QB Ch10 (Eng) Output (Final)

Economics Inquiry for HKDSE – Microeconomics 2Chapter 10 Price Elasticity of Demand and Supply

Multiple Choice Questions

|!|EM25001|!|

Price elasticity of demand refers to the ratio of

A. the change in demand to the change in price.

B. the change in quantity demanded to the change in price.

C. the percentage change in demand to the percentage change in price.

D. the percentage change in quantity demanded to the percentage change in price.

##

D

Price elasticity of demand measures the percentage change instead of absolute change. It shows the

responsiveness of quantity demanded when the price of a good changes by 1%.

##

|!|EM25002|!|

According to the law of demand, the price elasticity of demand coefficient

A. must be positive.

B. may be positive.

C. must be negative.

D. may be negative.

##

C

According to the law of demand, if there is a negative change in price, there will be a positive change

in quantity demanded, holding all other things constant. Therefore, the price elasticity of demand

coefficient must be negative.

##

© Aristo Educational Press Ltd. 10-1


|!|EM25003|!|

The price elasticity of demand for good Y is 1.4. After a drop in supply, the equilibrium price increases

by 48%. The equilibrium quantity would __________ by __________.

A. increase … 34.2%

B. decrease … 34.2%

C. decrease … 67.2%

D. increase … 67.2%

##

C

A drop in supply leads to an increase in price. According to the law of demand, when price increases,

quantity demanded will decrease, holding all other things constant.

Ed = Percentage change in quantity demanded / Percentage change in price

1.4 = Percentage change in quantity demanded / 48%

Percentage change in quantity demanded = 67.2%

##

|!|EM25004|!|

The price elasticity of demand for a good is 1.6 and the percentage change in price is 60%. The

percentage change in quantity demanded is __________.

A. 26%

B. 86%

C. 96%

D. 99%

##

C

Ed = Percentage change in quantity demanded / Percentage change in price

1.6 = Percentage change in quantity demanded / 60%

Percentage change in quantity demanded = 96%

##



|!|EM25005|!|

The price of a good decreases from $100 to $50 and the quantity demanded increases from 200 units to

300 units. The price elasticity of demand for the good is _________.

A. 0.2

B. 0.4

C. 0.6

D. 0.8

##

C

Ed =

Ed =

= -0.6

##

|!|EM25006|!|

The arc elasticity of demand for apples is 0.8. When the price changes from $4 to $5, the quantity

demanded for apples will ____________ by ____________.

A. increase … 18%

B. decrease … 18%

C. increase … 20%

D. decrease … 20%



##

B

According to the law of demand, when there is a positive change in price, there will be a negative

change in quantity demanded, holding all other things constant. The quantity demanded will decrease

when the price increases from $4 to $5.

Ed =

0.8 =


##

|!|EM25007|!|

The price elasticity of demand for good Y is 1.6. After a drop in supply, the equilibrium price increases

by 40%, the quantity demanded will __________ by __________.

A. increase … 25%

B. decrease … 25%

C. increase … 64%

D. decrease … 64%

##

D

According to the law of demand, when price increases, quantity demanded will decrease.

Ed =

1.6 = Ed =


##



|!|EM25008|!|

The table below shows the relationship between the price and quantity demanded for good Y.

Unit price ($) Quantity demanded (units)

Original 20 800

New 40 600

What is the arc elasticity of demand for good Y?

A. 0.18

B. 0.26

C. 0.37

D. 0.43

##

D

Ed =

Ed =

= -0.43

##

|!|EM25009|!|

If the price elasticity of demand for a good is zero, this implies its demand curve is

A. downward sloping.

B. upward sloping.

C. vertical.

D. horizontal.



##

C

If the elasticity of demand for a good is zero, its demand is perfectly inelastic. Since changes in prices

do not lead to changes in quantity demanded, it implies that the demand curve is vertical.

##

|!|EM25010|!|

If the demand curve for a good is a rectangular hyperbola, its demand is

A. inelastic.

B. unitary elastic.

C. perfectly elastic.

D. perfectly inelastic.

##

B

If the demand curve is a rectangular hyperbola, it means that the percentage change in quantity

demanded for a good is equal to the percentage change in price. The demand for the good is unitary

elastic.

##

|!|EM25011|!|

For good X, once the price increases, the quantity demanded will drop to zero immediately. The price

elasticity of demand for good X is

A. elastic.

B. unitary elastic.





##

C

If the demand is perfectly elastic, an extremely small change in price causes an infinite change in the

quantity demanded. According to the law of demand, a positive change in price will lead to a negative

change in quantity demanded. Therefore, once the price increases, the quantity demanded will drop to

zero immediately.

##

|!|EM25012|!|

At the mid-point of a downward-sloping linear demand curve, the demand is

A. perfectly inelastic.

B. unitary elastic.


D. inelastic.

##

B

At the mid-point of a downward-sloping linear demand curve, the price elasticity of demand coefficient

equals one. So, the demand is unitary elastic.

##



|!|EM25013|!|

The diagram below shows the demand curve for good X.

The original price and quantity demanded for good X are $320 and 1,000 units respectively. The price

elasticity of demand for good X over the price range between $300 and $320 is elastic. When the price

decreases from $320 to $300, the new quantity demanded “Y” will most likely be ___________ units.

A. 1,025

B. 1,055

C. 1,065

D. 1,095

##

D

Ed =

-1

Y > 1,067

If the price range between $300 and $320 is elastic, it means a change in price causes a more than

proportionate change in quantity demanded. So, the value of Y must be greater than 1,067. 1,095 is the

only possible answer.

##


Unit price ($)

300

01,000

320

D

Quantity (units)Y


|!|EM25014|!|

“I love drinking milk. I drink a bottle of milk everyday. This habit will not be affected even there is a

change in the price of milk,” Dick said. Dick’s demand for milk is

A. elastic.

B. unitarily elastic.

C. perfectly inelastic.

D. perfectly elastic.

##

C

The statement implies that Dick’s quantity demanded for milk will remain unchanged even there is a

change in price. His demand for milk is therefore perfectly inelastic.

##

|!|EM25015|!|

The table below shows the relationship between the price and the quantity demanded for apples.

