:
- A normal good with inelastic demand
- An inferior good (Correct answer)
- A luxury good
- A Giffen good
Correct answer: An inferior good
Negative income elasticity of demand means demand falls when income rises, which is the definition of an inferior good.
AP Micro Microeconomics: Supply and Demand 3
Price elasticity of demand is defined as: