Elasticity of Demand Test

1
Elasticity of Demand Test

• This test consists of 10 questions designed to
  test your understanding of elasticity of demand.
• The links provide you with a choice of answer,
  along with explanations and solutions.
• You will need a calculator to complete this test.

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Question 1.

• A product has a price elasticity of
• demand of 1.5. Is this,
• a. Elastic
• b. inelastic
• c. unitary.

3
When Price Elasticity of Demand is greater than
1, the Price Elasticity of Demand is Elastic.
Your answer is correct.
4
When Price Elasticity of Demand is Less than 1,
the Price Elasticity of Demand is Inelastic. Try
again.
5
A Price Elasticity of Demand of 1, means that
Price Elasticity of Demand is Unitary. That is
exactly proportional. Try again.
6
Question 2.

• A firm increases the price of product A, from
  50p to 60p, demand falls from 1000 units a week,
  to 900 units a week. What is the Price elasticity
  of demand of the product?
• A. 2
• B. 1.5
• C. 0.5

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To calculate Ped use the following formula
Change in quantity demanded Change in price
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To calculate Ped use the following formula
Change in quantity demanded Change in price
9
Correct you applied the formula Change in
quantity demanded Change in price
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Question 3.

• The government has measured an increase of
  average incomes of 10 over the last year. A firm
  selling holidays has measured its Income
  Elasticity of Demand at 2.5. What will be the
  firms increase in sales?
• A. 15
• B. 25
• C. 4

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Try multiplying the increase in incomes by the
income elasticity of demand for the product.
12
Correct you multiplied the increase in incomes
by the income elasticity of demand for the
product.
13
Try multiplying the increase in incomes by the
income elasticity of demand for the product.
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Question 4.

• A firm markets a product with a Price Elasticity
  of Demand of 0.75. What will be the effect on
  revenues of a decrease in price?
• A. Stay the same
• B. Increase.
• C. Decrease

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Revenues will only stay the same if
Price elasticity of demand is unitary, to1!
16
If goods have a Ped of less than 1, they are
price inelastic. A fall in price will therefore
cause a less than proportional increase in
demand. Revenue will fall. Revenue will increase
id Ped is greater than 1.
17
If goods have a Ped of less than 1, they are
price inelastic. A fall in price will therefore
cause a less than proportional increase in
demand. Revenue will fall
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Question 5.

• Which of the following defines elastic
  Advertising Elasticity of Demand?
• A. A change in advertising expenditure causes a
  less than proportional change in quantity
  demanded.
• B. A change in advertising expenditure causes a
  more than proportional change in quantity
  demanded.

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Elastic demand means that there will always be a
greater than proportional change. This holds
true whatever type of elasticity we are examining.
20
Correct. Elastic demand means that there will
always be a greater than proportional change.
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Question 6.

• A firm decreases the price of product A from 60p
  to 50p, sales before the price reduction were at
  3,000 week, The products Price Elasticity of
  demand is 1.5. What will be the new level of
  weekly revenue, following the price reduction?
• A. 1875
• B. 1800
• C. 1500

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Correct. The fall in price is 16.67 of
original price. To find the new sales level, you
multiplied this by the Ped, which was 1.5. This
gave you an answer of 25. The fall in price has
increased sales by 25. The new sales level will
be 3750. 3750 times the new price of 50p gives us
1875
23
Wrong, revenue has changed The fall in price is
16.67 of original price. To find the new sales
level, you must multiply this by the Ped, which
was 1.5. This gives you an answer of 25. The
fall in price has increased sales by 25. The
new sales level will be 3750. 3750 times the new
price of 50p gives us ?
24
Wrong, revenue has increased! The fall in price
is 16.67 of original price. To find the new
sales level, you must multiply this by the Ped,
which was 1.5. This gives you an answer of 25.
The fall in price has increased sales by 25.
The new sales level will be 3750. 3750 times the
new price of 50p gives us ?
25
Question 7.

• Which of the following defines inelastic Income
  Elasticity of Demand?
• A. A change in incomes causes a proportional
  change in the quantity demanded.
• B. A change in incomes causes a less than
  proportional change in the quantity demanded.

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Inelastic demand means that there will always be
a less than proportional change.For the change to
be proportional them Ped would have to 1 ie.
be unitary.
27
Correct. Inelastic demand means that there will
always be a less than proportional change
whatever form of elasticity of demand we were
examining.
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Question 8.

• Which of the following goods or services is
  likely to have inelastic Income Elasticity of
  Demand?
• A. Foreign holidays
• B. Bread
• C. Jaguar Cars

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Likely to be elastic. As incomes increase the
rate of increase of demand for luxury goods is
likely to be faster.
30
Bread is a necessity. As incomes increase the
increase is demand for bread is likely to be
slower. Income elasticity of demand for
necessities is inelastic.
31
Likely to be elastic. As incomes increase the
rate of increase of demand for luxury goods is
likely to be faster.
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Question 9.

• Which of the following goods is likely to have
  Elastic Price Elasticity of Demand?
• A. Petrol
• B. Cigarettes
• C. Lemonade

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Petrol is likely to have an inelastic Ped.
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Cigarettes because of their addictive nature are
likely to have an inelastic Ped.
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Correct. This is because there are
many substitutes for lemonade.
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Question 10.

• A computer firm has just launched its new
  intelligent mouse onto the market. Demand is
  currently at 300 units a week. The company
  doubles its advertising budget, knowing that the
  products Advertising Elasticity of Demand is 2.
  What will be the new quantity demanded?
• A. 600
• B. 750
• C. 900

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Wrong. Remember to use the formula Advertising
elasticity of demand times change in
advertising expenditure change in quantity
demanded.
38
Wrong. Remember to use the formula Advertising
elasticity of demand times change in
advertising expenditure change in quantity
demanded.
39
Correct. You used the formula Advertising
elasticity of demand times change in
advertising expenditure change in quantity
demanded.
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You have now completed the test. For further
more detailed revision please use the case
studies on the ALoA web site. www.aloa.co.uk