Unit price ($) 10 12 Y

Quantity demanded (units) X 60 45

If the demand for apples over the above price range is unitary elastic, the values of X and Y will be

_______ and ________ respectively.

A. 75 … 14

B. 74 … 16

C. 72 … 16

D. 62 … 15



##

C

When the demand for a good is unitary elastic, the percentage change in price is equal to the percentage

change in quantity demanded. Neither an increase nor a decrease in price will cause the seller’s total

revenue to change. At the price of $12, total revenue is $720 ($12 60).

X = 720 / 10

= 72

Y = 720 / 45

= 16

##

|!|EM25016|!|

Which of the following shows that the demand for private cars is inelastic?

A. The quantity demanded for private cars increases when there are more private car suppliers.

B. When the price of private cars increases, sellers’ total revenue decreases.

C. The quantity demanded for private cars increases by 20% when the price drops by 30%.

D. The quantity demanded for private cars decreases when consumers’ income falls.

##

C

When the demand for a good is said to be inelastic, the percentage change in quantity demanded (20%)

is smaller than the percentage change in price (30%).

##

|!|EM25017|!|

If demand for a good is inelastic, the percentage increase in price is ___________ than the percentage

____________ in quantity demanded.

A. larger … increase

B. larger … decrease

C. smaller … increase

D. smaller … decrease



##

B

According to the law of demand, an increase in price will result in a decrease in quantity demanded.

For an inelastic demand, the percentage increase in price is larger than the percentage decrease in

quantity demanded.

##

|!|EM25018|!|

In Country X, there was only one fresh chicken supplier, Fresh Chicken Company, in the past. Later,

the government opened up the market. Nowadays, there are four fresh chicken suppliers in the region.

We would expect the elasticity of demand for fresh chicken of Fresh Chicken Company to become

A. higher.

B. lower.

C. the same.

D. Cannot be determined.

##

A

When the price of fresh chicken of Fresh Chicken Company increases, people may buy from other

suppliers instead. Therefore, the demand for fresh chicken of Fresh Chicken Company would become

more elastic.

##

|!|EM25019|!|

Along a downward-sloping linear demand curve, the price elasticity of demand coefficient

____________ when the price increases.

A. increases

B. decreases

C. may increase or decrease

D. remains unchanged



##

A

Along a downward-sloping linear demand curve, demand is unitary elastic at the mid-point, demand is

elastic above the mid-point and demand is inelastic below the mid-point. The price elasticity of demand

increases when price increases along the curve.

##

|!|EM25020|!|

Which of the following would lead to an increase in the price elasticity of demand for medical services

provided by public hospitals?

A. The charges for medical services provided by public hospitals drop.

B. There is an outbreak of flu.

C. There is a drop in operation cost of public hospitals.

D. More private hospitals provide low-priced medical services.

##

D

Low-priced medical services provided by private hospitals are substitutes for public medical services.

If the price of public medical services increases, people may switch to substitutes. Therefore, the price

elasticity of demand for public medical services becomes greater.

##

|!|EM25021|!|

Which of the following will increase the price elasticity of demand for bus services?

A. One of the bus companies goes bankrupt.

B. The MTR fares drop drastically.

C. The quality of bus services improves.

D. The MTR becomes more crowded.



##

B

The services provided by the MTR and bus services are substitutes. When MTR fares are lowered, this

increases the attractiveness of MTR services. People may switch to take the MTR. This will increase

the price elasticity of demand for bus services.

##

|!|EM25022|!|

Suppose the demand for a good is inelastic within the relevant price range. Which of the following is

CORRECT?

(1) When supply decreases, total revenue increases.

(2) When supply decreases, profit increases.

(3) When demand decreases, total revenue increases.

A. (1) only

B. (2) only

C. (2) and (3) only

D. (1), (2) and (3)

##

A

Since the demand for the good is inelastic within the relevant price range, its percentage change in

quantity demanded is smaller than the percentage change in price. When supply decreases, the supply

curve shifts to the left. Equilibrium price increases and quantity transacted decreases. Loss in revenue

due to a decrease in quantity transacted is smaller than the gain in revenue due to an increase in price.

Total revenue therefore increases.

##



|!|EM25023|!|

As vegetable crops were severely destroyed by the recent typhoon, price of vegetables increased by

about three times. However, the retailers said that they were not worried about their revenue as they

expected they would get the same revenue. It can be concluded that the demand for vegetables is

A. unitary elastic.

B. elastic.

C. inelastic.

D. perfectly elastic.

##

A

As the demand for vegetables is unitary elastic, the loss in revenue due to the decrease in quantity

transacted is equal to the gain in revenue due to the increase in price. Therefore, total revenue remains

unchanged.

##

|!|EM25024|!|

When supply of good X increases, the equilibrium price decreases and the quantity transacted

increases. If the total revenue increases, the price elasticity of demand for good X is __________

within the relevant price range.

A. equal to 0

B. greater than 1

C. smaller than 1

D. equal to 1

##

B

If the demand for good X is elastic, the percentage increase in quantity transacted is greater than the

percentage decrease in price. Hence, the gain in revenue due to the increase in quantity transacted is

greater than the loss in revenue due to the decrease in price. Total revenue therefore increases.

##



|!|EM25025|!|

The diagram below shows the demand curve for good X.

When the price increases from $80 to $100, the elasticity of demand for good X over this price range is

__________________.

A. perfectly elastic

B. perfectly inelastic

C. elastic

D. inelastic

##

D

From the above diagram, when price increases from $80 to $100, the total revenue increases from

$9,600 ($80 120) to $10,000 ($100 100). As an increase in price leads to an increase in total

revenue, the elasticity of demand within the relevant price range is smaller than 1, i.e., inelastic

demand.

##


Unit price ($)

80

0100 120

100

D

Quantity (units)


|!|EM25026|!|

Stall A sells only good X and good Y. The original price and quantity demanded for good X are $20 and

30 units respectively. The original price and quantity demanded for good Y are $40 and 50 units

respectively. When both of their prices increase by $10, both of their quantity demanded decrease by 20

units. Which of the following statements is CORRECT?

