True-false test

1. Income elasticity of demand coefficient presents relationship between changes in price and demand.
2. In the short run supply response to change in price is stronger than in the long run.
3. In the short run supply increases as a result of investment process.
4. Engel curve shows what quantities of a good is consumed at each level of income.
5. If relatively large change in price results in relatively small change in demand, demand is inelastic
(elasticity of demand coefficient is lower than 1 (in magnitude)).
6. When consumer’s income increases, share of consumer’s expenditures for normal goods always raises.
7. When cross-price elasticity of demand coefficient is positive, the goods are substitutes.
8. For goods that satisfy basic consumer’s wants and do not have substitutes price elasticity of demand
coefficient is equal to zero.
9. If price elasticity of supply coefficient is less than 1, then increase in price by 50% results in raise in
supply by more than 50%.
10.Demand is more elastic in the long run than in the short run.

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11.If income elasticity of demand equals zero, then increase in income by 100% will cause demand to
drop by 100%.
12. If a good has close substitute at similar price, demand for that good is highly elastic.
13. The higher the share of expenditures for a good in a consumer’s income, the higher price elasticity of
demand for that good is.
14.In case of inferior good, Engel curve is downward sloping.
15.In immediate market period change in equilibrium price may only be a result of change in demand.
16.For luxury goods, both income and price elasticities of demand are relatively high.
17.If income elasticity of demand for a good is negative, then consumers increase demand for it when
they get poorer.

Choice test

1. Consumers buy 2000 tons of tomatoes at 5 zl per kilo. What will be demand for tomatoes, if price
elasticity of demand coefficient equals -2, and their price will increase to 6 zl per kilo?
a. 1000 tons

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b. 1200 tons
c. 1800 tons
d. 2000 tons.
2. If price elasticity of demand for a good equals 0.5 (in magnitude), then increase in price by 50% will
cause demand to drop by:
a. 50%
b. 25%
c. 100%
d. 25 units of the good.
3. If income elasticity of demand coefficient is equal to 0.7, then demand changes:
a. in the opposite direction as income does
b. in the same direction as income, but to a smaller degree
c. in the same direction as income, and the same degree
d. in the same direction as income, but to a greater degree.
4. If cross-price demand elasticity for butter and margarine is equal to 2, and price of butter raises from 2
zl to 3 zl per box, then demand for margarine:

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a. drops by 20%
b. drops by 100%
c. raises by 50%
d. raises by 100%.
5. If 1% drop in price results in 2% growth in demand, then:
a. demand is highly inelastic
b. demand is highly elastic
c. demand is perfectly inelastic
d. demand is unitary elastic.
6. When cross-price elasticity of demand for two goods is negative, then:
a. goods are substitutes
b. goods are complements
c. goods are luxuries
d. goods are inferior.
7. A good is an inferior good then:
a. price elasticity of demand for the good equals -0.5

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b. income elasticity of demand equals 1
c. cross-price elasticity of demand equals -1
d. income elasticity of demand equals -2.
8. If demand is inelastic:
a. 2% percent increase in price will result in less than 2% decrease in demand
b. 2% percent increase in price will result in 2% decrease in demand
c. 2% percent increase in price will result in more than 2% decrease in demand
d. 2% percent increase in price will result in less than 2% increase in demand.
9. If price elasticity of demand for coffee is estimated to be -0.25 in the short run, which is the most likely
value of the long run elasticity?
a. -0.10
b. -0.25
c. -0.40
d. none of the above-the elasticity of demand in the long run is always positive.
10.The demand for oranges is D=20000-5p, where p is price per ton. The price elasticity of demand at
p=800zl is:

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 a. -4
b. 4 (positive value-not magnitude)
c. -0.25
d. 0.25 (positive value-not magnitude).

Exercise 1.
The demand formula for a good is given as follows: QD = 4 – 2p + 0,01·I, where income I=100 and price p=1:
a. What is a point price elasticity of demand for that good?
b. What is a point income elasticity of demand for that good?

Exercise 2.
The supply for the good is QS = 124+1.5p, and the demand curve is QD = 189-2.25p.
a) What is the equilibrium price and quantity?
b) What is the elasticity of demand at the market equilibrium?

Exercise 3.

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 a) If the supply for the good is QS = -10000+5000p, and the demand curve is QD = 40000-2000p, what will
be the effect of a price ceiling of pc=5? Will the market be in equilibrium? If not, how much excess
demand or excess supply will there be at the ceiling price?
b) The good has fallen out of fashion recently, and the demand curve for it is now Q D=20000-2000p. What
will be the effect of a price ceiling of pc=5 now? Will the market be in equilibrium? If not, how much
excess demand or excess supply will there be at the ceiling price?
c) Using the original supply and demand curves for the good, compute the market equilibrium price and
quantity. What is the elasticity of supply and demand at the equilibrium price?
d) If the good come back in fashion after the public learns that it is now “environmental friendly”, what
will happen to the equilibrium price and quantity?

Exercise 4.
The demand formula for wheat is as follows: QD = 1100 – 6p, and the supply formula: QS = 100+4p. The
government introduces the minimum price (price support) of 150 euro per 1 ton of wheat and decides to buy
(and store) the whole surplus of wheat at that price. How much money will the government have to spend for
buying the surplus of wheat?

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Exercise 5.

University A is located in a small town B. Currently, a typical student apartment rents for 300 zl per month
and 15000 apartments are rented. The University considers expanding enrollment by lowering its current
academic standards. It is estimated that at the current price and quantity, the price elasticity of demand for
apartments is -1/4, and the elasticity of supply is ½.
a) What are the equations of demand and supply?
b) What is the equilibrium price and quantity?
c) Suppose there is a 20% increase in the demand for apartments as a result of the enrollment increase. What
will be the new equilibrium price and quantity in this market? Compute the elasticity of demand at the new
equilibrium.