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Unit 2 of 5

Unit 2: Elasticity and Consumer Choice

Study guide for CLEP CLEP Principles of Microeconomics — Unit 2: Elasticity and Consumer Choice. Practice questions, key concepts, and exam tips.

69

Practice Questions

22

Flashcards

4

Key Topics

Key Concepts to Study

price elasticity of demand
cross-price elasticity
income elasticity
marginal utility

Sample Practice Questions

Try these 5 questions from this unit. Sign up for full access to all 69.

Q1MEDIUM

If a good has a price elasticity of supply of 0.5, a 10% increase in price will lead to a

A) 5% increase in quantity supplied
B) 10% increase in quantity supplied
C) 20% increase in quantity supplied
D) 50% increase in quantity supplied
E) 0% increase in quantity supplied
Show Answer

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.

Q2EASY

What elasticity measures how responsive quantity demanded is to a change in price?

A) Income elasticity of demand
B) Cross-price elasticity of demand
C) Price elasticity of demand
D) Price elasticity of supply
E) Income elasticity of supply
Show Answer

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.

Q3MEDIUM

What determines the tax incidence?

A) Tax rate
B) Elasticity of demand and supply
C) Market size
D) Government revenue
E) Consumer income
Show Answer

Answer: B — Elasticity of demand and supply is correct because elasticities determine the burden.

Q4MEDIUM

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?

A) 0.8; coffee and tea are complementary goods
B) -0.8; coffee and tea are complementary goods
C) 0.8; coffee and tea are substitute goods
D) 1.25; coffee and tea are substitute goods
E) -1.25; coffee and tea are substitute goods
Show Answer

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 A incorrectly uses the right magnitude but wrong sign and classification. Option B has the wrong sign (cross-price elasticity for substitutes is positive). Option D miscalculates the elasticity. Option E has both an incorrect calculation and misidentifies the relationship as substitutes when the negative sign would suggest complements.

Q5EASY

A perfectly inelastic good has a price elasticity of demand of

A) 0.1
B) 0.5
C) 1.0
D) 0
E) infinity
Show Answer

Answer: D — 0 is correct because Ed = 0 for a perfectly inelastic good.

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Study Tips for Unit 2: Elasticity and Consumer Choice

  • Focus on understanding concepts, not memorizing facts — CLEP tests application
  • Practice with timed questions to build exam-day speed
  • Review explanations for wrong answers — they reveal common misconceptions
  • Use flashcards for key terms, practice questions for deeper understanding

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