AP Micro AP Micro Elasticity 1 — Questions and Answers
Question 1: If the price of a good rises by 10% and quantity demanded falls by 20%, the price elasticity of demand is:
- 0.5
- 2.0 (Correct answer)
- 1.0
- 0.2
Correct answer: 2.0
PED = % change in quantity demanded / % change in price = 20% / 10% = 2.0 (elastic).
Question 2: A good with a price elasticity of demand equal to 0.3 is considered:
- Perfectly elastic
- Unit elastic
- Inelastic (Correct answer)
- Elastic
Correct answer: Inelastic
When PED < 1, demand is inelastic, meaning consumers are relatively unresponsive to price changes.
Question 3: Which of the following goods is most likely to have highly inelastic demand?
- Luxury vacations
- Insulin for diabetics (Correct answer)
- Designer handbags
- Restaurant meals
Correct answer: Insulin for diabetics
Insulin is a necessity with no close substitutes, making its demand highly inelastic.
Question 4: If a 5% increase in consumer income leads to a 10% increase in demand for a good, the income elasticity of demand is:
- 0.5
- −2.0
- 2.0 (Correct answer)
- 1.0
Correct answer: 2.0
Income elasticity = % change in quantity demanded / % change in income = 10% / 5% = 2.0.
Question 5: A negative income elasticity of demand indicates the good is a(n):
- Normal good
- Inferior good (Correct answer)
- Luxury good
- Complement
Correct answer: Inferior good
Inferior goods have negative income elasticity because demand falls as income rises.
Question 6: Cross-price elasticity of demand is positive when two goods are:
- Complements
- Inferior goods
- Substitutes (Correct answer)
- Normal goods
Correct answer: Substitutes
Substitutes have positive cross-price elasticity because a price increase in one raises demand for the other.
AP Micro AP Micro Elasticity 1
If the price of a good rises by 10% and quantity demanded falls by 20%, the price elasticity of demand is: