BMAL-590 MICROECONOMICS EXAM
QUESTIONS WITH 100% CORRECT
ANSWERS
Classications of Demand Curves - Answer- The price elasticity of demand is closely
related to the slope of the demand curve.
Rule of thumb:
The flatter the curve, the more elastic the response to price.
The steeper the curve, the smaller the response to price changes.
Perfectly Inelastic Demand (Extreme Case) - Answer- D curve:
vertical
Consumers' price sensitivity:
None, Q1 is the same
Elasticity:
0
Inelastic Demand - Answer- A situation in which an increase or a decrease in price will
not significantly affect demand for the product
D curve:
relatively steep
Consumers' price sensitivity:
relatively low
Elasticity:
<1
Unit Elastic Demand - Answer- the percentage change in quantity demanded equals the
percentage change in price; the resulting price elasticity has an absolute value of 1.0
D curve:
intermediate slope
Consumers' price sensitivity:
intermediate
Elasticity:
1
,Elastic Demand - Answer- D curve:
relatively flat
Consumers' price sensitivity:
relatively high
Elasticity:
>1
Perfectly Elastic Demand (Other Extreme Case) - Answer- D curve:
horizontal
Consumers' price sensitivity:
extreme
Elasticity:
∞
"Extreme price sensitivity" means the tiniest price increase causes demand to fall to
zero. "Q changes by any %" - when the D curve is horizontal, quantity cannot be
determined from price. Consumers might demand Q1units one month, Q2 units another
month, and some other quantity later. Q can change by any amount, but P always
"changes by 0%" (i.e., doesn't change).
Price elasticity is higher when close substitutes are available.
Price elasticity is higher for narrowly defined goods than broadly defined ones.
Price elasticity is higher for luxuries than for necessities
Price elasticity is higher in the long run than the short run. - Answer- important to know
The price elasticity of demand depends on: - Answer- Closeness of Substitutes. The
extent to which close substitutes are available.
Necessities vs. Luxuries. Whether the good is a necessity or a luxury.
Broadly vs. Narrowly Defined Goods. How broadly or narrowly the good is defined.
Time Horizon. The time horizon—elasticity is higher in the long run than the short run.
Which of the following is false? - Answer- Demand for individual brand is less elastic
than industry aggregate demand.
- Price elasticity is higher for narrowly defined goods than broadly defined goods. An
individual brand demand is narrow while the industry aggregate demand is broad.
, PEoD Determinants facts - Answer- Products with close substitutes have elastic
demand.
Products with many complements have less elastic demand.
In the long run, demand curves become more elastic.
A price increase has two effects on revenue: - Answer- Higher P means more revenue
on each unit you sell.
But you sell fewer units (lower Q), due to law of demand.
Which of these two effects is bigger? It depends on the price elasticity of demand.
When supply is inelastic: - Answer- an increase in demand has a bigger impact on price
than on quantity.
When supply is elastic - Answer- an increase in demand has a bigger impact on
quantity than on price.
Income Elasticity of Demand - Answer- a measure of how much the quantity demanded
of a good responds to a change in consumers' income, computed as the percentage
change in quantity demanded divided by the percentage change in income
Recall from Supply and Demand Review: An increase in income causes an increase in
demand for a normal good.
Hence, for normal goods, income elasticity > 0.
For inferior goods, income elasticity < 0.
Suppose the demand is perfectly inelastic. The implication would be that the smallest
change in price would result in - Answer- no change in quantity
For goods and services that have an elastic demand, if price is increased, total revenue
- Answer- decreases
Goods and services that are independent of each other have a cross elasticity of
demand that is - Answer- 0
A perfectly elastic demand is a ______ curve - Answer- horizontal
Production - Answer- a process of transforming various factors of production include:
material, people, technology, land, equipment, money - into goods and services
firm - Answer- A key concept in production
QUESTIONS WITH 100% CORRECT
ANSWERS
Classications of Demand Curves - Answer- The price elasticity of demand is closely
related to the slope of the demand curve.
Rule of thumb:
The flatter the curve, the more elastic the response to price.
The steeper the curve, the smaller the response to price changes.
Perfectly Inelastic Demand (Extreme Case) - Answer- D curve:
vertical
Consumers' price sensitivity:
None, Q1 is the same
Elasticity:
0
Inelastic Demand - Answer- A situation in which an increase or a decrease in price will
not significantly affect demand for the product
D curve:
relatively steep
Consumers' price sensitivity:
relatively low
Elasticity:
<1
Unit Elastic Demand - Answer- the percentage change in quantity demanded equals the
percentage change in price; the resulting price elasticity has an absolute value of 1.0
D curve:
intermediate slope
Consumers' price sensitivity:
intermediate
Elasticity:
1
,Elastic Demand - Answer- D curve:
relatively flat
Consumers' price sensitivity:
relatively high
Elasticity:
>1
Perfectly Elastic Demand (Other Extreme Case) - Answer- D curve:
horizontal
Consumers' price sensitivity:
extreme
Elasticity:
∞
"Extreme price sensitivity" means the tiniest price increase causes demand to fall to
zero. "Q changes by any %" - when the D curve is horizontal, quantity cannot be
determined from price. Consumers might demand Q1units one month, Q2 units another
month, and some other quantity later. Q can change by any amount, but P always
"changes by 0%" (i.e., doesn't change).
Price elasticity is higher when close substitutes are available.
Price elasticity is higher for narrowly defined goods than broadly defined ones.
Price elasticity is higher for luxuries than for necessities
Price elasticity is higher in the long run than the short run. - Answer- important to know
The price elasticity of demand depends on: - Answer- Closeness of Substitutes. The
extent to which close substitutes are available.
Necessities vs. Luxuries. Whether the good is a necessity or a luxury.
Broadly vs. Narrowly Defined Goods. How broadly or narrowly the good is defined.
Time Horizon. The time horizon—elasticity is higher in the long run than the short run.
Which of the following is false? - Answer- Demand for individual brand is less elastic
than industry aggregate demand.
- Price elasticity is higher for narrowly defined goods than broadly defined goods. An
individual brand demand is narrow while the industry aggregate demand is broad.
, PEoD Determinants facts - Answer- Products with close substitutes have elastic
demand.
Products with many complements have less elastic demand.
In the long run, demand curves become more elastic.
A price increase has two effects on revenue: - Answer- Higher P means more revenue
on each unit you sell.
But you sell fewer units (lower Q), due to law of demand.
Which of these two effects is bigger? It depends on the price elasticity of demand.
When supply is inelastic: - Answer- an increase in demand has a bigger impact on price
than on quantity.
When supply is elastic - Answer- an increase in demand has a bigger impact on
quantity than on price.
Income Elasticity of Demand - Answer- a measure of how much the quantity demanded
of a good responds to a change in consumers' income, computed as the percentage
change in quantity demanded divided by the percentage change in income
Recall from Supply and Demand Review: An increase in income causes an increase in
demand for a normal good.
Hence, for normal goods, income elasticity > 0.
For inferior goods, income elasticity < 0.
Suppose the demand is perfectly inelastic. The implication would be that the smallest
change in price would result in - Answer- no change in quantity
For goods and services that have an elastic demand, if price is increased, total revenue
- Answer- decreases
Goods and services that are independent of each other have a cross elasticity of
demand that is - Answer- 0
A perfectly elastic demand is a ______ curve - Answer- horizontal
Production - Answer- a process of transforming various factors of production include:
material, people, technology, land, equipment, money - into goods and services
firm - Answer- A key concept in production
