2. When the demand curve for a good is unit elastic, raising the price of the go

Question

2. When the demand curve for a good is unit elastic, raising the price of the good by 25 percent will change the revenue of the firm by:

A. 125 percent
B. 100 percent
C.25 percent
D. 0 percent

3.If the demand for currently illegal recreational drugs is highly inelastic and these drugs became legal, prices would fall. An economist would expect which of the following to happen in response to the lower price?

A. Total spending on drugs would rise
B. No one would follow the laws of economics anymore
C. Not many more people would become drug users

4. The elasticity of demand for a good is -0.75. A 4 percent increase in price will cause a:

A. 3 percent decrease in quantitiy demanded
B. 5.33 percent increase in quantity demanded
C. 5.33 percent decrease in quanttiy demanded
D. 0.19 percent decrease in quantity demandad

5. The price of good X increases from $55 to $60, and the quantity demanded decreases from 500 to 400. The price of good Y increase from $55 to $60, and the quantitiy demanded decreases from 500 to 475. Given the information, the;

A. consumers who buy good X are less sensitive to price changes than consumers who buy good Y
B. demand curve for good X is less elastic than the demand curve for good Y
C. demand curve for good X is mor elastic than the demand curve for good Y.
D. demand curve for good X and good Y violate the law of demand

6. If the price elasticity of demand for a product is 2 in absolute value, and the price elasticity of supply for the same product is 1, what is the predicted percent change in price from a 5 percent fall in the supply?

A. 1.67 percent fall in price
B. 1.67 percent rise in price
C. 0.6 percent fall in price
D. 0.6 percent rise in price

Explanation / Answer

2. D) 0 Percent

In case of unit elasticity, 25% raise in Price leads to 25% fall in Quantity. So, Revenue which is procduct of P and Q does not changes.

3. A. Total spending on drugs would rise

Already the demand of these drugs was inelastic and when they will be legal and also prices fall, people will demand more.

4. A. 3 percent decrease in quantitiy demanded

E = Percentage change in Quantity demanded / Percentage change in Price

Percentage change in Quantity demanded = -0.75 x 4 = 3

5. e = (Change in Q / Change in P) / (Q/P)

ex = (400-500) / ( 60-55) / ( 500/55) => -20 / 9 => -2.2

eY = (475-500) / ( 60-55) / ( 500/55) => - 5 / 9 => - 0.55

DEMAND FOR x IS MORE ELASTIC. ANSWER IS C

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