A. The price elasticity of demand for good X and good Y are the same.

B. The demand for good Y is more elastic than that of good X.

C. The demand for good X is more elastic than that of good Y.

D. The total revenue of seller increases as the prices of both goods increase.

##

C

Ed =

Ed for good X =

= -2.5

Ed for good Y =

= -2.25

The absolute value of the elasticity of demand coefficient should be considered, so the demand for

good X is more elastic than that of good Y.

Option A is incorrect. Although the absolute change in price and quantity demanded of the two goods

are the same, the percentage change in price and quantity demanded should be considered.

Option D is incorrect. Since the demand for both goods are elastic, i.e. Ed > 1, the loss in revenue due

to the decrease in quantity demanded is larger than the gain in revenue due to the increase in price. The

total revenue of seller will fall if the price increases.

##



|!|EM25027|!|

The table below shows the relationship between the price and total revenue of good X.

Unit price ($) 10 25

Total revenue ($) 2,000 4,500

Within the above price range, the elasticity of demand for good X is ____________.

A. 0.12

B. 0.14

C. 0.21

D. 0.24

##

A

The quantity demanded for $10 and $25 are 200 and 180 units respectively.

Ed =

= -0.12

##

|!|EM25028|!|

“I love eating ice-cream. However, I only spend a fixed amount of my pocket money on buying ice-

cream. My decision won’t be affected even when there is a change in the price of ice-cream,” Joyce

said. Joyce’s demand for ice cream was

A. perfectly elastic.

B. unitary elastic.

C. perfectly inelastic.

D. elastic.

##

B

Joyce’s statement implies that her spending (total expenditure) on ice-cream would remain unchanged

even there was a change in price. The demand was unitary elastic



##

|!|EM25029|!|

Suppose the demand curve for good X is a straight line. Point A is below the mid-point of the demand

curve where the price and total revenue are $4 and $200 respectively. If the price decreases from $4 to

$3, total revenue

A. will be greater than $200.

B. will be smaller than $200.

C. will be equal to $200.

D. will remain unchanged.

##

B

Below the mid-point of a linear demand curve, the price elasticity of demand is smaller than one which

is inelastic. When price decreases, the gain in revenue due to the increase in quantity demanded is

smaller than the loss in revenue due to the decrease in price. Total revenue will therefore decrease and

will be smaller than $200 (the original revenue).

##

|!|EM25030|!|

Suppose the demand curve for good Y is a straight line. At point B, the price and total revenue are $10

and $400 respectively. If the price decreases to $8, the total revenue will be larger than $400. Point B is

A. at the mid-point of the demand curve.

B. below the mid-point of the demand curve.

C. above the mid-point of the demand curve.

D. below or above the mid-point of the demand curve.

##

C

If point B is above the mid-point of demand curve, that means the demand is elastic, when price

decreases, the gain in revenue due to the increase in quantity demanded is larger than the loss in

revenue due to the decrease in price, total revenue will therefore increase.

##



|!|EM25031|!|

The table below shows the price of strawberries and the total revenue.


Total revenue ($) X 60

If the demand for strawberries is perfectly inelastic over the above price range, the value of X will be

_______.

A. $30

B. $40

C. $50

D. $60

##

C

At the price of $12, quantity transacted is 5 units ($60 / $12). If the demand is perfectly inelastic,

quantity demanded remains unchanged when price changes. At the price of $10, the quantity transacted

is also 5 units. Total revenue will be $50 ($10 5).

##

|!|EM25032|!|

Due to technological improvement, the cost of producing high definition televisions falls. The seller’s

total revenue will increase if the price elasticity of demand is

(1) elastic.

(2) inelastic.

(3) perfectly inelastic.

(4) perfectly elastic.

A. (1) only

B. (3) only

C. (1) and (4) only

D. (2) and (3) only



##

C

For (1), when the production costs of producing high definition televisions fall, supply increases. Given

a downward-sloping demand curve, equilibrium price decreases and quantity transacted increases. If

the demand is elastic, the gain in revenue due to the increase in quantity transacted is larger than the

loss in revenue due to the decrease in price. Total revenue will increase.

For (4), if the demand is perfectly elastic, the demand curve is horizontal. The price remains unchanged

and quantity transacted increases when there is an increase in supply. Total revenue will increase.

##

|!|EM25033|!|

In Country A, all medical services are provided by private hospitals. Recently, several new private

hospitals opened. Total revenue of private hospitals will

A. decrease.

B. increase.

C. remain unchanged.

D. be uncertain.

##

A

An increase in supply of medical services leads to a decrease in price and an increase in quantity

demanded. Since all medical services are provided by private hospitals, so no substitutes are available.

Also, medical services are a necessity to people. The demand for medical services tends to be inelastic.

The gain in revenue due to the increase in quantity demanded is smaller than the loss in revenue due to

the decrease in price. Total revenue will therefore decrease.

##

|!|EM25034|!|

Assume the demand for fresh chicken is elastic. If more fresh chicken is imported, the sellers’ total

revenue will

A. decrease.

B. increase.

C. remain unchanged.

D. increase, decrease or remain unchanged.



##

B

If more fresh chicken is imported, the supply curve shifts to the right. Equilibrium price decreases and

quantity transacted increases. Since the demand for fresh chicken is elastic, the gain in revenue due to

the increase in quantity transacted is larger than the loss in revenue due to the decrease in price. Total

revenue will therefore increase.

##

|!|EM25035|!|

The table below shows the price and quantity demanded for lemons.

Unit price ($) 8 9 10

Quantity demanded (units) 90 80 72

Which of the following statements about lemons is CORRECT?

A. The price elasticity of demand coefficient is larger than one.

B. Demand for lemons is perfectly elastic.

C. The demand curve for lemons can be represented by a rectangular hyperbola.

D. The seller can increase total revenue by increasing the price.

##

C

Ed =

Ed =

= -1

Over the price range $9 and $10,

Ed =

= -1

The demand is unitary elastic over the above price range, the demand curve can be represented by a

rectangular hyperbola.



##

|!|EM25036|!|

If the demand for a good is perfectly elastic, an increase in supply will lead to

(1) a decrease in price level.

(2) an increase in quantity transacted.

(3) an increase in total revenue.

