ECO415: Semester March – August 2021

EXERCISE CHAPTER 3

Multiple choices questions

1. Price elasticity of demand refers to the ration of the

A. percentage change in the price of a good or service in response to a percentage change in the
quantity demanded.

B. percentage change in the price of a good or service to a percentage change in income.

C. percentage change in the quantity demanded of a good or service to a percentage change in its price.

D. percentage change in the quantity demanded of a good or service to a change in price of another
good or service.

2. If demand is price elastic,

A. a small change in price will lead to a greater change in quantity demanded.

B. a small change in price will lead to no change in quantity demanded.

C. a small change in price will lead to a smaller change in quantity demanded.

D. a small change in price will lead to a proportionate change in quantity demanded.

3. If the demand curve for a product is a vertical straight line, it shows that it is

A. perfectly elastic

B. perfectly inelastic

C. elastic

D. inelastic

4. If demand is elastic, when the price decreases, the total revenue will

A. decrease

B. increase

C. not change

D. All of the above

5. If car and petrol are complements, then their cross elasticity coefficient is
ECO415: Semester March – August 2021

A. less than one

B. more than one

C. positive

D. negative

6. Elasticity of supply will be more elastic when

A. the number of producers selling the product decreases.

B. producers are given less time to respond to the price changes.

C. there are many buyers for the product.

D. there are many resources that can be used to make the product.

7. The government has increased the tax on cigarettes recently. This tax can help to increase the
government revenue if the elasticity of demand for cigarettes is

A. perfectly elastic

B. elastic

C. inelastic

D. unitary elasticity

8. A positive income elasticity of demand coefficient indicates that

A. a product is an inferior good.

B. a product is a normal good.

C. a product has an elastic demand

D. a product has an inelastic demand

9. In the short run, supply is

A. price inelastic.

B. price elastic.

C. perfectly price inelastic.

D. perfectly price elastic.

ECO415: Semester March – August 2021

10. If a product has an elastic demand, total revenue may increase if the producer

A. decreases the price of the product.

B. increases the price of the product.

C. reduces supply

D. does more advertisement for the product.

Case Study

Flood Destroyed Major Crops

The recent flood that happened in Kedah has resulted in a bad harvest of major crops, including paddy,
to many farmers in that state, which is known as the “rice bowl of the country”. The reduction in supply
resulted in a higher price of rice. Since rice is the staple food for Malaysians, the price increase affected
many people and vastly reduced paddy farmers’ total revenue.

Through the total revenue of farmers went down, the supply of rice need not change much in the short
run. With the help from the government and the use of advanced technology, these farmers hope that
the production of paddy will increase in the future.

1. Determine the degree of price elasticity of demand and supply for rice. Based on your answer, draw
the demand curve and the supply curve of rice to show the degree of price elasticity.

2. State whether the total revenue for the paddy farmers would increase or decrease due to the price
increase. Explain using a diagram.

3. Is the supply of rice elastic or inelastic in the long run? Explain three (3) factors which influence the
elasticity of supply in the long run.

4. Give two (2) suggestions about how farmers can increase the production of paddy in Malaysia.

Essay Questions

1. Explain, with relevant examples and diagrams, the five (5) degrees of price elasticity of demand.

2. Discuss, with the help of a diagram, what will happen to total revenue when the price of a good has
been increased and the demand for the good is inelastic.

3. Discuss the application of price elasticity of demand.

END OF QUESTIONS