Unit 2 of 5
Study guide for CLEP CLEP Principles of Microeconomics — Unit 2: Elasticity and Consumer Choice. Practice questions, key concepts, and exam tips.
69
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If a good has a price elasticity of supply of 0.5, a 10% increase in price will lead to a
Answer: A — 5% increase in quantity supplied is correct because Es = $\frac{%ΔQs}{%ΔP}$ = 0.5, so a 10% increase in price leads to a 5% increase in quantity supplied.
What elasticity measures how responsive quantity demanded is to a change in price?
Answer: C — Price elasticity of demand is correct because it measures how responsive quantity demanded is to a change in price. Income elasticity of demand is incorrect as it measures responsiveness to changes in income.
What determines the tax incidence?
Answer: B — Elasticity of demand and supply is correct because elasticities determine the burden.
When the price of coffee increases by 10%, the quantity demanded of tea increases by 8%. Based on this information, what is the cross-price elasticity of demand, and what does this relationship suggest about these two goods?
Answer: C — Cross-price elasticity is calculated as the percentage change in quantity demanded of one good divided by the percentage change in price of another good: (8% / 10%) = 0.8. A positive cross-price elasticity indicates substitute goods—when coffee becomes more expensive, consumers buy more tea instead. Option "0.8; coffee and tea are complementary goods" incorrectly uses the right magnitude but wrong sign and classification. Option "-0.8; coffee and tea are complementary goods" has the wrong sign (cross-price elasticity for substitutes is positive). Option "1.25; coffee and tea are substitute goods" miscalculates the elasticity. Option "-1.25; coffee and tea are substitute goods" has both an incorrect calculation and misidentifies the relationship as substitutes when the negative sign would suggest complements.
A perfectly inelastic good has a price elasticity of demand of
Answer: D — 0 is correct because Ed = 0 for a perfectly inelastic good.
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