A. (1) only

B. (1) and (2) only

C. (2) and (3) only

D. (1), (2) and (3)

##

C

An increase in supply shifts the supply curve to the right. If the demand is perfectly elastic, it is

represented by a horizontal demand curve. The equilibrium price remains unchanged while the quantity

transacted increases. Total revenue will therefore increase.

##

|!|EM25037|!|

In order to raise the total revenue, the seller of good X cuts the price to boost sales. However, he finds

that his total revenue remains unchanged. It is because

A. the price is not low enough to attract customers.

B. customers have no response to the price changes.

C. the demand for good X is unitary elastic within the relevant price range.

D. None of the above.

##

C

According to the law of demand, when price decreases, quantity demanded will increase, holding all

other things constant. If the demand is unitary elastic, the gain in revenue due to the increase in

quantity demanded is equal to the loss in revenue due to the decrease in price. Total revenue therefore

remains unchanged.

##



|!|EM25038|!|

The table below shows the relationship between the price of fans and the total revenue.

Unit price ($) 10 20 30

Total revenue ($) 2,500 4,000 4,500

Within the above price range, the absolute value of the price elasticity of demand coefficient of fans is

A. equal to infinity.

B. smaller than one.

C. equal to one.

D. greater than one.

##

B

Total revenue increases with an increase in price, the demand for fans within the relevant price range is

inelastic, the absolute value of the price elasticity of demand coefficient of fans is smaller than one.

##

|!|EM25039|!|

Suppose the demand curve for good X is a downward-sloping straight line. The price and quantity

demanded are below the mid-point of the demand curve. The seller of good X can increase its total

revenue by ___________ the price.

A. increasing

B. decreasing

C. either increasing or decreasing

D. neither increasing nor decreasing

##

A

Below the mid-point of a linear downward-sloping demand curve, demand is inelastic. When price

increases, quantity demanded decreases. The loss in revenue due to the decrease in quantity demanded

is smaller than the gain in revenue due to the increase in price. Total revenue therefore increases.



##

|!|EM25040|!|

Because of the good harvest of coffee beans, total revenue of the farms that grow coffee beans

increases. Which of the following statements is CORRECT?

A. The demand for coffee beans is elastic.

B. The demand for coffee beans is inelastic.

C. The supply of coffee beans is elastic.

D. The supply of coffee beans is inelastic.

##

A

When there is a good harvest, supply of coffee beans increases. This leads to an increase in quantity

transacted and a decrease in price. When the demand for coffee beans is elastic, the percentage increase

in quantity transacted is larger than the percentage decrease in price. The gain in revenue due to the

increase in quantity transacted is larger than the loss in revenue due to the decrease in price. Farmers’

total revenue therefore increases.

##

|!|EM25041|!|

Price elasticity of supply measures

A. the percentage change in supply to the percentage change in price.

B. the change in quantity supplied to the change in price.

C. the percentage change in quantity supplied to the percentage change in price.

D. the change in supply to the change in price.

##

C

Price elasticity of supply measures the percentage change instead of absolute change. It measures the

responsiveness of quantity supplied to a change in its price by 1%.

##



|!|EM25042|!|

Which of the following shows that the supply of laptop computers is elastic?

A. The quantity supplied of laptop computers increases when the price increases.

B. The quantity supplied of laptop computers increases when there are more suppliers.

C. The quantity supplied of laptop computers decreases when consumers’ income falls.

D. The quantity supplied of laptop computers increases by 50% when the price increases by

30%.

##

D

For an elastic supply, the percentage change in quantity supplied (50%) is greater than the percentage

change in price (30%).

##

|!|EM25043|!|

According to the law of supply, the value of price elasticity of supply

A. may be positive.

B. must be positive.

C. may be negative.

D. must be negative.

##

B

According to law of supply, when there is a positive change in price, there will be a positive change in

quantity supplied, vice versa, holding all other things constant. The price elasticity of supply coefficient

therefore must be positive.

##



|!|EM25044|!|

The original price and quantity supplied of good X are $100 and 100 units respectively. When the price

increases to $200, the new quantity supplied is 300 units. The price elasticity of supply is

A. 0.8

B. 1.1

C. 1.3

D. 1.5

##

D

Es =

Es =

= 1.5

##

|!|EM25045|!|

Suppose the price elasticity of supply of a good is 2.5. If the percentage change in quantity supplied is

90%, what is the percentage change in price?

A. 22%

B. 26%

C. 36%

D. 225%

##

C

Es =

2.5 =

Percentage change in price = 36%

##



|!|EM25046|!|

The price elasticity of supply of a good is 0.8. If the price increases from $40 to $50, the percentage

change in quantity supplied will be

A. 18%.

B. 20%.

C. 22%.

D. 24%

##

A

Es =

0.8 =

Percentage change in quantity supplied = 18%

##

|!|EM25047|!|

Suppose the price elasticity of supply of a good is 1.5. The original price and quantity supplied are $5

and 30 units respectively. If the price increases from $5 to $7, the quantity supplied will increase to

A. 40 units.

B. 50 units.

C. 60 units.

D. 70 units.

##

B

Es =

Let y be the new quantity supplied.

1.5 =

y = 50

##



|!|EM25048|!|

The table below shows the relationship between the price and quantity supplied of good X.

Unit price ($) Quantity supplied (units)

Original 10 150

New 30 250

What is the arc elasticity of supply of good X?

A. 0.3

B. 0.5

C. 0.7

D. 0.9

##

B

Es =

Es =

= 0.5

##

|!|EM25049|!|

Because of the outbreak of a new flu strain, the price of facemask of a particular brand increased by

60% and the quantity transacted increased from 1,200 units to 1,800 units.

Within the above price range, elasticity of ___________ of facemask is ____________.

A. demand … elastic

B. demand … inelastic

C. supply … elastic

D. supply … inelastic



##

D

When there is an outbreak of new flu strain, the demand for mask increases. The equilibrium price

increases. According to the law of supply, holding all other things constant, when the price increases,

quantity supplied will increase.

Es =

Es =

= 0.67

The elasticity of supply is inelastic (Es<1).

