Chapter 3: Price Elasticity of Demand and Supply – True or False

Chapter 3: Price Elasticity of Demand and Supply – True or False

This chapter will help you reinforce your understanding of price elasticity of demand and supply by analyzing true or false questions.

1. If the price elasticity of demand for good X is -2, this means that if the price of good X increases by 3%, the quantity demanded for good X will decrease by 1.5%.

False. A price elasticity of demand of -2 means that for every 1% increase in price, the quantity demanded will decrease by 2%. Therefore, if the price increases by 3%, the quantity demanded will decrease by 6% (3 x 2 = 6), not 1.5%.

2. A horizontal demand curve is a perfectly elastic demand curve.

True. A horizontal demand curve shows that the quantity demanded can change greatly with a change in price, meaning that consumers will buy any quantity of the good at a fixed price.

3. To increase total revenue, a seller should lower the selling price because they can sell more goods.

False. This statement is only true when demand is elastic. If demand is elastic, lowering the price will lead to an increase in quantity demanded enough to increase total revenue. However, if demand is inelastic or unit elastic, lowering the price will decrease total revenue.

4. If two goods X and Y have a relationship expressed as follows: QX = 20 – 4PY, we can conclude that X and Y are complementary goods.

True. The equation shows that when the price of Y (PY) increases, the quantity demanded for X (QX) decreases. This indicates that X and Y are complementary goods because when the price of one good increases, the demand for its complement decreases.

5. If the income elasticity of demand is -0.5, we can conclude that the good in question is an inferior good.

True. A negative income elasticity of demand indicates that as income increases, the quantity demanded decreases. This is characteristic of inferior goods, as consumers will buy less of these goods when their income rises.

6. If an increase in the price of oranges by 2% causes the demand for grapefruit to increase by 4%, then oranges and grapefruits are substitute goods and the cross-price elasticity of demand for grapefruit with respect to the price of oranges is greater than 1.

True. When the price of oranges increases, consumers switch to buying grapefruits, indicating that they are substitute goods. The cross-price elasticity of demand for grapefruit with respect to the price of oranges is 4%/2% = 2, which is greater than 1, meaning that the demand for grapefruit is highly sensitive to changes in the price of oranges.

7. If supply is perfectly elastic, it means that a 1% change in price will cause a change in quantity supplied of more than 1%.

True. Perfectly elastic supply means that producers are willing to supply any quantity of the good at a fixed price. Therefore, a small change in price will lead to a very large change in quantity supplied.

8. When a government imposes a tax on each unit of a product sold, consumers will bear less of the tax burden than producers if demand is elastic.

True. When demand is elastic, consumers are more sensitive to changes in price. Therefore, when the government imposes a tax, producers will bear most of the tax burden, while consumers will pay less.

9. When the government provides a subsidy for each unit of a product sold, the equilibrium price in the market will decrease unless demand is perfectly elastic.

False. A subsidy will cause a decrease in the equilibrium price, regardless of whether demand is elastic or not. However, the magnitude of the price decrease will be larger when demand is more elastic, as consumers will be more sensitive to the change in price.

10. If a 10% increase in the price of a good causes total revenue to also increase by 10%, the conclusion is that demand for the good is unit elastic.

False. When the price increases by 10% and total revenue also increases by 10%, demand for the good is perfectly inelastic (E = 0). This means that the quantity demanded does not change when the price changes.

11. EDp measures the responsiveness: of the quantity demanded to a change in the price of the good being considered.

True. EDp (price elasticity of demand) is a measure of the sensitivity of the quantity demanded to changes in the price of the good.

12. When TR is maximized, then MR = 0 and E = 1.

True. When total revenue (TR) is maximized, marginal revenue (MR) equals 0, and the price elasticity of demand (E) equals 1. This indicates that at this point, the quantity demanded does not change when the price changes.

Note: This document provides a supplement and explanation of the true or false questions. You can refer to other materials on price elasticity of demand and supply to understand these concepts and their applications better.