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Ch5A - ECO 105 Principles of Economic Theory Chapter 5...

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ECO 105: Principles of Economic Theory Chapter 5 Answer Key for Sample Multiple-Choice Questions 1. b) is the correct answer. The price elasticity of demand is defined as the sensitivity or responsiveness of the quantity demanded to a change in price. 2. a) is the correct answer. The reason for using relative or percentage measures is to obtain a consistent coefficient of elasticity, no matter what units are used to measure the quantity of the product being demanded at the various prices. Answer d) is incorrect because the initial size of the price and quantity are important. That is in fact why a relative measure is needed. 3. d) is the correct answer. The coefficient of the price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price. Answer a) is the slope of the demand curve, answer b) is the reciprocal of the slope, and answer c) is the reciprocal of the coefficient of elasticity. 4. b) is the correct answer. The percentage change in quantity demanded is 100/250 = 40 percent. The percentage change in price is 8/16 = 50 percent. 40 percent/50 percent = .8. This suggests that demand for movies is somewhat inelastic. 5. c) is the correct answer. The percentage change in quantity demanded is 2000/4000 = 50 percent. The percentage change in price is $10/$25 = 40 percent. Therefore, the price elasticity of demand is 50 percent/40 percent = 1.25. 6. d) is the correct answer. The percentage change in quantity demanded is 600/1,000 = 60 percent. The percentage change in price is $50/$125 = 40 percent. Therefore, the price elasticity of demand is 60 percent/40 percent = 1.5. 7. d) is the correct answer. The percentage change in quantity demanded is 600/400 = 150 percent. The percentage change in price is $4/$8 = 50 percent. The price elasticity of demand is 150 percent/50 percent = 3. 8. b) is the correct answer. We know from the definition of elasticity that the percentage change in quantity demanded desired by the car dealer is 20/40 = 50 percent. We must now solve the coefficient of elasticity formula for the change in price when the initial price is $20,000. The percentage change in price must be 50 percent, since
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