##

|!|EM25050|!|

“Recently, the demand for beef increased. Though the quantity of beef sold remained constant, my total

revenue increased,” a beef seller said. In this case, the elasticity of supply of beef was

A. elastic.

B. unitary elastic.



##

D

When the demand for beef increased, equilibrium price increased. Since the supply was perfectly

inelastic, the quantity transacted remained unchanged when price changed. Total revenue therefore

increased.

##

|!|EM25051|!|

If the linear supply curve starts from the origin, the supply is


B. perfectly elastic.

C. unitary elastic.

D. inelastic.



##

C

A unitary elastic supply curve can be represented by any linear supply curve passing through the origin.

##

|!|EM25052|!|

Because of cold weather, the demand for ice cream decreases. The price of ice cream decreases from

$12 to $10 and the quantity transacted decreases from 100 units to 80 units. The price elasticity of

____________ is _____________.





##

C

Es =

Es =

= 1.22

Since the elasticity of supply coefficient is larger than one, the price elasticity of supply is elastic.

##

|!|EM25053|!|

Once the price of good X decreases, the quantity supplied of the good drops to zero immediately. The

price elasticity of supply of the good is


B. perfectly elastic.

C. unitary elastic.

D. inelastic.



##

B

If the price elasticity of supply of a good is perfectly elastic, an extremely small change in price leads

to an infinite change in the quantity supplied. Therefore, the sellers do not sell any of the good when

the price decreases.

##

|!|EM25054|!|

The supply of Monet’s paintings tends to be

A. elastic.

B. inelastic.



##

D

The quantity supplied of the paintings of a deceased artist cannot adjust according to their prices.

Therefore, their supply tends to be perfectly inelastic.

##



|!|EM25055|!|

The diagram below shows the supply curve of good X.

According to the above diagram, the value of Y will be __________.

A. 8

B. 9

C. 10

D. 11

##

B

Since the supply curve passes through the origin, it means that the supply of good X is unitary elastic.

The price elasticity of supply is equal to one.

1 =

Y = 9

##


Unit price ($)

6

06 Y

4

S

Quantity (units)


|!|EM25056|!|

The table below shows the relationship between the price and the quantity supplied of pineapples.


Quantity supplied (units) 60 Y

If the supply of pineapples is inelastic over the price range above, the value of Y will most likely be

__________.

A. 62

B. 64

C. 66

D. 68

##

A

0 < < 1

0 <Y < 64

Since the supply is inelastic, the value of Y must be smaller than 64 but larger than 60. Option A is the

only possible answer.

##

|!|EM25057|!|

Since people are afraid of eating fake eggs, people consume fewer eggs. The price of eggs decreased by

40% and the quantity transacted decreased by 55%. We can conclude that the price elasticity of demand

A. is elastic.

B. is inelastic.

C. is unitary elastic.

D. cannot be determined.



##

D

Since people are afraid of eating fake eggs, the demand for egg decreases. Given an upward-slopping

supply curve, both the equilibrium price and the quantity transacted will decrease. From the

information above, we can conclude that the price elasticity of supply is elastic since percentage change

in quantity supplied (55%) is larger than the percentage change in price (40%). However, we cannot tell

the price elasticity of demand.

##

|!|EM25058|!|

The following table shows the price and quantity supplied of apple juice.

Unit price ($) 11 12 13

Quantity supplied (units) 19 21 23

Within the above price range, which of the following statements about apple juice is CORRECT?

A. The supply curve of apple juice is a linear line passing through the origin.

B. The price elasticity of supply coefficient is larger than one.

C. Seller’s total revenue can be increased by lowering the price.

D. None of the above.



##

B

Es =

Es over the price range of $11 and $12

Es =

= 1.15

Es over the price range of $12 and $13

Es =

= 1.14

The price elasticity of supply is elastic.

##

|!|EM25059|!|

Firm A and firm B are in the same industry. Firm A has spare production capacity while firm B does

not. From the information above, we can conclude that the ____________ for/of firm A is more

___________ than that of firm B.





##

C

The supply of firm A (a firm with spare production capacity) tends to be more elastic than firm B (a

firm without spare production capacity). It can increase production flexibly by making use of the spare

production capacity.

##



|!|EM25060|!|

When the price of good X increases, some firms are attracted to the market and they enter the market

easily. The price elasticity of ____________ of good X tends to ___________.

A. supply … decrease

B. demand … decrease

C. supply … increase

D. demand … increase

##

C

With the same increase in price, if firms can enter the market easily, the market quantity supplied will

increase by a greater extent. Hence, the supply of the good becomes more elastic.

##



Short Questions

|!|ES25001|!|

“The price elasticity of demand coefficient is always negative.” Do you agree with this statement?

Explain. (3 marks)

##

Yes. According to the law of demand, an increase in price will lead to a decrease in quantity demanded,

vice versa, holding all other things constant. Price and quantity demanded of a good are negatively

related. Therefore, the price elasticity of demand coefficient is always negative. (3 marks)

##

|!|ES25002|!|

(a) What is price elasticity of demand? (2 marks)

(b) The original price and quantity demanded for good X is $14 and 50 units respectively. If the price

increases to $16, its quantity demanded decreases to 40 units. What is the price elasticity of

demand for good X within the above price range? Show your working. (2 marks)

##

(a) Price elasticity of demand measures how responsive the quantity demanded for a good to a change

in its price. (2 marks)

(b) Ed =

Ed =

= -1.67 (2 marks)

##



|!|ES25003|!|

The table below shows the relationship between the price and quantity demanded of good X.


Original 20 400

New 40 250

(a) What is the arc elasticity of demand for good X within the above price range? Show your

working. (2 marks)

(b) What does the elasticity of demand coefficient imply? (2 marks)

(c) Which type of price elasticity of demand does good X belong to? (1 mark)

##

(a) Ed =

= -0.69 (2 marks)

(b) The absolute value of arc elasticity of demand coefficient of good X is 0.69, implying that a 1%

increase in price of the good will bring about a 0.69% decrease in quantity demanded. (2 marks)

(c) Since the absolute value of arc price elasticity of demand coefficient is smaller than one, the

demand is inelastic within the relative price range. (1 mark)

##

|!|ES25004|!|

(a) The original price and quantity demanded of good X are $320 and 1,000 units respectively. When

there is an increase in supply, the new price and quantity demanded become $300 and 1,075 units.

Calculate the arc elasticity of demand. (2 marks)

(b) How will the seller’s total revenue change? Explain. (3 marks)



##

(a) Ed =

= -1.12 (2 marks)

(b) As the demand is elastic (Ed = 1.12), when there is a decrease in price, the gain in revenue due to

the increase in quantity demanded [$300 (1,075 – 1,000) = $22,500] is larger than the loss in

revenue due to the decrease in price [$(320 – 300) 1,000 = 20,000], total revenue will therefore

increase. (3 marks)

##

|!|ES25005|!|

The following tables show the demand schedules for ice cream and coffee.

Demand schedule for ice cream Demand schedule for coffee

Unit price ($) Quantity demanded (units) Unit price ($) Quantity demanded (units)

20 3 9 4

25 1 14 3

(a) What are the price elasticities of demand for ice cream and coffee within the above price ranges?

Show your working. (4 marks)

(b) State ONE reason to explain the difference of the price elasticity of demand between these two

goods. (2 marks)

##

(a) Ed for ice cream =

= -4.5 (2 marks)

Ed for coffee =

= -0.66 (2 marks)

(b) The demand for coffee is more inelastic than the demand for ice cream because people tend to be

more addicted to coffee than ice cream.

Or any other reasonable answer with explanation. (2 marks)

##



|!|ES25006|!|

The table below shows the relationship between the price and quantity demanded of noodles in a

Chinese restaurant.


20 45

24 30

(a) Within the price range of $20 to $24, what is the arc elasticity of demand for noodles? Show your

working. (2 marks)

(b) Should the owner raise the price from $20 to $24 in order to raise the total revenue? Explain.

(3 marks)

##

(a) Ed = = -2.2 (2 marks)

(b) No.

Since the demand for noodles is elastic (Ed = 2.2), when price increases, the loss in revenue due to

the decrease in quantity demanded [$24 (45 – 30) = $360] is larger than the gain in revenue due

to the increase in price [$(24 –20) 30 = $120], total revenue will decrease. (3 marks)

##

|!|ES25007|!|

Different boutiques have different strategies for raising their total revenue. Most of them offer great

discounts to customers. However, not all of them enjoy a gain in total revenue. Using the concept of

price elasticity, explain with the aid of a diagram, under what condition the boutiques will gain from

lowering the price. (7 marks)



##

If the demand for clothing is elastic, seller’s revenue will increase if price decreases.

When the price decreases from P0 to P1, quantity demanded increases from Q0 to Q1. As the percentage

increase in quantity demanded is larger than the percentage decrease in price, the gain in revenue due to

the increase in quantity demanded is larger than the loss in revenue due to the decrease in price. Total

revenue will therefore increase. (4 marks)

(3 marks)

##

|!|ES25008|!|

Mr. Wong is the owner of a bakery. However, the performance of his business is not satisfactory.

Explain whether he can increase his total revenue by raising the price of his cakes if the

(a) price elasticity of demand for his cakes is one; (3 marks)

(b) price elasticity of demand for his cakes is smaller than one. (3 marks)


Unit price

0 Quantity

P0

Q0

D

Q1

P1

Gain in revenue

Loss in revenue


##

(a) He cannot increase total revenue by raising the price of his cakes if the price elasticity of demand

is one, i.e. unitary elastic. When price increases, quantity demanded decreases. As the percentage

decrease in quantity demanded is equal to the percentage increase in price, the loss in revenue due

to the decrease in quantity demanded is equal to the gain in revenue due to the increase in price.

Total revenue therefore remains unchanged. (3 marks)

(b) He can increase total revenue by raising the price of his cakes if the price elasticity of demand is

smaller than one, i.e. inelastic. When price increases, quantity demanded decreases. As the

percentage decrease in quantity demanded (transacted) is smaller than the percentage increase in

price, the loss in revenue due to the decrease in quantity demanded is smaller than the gain in

revenue due to the increase in price. Total revenue therefore increases. (3 marks)

##

|!|ES25009|!|

Explain, with the aid of separate diagrams, how a decrease in supply will affect a seller’s total revenue

if

(a) the demand for his goods is perfectly inelastic. (6 marks)

(b) the demand for his goods is perfectly elastic. (6 marks)

##

(a) If the demand for his goods is perfectly inelastic, the demand curve is vertical. When supply

decreases from S0 to S1, equilibrium price increases from P0 to P1 and the quantity transacted

remains unchanged at Q. Thus the seller’s total revenue will increase. (3 marks)

(3 marks)


Unit price

P1

0 Q

P0

S0

Quantity

S1

D Gain in revenue


(b) If the demand for his goods is perfectly elastic, the demand curve is horizontal. When supply

decreases from S0 to S1, equilibrium quantity decreases from Q0 to Q1 and price remains

unchanged at P. Thus the seller’s total revenue will decrease. (3 marks)

(3 marks)

##

|!|ES25010|!|

Because of good weather, there was a good harvest of tomatoes. Farmers growing tomatoes enjoyed a

gain in total revenue. With the concept of price elasticity, explain why there is a rise in total revenue

with the aid of a diagram. (8 marks)


Unit price

0Q0

P

S0

Quantity

S1

D

Loss in revenue

Q1


##

When there is a good harvest, supply of tomatoes increases. The supply curve shifts to the right from S0

to S1. The equilibrium price decreases from P0 to P1 and the quantity transacted increases from Q0 to Q1.

If the demand for tomatoes is elastic, the percentage increase in quantity transacted is greater than the

percentage decrease in price. Hence the gain in revenue due to the increase in quantity transacted is

larger than the loss in revenue due to the decrease in price. Total revenue therefore increases. (4 marks)

(4 marks)

##

|!|ES25011|!|

(a) In recent years, due to the price of paper increases continuously, the price of textbooks keeps

rising. Eventually textbook seller’s total revenue rises. With the concept of price elasticity,

illustrate the above phenomenon with the aid of a diagram. (8 marks)

(b) State ONE reason to explain why textbooks tend to have such price elasticity of demand.

(2 marks)


Unit price

P0

0 Q1

P1

S1

Quantity

S0

D

Gain in revenue

Q0

Loss in revenue


##

(a) Paper is one of the important raw materials used in printing textbooks. When the price of paper

increases, the cost of production increases. The supply curve shifts to the left from S0 to S1. The

equilibrium price increases from P0 to P1 and the quantity transacted decreases from Q0 to Q1. As

the demand for textbooks tends to be inelastic, the percentage decrease in quantity transacted is

smaller than the percentage increase in price. Hence the loss in revenue due to the decrease in

quantity transacted is smaller than the gain in revenue due to the increase in price. Total revenue

therefore increases. (4 marks)

(4 marks)

(b) Possible reason:

- It is difficult for people to find substitutes for textbooks.

- Textbooks are a necessity for students.

- Any reasonable answer with explanation.

(Mark the FIRST point only, 2 marks)

##

|!|ES25012|!|

(a) Explain why price elasticity of supply is used instead of the law of supply in measuring how

responsive the quantity supplied of a good to a change in its price. (2 marks)

(b) Find the percentage change in price if the price elasticity of supply of a good is 1.6 and the

percentage change in quantity supplied is 80%. Show your working. (2 marks)


Unit price

P1

0 Q0

P0

S0

Quantity

S1

D

Gain in revenue

Q1

Loss in revenue


##

(a) The law of supply only shows that price and quantity supplied are positively related, holding all

other things constant. However, it does not show the exact amount that the quantity supplied will

change. (1 mark)

Price elasticity of supply measures the ratio of the percentage change in quantity supplied to the

percentage change in price. (1 mark)

(b) Es =

1.6 =

Percentage change in price = 50% (2 marks)

##

|!|ES25013|!|

(a) What is arc elasticity of supply? (2 marks)

(b) According to the law of supply, can the price elasticity of supply coefficient be negative? Explain.

(3 marks)

##

(a) Arc elasticity of supply refers to the measurement of price elasticity of supply over a certain price

range of a supply curve. (2 marks)

(b) No.

According to the law of supply, when there is a positive change in price, there will be a positive

change in quantity supplied, vice versa, holding all other things constant. As price and quantity

supplied are positively related, the price elasticity of supply coefficient is therefore always

positive. (3 marks)

##



|!|ES25014|!|

The table below shows the relationship between the price and quantity supplied of good A.

Unit price ($) Quantity supplied (units)

Original 80 350

New 100 400

(a) Within the above price range, what is the arc elasticity of supply for good A? (2 marks)

(b) Which type of price elasticity of supply does it belong to? (1 mark)

##

(a) Es = = 0.6 (2 marks)

(b) Since the price elasticity of supply coefficient is smaller than one, it is an inelastic supply.

(1 mark)

##



|!|ES25015|!|

S0 and S1 are the supply curves of good X and good Y respectively.

(a) What is arc elasticity of supply? (2 marks)

(b) Compare the price elasticity of supply of good X and good Y. Which good’s supply is more

elastic? Explain. (3 marks)

##

(a) Arc elasticity of supply refers to the measurement of price elasticity of supply over a certain price

range of a supply curve. (2 marks)

(b) The price elasticity of both goods is the same. (1 mark)

Since both supply curves are linear lines passing through the origin, the supply of good X and the

supply of good Y are both unitary elastic. (2 marks)

##

|!|ES25016|!|

When the price of good X increases from $12 to $14, its quantity supplied increases from 100 units to

130 units.

(a) Within the above price range, calculate the price elasticity of supply of good X. Show your

working. (2 marks)

(b) State TWO possible reasons to explain why good X has such price elasticity of supply. (4 marks)


Unit price

0

S1

Quantity

S0

D


##

(a) Es =

= 1.70 (2 marks)

(b) Possible reasons:

- Availability of spare production capacity. Firms with spare production capacity tend to have

elastic supply.

- Nature of the industry or product. Firms in labour-intensive industries tend to have elastic

supply.

- Any reasonable answer(s)

(Mark the FIRST TWO points only, 2 marks each)

##

|!|ES25017|!|

Compare the elasticity of supply of the items in each of the following pairs. Explain your answer.

(a) electricity supply and toy cars (3 marks)

(b) vegetables and cup noodles (3 marks)

##

(a) The supply of toy cars tends to be more elastic. (1 mark)

Making toy cars is a labour-intensive industry. Employing more workers to produce more toy cars

takes a shorter time. (1 mark)

Since the electricity generation is a capital-intensive industry, installing new equipment for

generating more electricity takes a longer time. (1 mark)

(b) The supply of cup noodles tends to be more elastic. (1 mark)

Since vegetables need time to grow, the supply of vegetables cannot increase immediately even if

there is an increase in price. (1 mark)

Compared with vegetables, producing more cup noodles takes a shorter time. (1 mark)

##



Long Questions

|!|EL25001|!|

(a) As the number of fresh chickens imported falls, the price of fresh chickens keeps rising

continuously. With the aid of a diagram, explain how this affects the price, quantity transacted and

total revenue of frozen chickens. (7 marks)

(b) As fewer fresh chickens will be consumed owing to the price rise, sellers of fresh chickens are

worried about a fall in total revenue. With the concept of price elasticity of demand, explain under

what condition the total revenue of the sellers of fresh chickens will increase with the aid of a

diagram. (8 marks)

##

(a) Fresh chickens and frozen chickens are substitutes. When the price of fresh chickens increases,

people may switch to buy frozen chickens. Demand for frozen chickens increases from D0 to D1.

Equilibrium price increases from P0 to P1, quantity transacted increases from Q0 to Q1 and total

revenue increases from P0 × Q0 to P1 × Q1. (4 marks)

(3 marks)


Unit price

0

S

Quantity

P0

Q0

D0

D1

Q1

P1


(b) The total revenue of the sellers of fresh chickens will increase if the demand for fresh chickens is

inelastic. When the number of fresh chickens imported falls, supply of fresh chicken decreases.

Supply curve shifts to the left from S0 to S1. Equilibrium price increases from P0 to P1 and the

quantity demanded decreases from Q0 to Q1. If the demand for fresh chickens is inelastic, the

percentage decrease in quantity transacted is smaller the percentage increase in price. Hence the

loss in revenue due to the decrease in quantity demanded is smaller than the gain in revenue due

to the increase in price. Total revenue will therefore increase. (4 marks)

(4 marks)

##

|!|EL25002|!|

Salon A and salon B are located in the same street.

(a) After the opening of salon B, salon A leaves its price unchanged but the owner finds that his total

revenue decreases. With the aid of a diagram, explain the effects of the opening of salon B on

salon A. (6 marks)

(b) If the demand for the services provided by salon A is inelastic, should the owner offer discounts to

its customers in order to raise total revenue? Explain with the aid of a diagram. (6 marks)

(c) Explain the effect of the following events on the price elasticity of demand or price elasticity of

supply of the services provided by salon A.

(i) A new salon is opened in the same street. (2 marks)

(ii) More hair stylists are employed by salon A. (2 marks)


Unit price

0 Quantity

P1

Q1

DQ0

P0

Gain in revenue

Loss in revenueS0

S1


##

(a) The services provided by salon A and salon B are substitutes. After the opening of salon B, the

demand for the services provided by salon A decreases. The demand curve shifts to the left from

D0 to D1. Quantity transacted decreases from Q0 to Q1. The total revenue of salon A decreases

from P × Q0 to P × Q1. (3 marks)

(3 marks)

(b) The owner should not offer discounts to customers. Price decreases from P0 to P1 if discount is

offered, quantity demanded increases from Q0 to Q1. If the demand is inelastic, the percentage

increase in quantity demanded is smaller than the percentage decrease in price. Hence the gain in

revenue due to the increase in quantity demanded is smaller than the loss in revenue due to the

decrease in price. Total revenue will thus decrease. (3 marks)

(3 marks)


Unit price

0 Quantity

P0

Q0

D

Q1

P1

Gain in revenue

Loss in revenue

Unit price

0 Quantity

P

Q1

D0

Q0

D1

Loss in revenue


(c) (i) Services provided by salon A and the services provided by the new salon are substitutes.

The price elasticity of demand for the services provided by salon A becomes more elastic

since more substitutes are available in the market. People can easily switch to other salons.

- Any reasonable answer(s) (2 marks)

(ii) When more hair stylists are employed, more services can be provided in a short period of

time when the price increases. The price elasticity of supply of the services provided by

salon A becomes more elastic since there is spare production capacity.

- Any reasonable answer(s) (2 marks)

##

|!|EL25003|!|

In order to boost sales, Trendy magazine lowers its price by $1 as a promotion. As a result, the

company records a huge rise in total revenue.

(a) (i) What is price elasticity of demand? (2 marks)

(ii) Is the demand for Trendy magazine elastic or inelastic? Explain. (3 marks)

(b) There is a rise in the cost of ink. With the aid of a diagram, explain how this affects the total

revenue of the company. (8 marks)

(c) Suppose a $50 supermarket cash coupon is given in the magazine. Is the $50 supermarket cash

coupon a free good? Explain. (3 marks)

##

(a) (i) Price elasticity of demand measures how responsive is the quantity demanded for a good to a

change in its price. (2 marks)

(ii) The elasticity of demand of Trendy magazine is elastic. (1 mark)

When the demand for a good is elastic, the seller’s total revenue will rise if the price

decreases. (2 marks)



(b) As ink is one of the factors of production in producing magazines. A rise in the cost of ink leads to

an increase in production cost. The supply decreases. The supply curve shifts to the left from S0 to

S1. The equilibrium price increases from P0 to P1 and the quantity transacted decreases from Q0 to

Q1. Since the demand for the magazine is elastic, the percentage decrease in quantity transacted is

greater than the percentage increase in price. Hence the loss in revenue due to the decrease in

quantity transacted is larger than the gain in revenue due to the increase in price. Total revenue

will therefore decrease. (4 marks)

(4 marks)

(c) The $50 supermarket cash coupon is not free goods. (1 mark)

The quantity of cash coupon is not sufficient to satisfy all human wants and more cash coupons

are preferred. (1 mark)

The provision of cash coupons involves the use of scarce resources. (1 mark)

##

|!|EL25004|!|

America Fitness and Beauty Fitness are the two biggest fitness centres in an economy. There is keen

competition between America Fitness and Beauty Fitness. In order to increase its competitiveness,

Beauty Fitness lowers the price of its fitness plans to attract more customers.

(a) Assume the price of fitness plans of America Fitness remains unchanged, explain how the

decrease in price of fitness plans of Beauty Fitness affect the total revenue of America Fitness

with the aid of a diagram. (6 marks)

(b) With the concept of price elasticity, explain under what condition will a decrease in price lead to a

rise in total revenue of Beauty Fitness with the aid of a diagram. (6 marks)

(c) What type of production does the fitness centres engage in? Explain. (2 marks)


Unit price

0 Quantity

P0

Q0

D

Q1

P1

Gain in revenue

Loss in revenueS0

S1


##

(a) The fitness plans provided by America Fitness and Beauty Fitness are substitutes. When the price

of fitness plans provided by Beauty Fitness decreases, the demand for fitness plan provided by

America Fitness decreases. The demand curve shifts to the left from D0 to D1. At the same price,

quantity transacted decreases from Q0 to Q1. Total revenue decreases from P Q0 to P Q1.

(3 marks)

(3 marks)

(b) If the demand for fitness plan is elastic, a decrease in price will lead to an increase in total

revenue. When price decreases from P0 to P1, quantity demanded increases from Q0 to Q1. If the

demand for fitness plan is elastic, the percentage increase in quantity demanded is larger than the

percentage decrease in price. The gain in revenue due to increase in quantity transacted is larger

than the loss in revenue due to decrease in price. Total revenue will therefore increase. (3 marks)

(3 marks)

(c) The fitness centres engage in tertiary production. (1 mark)

The fitness centres provide different kinds of fitness services to their customers. (1 mark)

##


Unit price

0

S

Quantity

D1

D0

Q1

P

Loss in revenue

Q0

Unit price

P0

0 Q1

P1

Quantity

D

Gain in revenue

Q0

Loss in revenue

Date post:	05-Jan-2016
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QB Ch10 (Eng) Output (Final)

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