Lesson 4.1.3.2

4.1.3.2 Price, income and cross elasticities of demand Quiz: AQA Economics, Unit 1

20 questions

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Lesson 4.1.3.2, Price, income and cross elasticities of demand: 20 multiple choice questions for the AQA Economics (7136), Unit 1: Individuals, firms, markets and market failure, written with Revision Ninja.

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The 20 questions

  1. Price elasticity of demand (PED) is defined as:

    • the change in quantity demanded divided by the change in income, measured in units of the good over a period of time.
    • the percentage change in quantity supplied divided by the percentage change in price, which is the elasticity used by sellers.
    • the percentage change in quantity demanded divided by the percentage change in price.
    • the percentage change in price divided by the percentage change in quantity demanded, so that a value above one means demand is inelastic.

  2. The price of a good rises from £2.00 to £2.50 and quantity demanded falls from 100 to 80 units. What is the PED, using the percentage method?

    • -1.25.
    • -0.25.
    • -2.5.
    • -0.8.

  3. A good has a PED of -0.8. Which description is correct?

    • The demand is perfectly elastic.
    • The demand is price inelastic, because the value is less than 1 in size.
    • The demand is unit elastic.
    • The demand is price elastic, because the value is greater than 1 in size.

  4. A firm cuts price from £5 to £4 and quantity demanded rises from 200 to 250 units. What is the PED?

    • -0.8, which is the value obtained if the percentage changes are reversed and the price fall is taken as the base for the calculation.
    • -0.5, which is the value obtained by dividing the change in price in pounds by the new quantity demanded by consumers in the market.
    • -2.0, which is the value obtained by dividing the change in units by the original quantity of 200 units sold by the firm in the period.
    • -1.25.

  5. A firm's demand is price elastic with PED = -1.5. If it raises price by 10%, approximately how much will quantity demanded change?

    • Fall by 1.5%.
    • Fall by 15%.
    • Rise by 15%.
    • Fall by 6.7%.

  6. Total revenue equals price multiplied by quantity sold. If demand is price elastic and a firm lowers its price, total revenue will:

    • fall, because the firm sells fewer units after lowering its price and so its total revenue from each unit sold is reduced by the cut.
    • rise, because quantity rises by proportionately more than price falls.
    • fall, because quantity rises by less than price falls, so the proportional gain in quantity is smaller than the proportional loss in price.
    • remain the same, because elasticity is unaffected by the price change, so that the firm's revenue depends only on its costs of production.

  7. Income elasticity of demand (YED) is defined as:

    • the percentage change in income divided by the percentage change in quantity demanded, so a high value shows strong price response.
    • the percentage change in quantity demanded divided by the percentage change in income.
    • the percentage change in price divided by the percentage change in income, which measures how far prices move with incomes.
    • the change in price divided by the change in quantity supplied, measured across all firms that sell the good in the market over time.

  8. Income rises by 5% and demand for a good rises by 10%. What is YED and what type of good is it?

    • YED = 2, a normal good.
    • YED = 0.5, a normal good.
    • YED = -2, an inferior good.
    • YED = 0.5, an inferior good.

  9. A good's YED is calculated as -0.4. Which statement is correct?

    • It is an inferior good, because demand falls as income rises.
    • It is a necessity, because demand is unchanged by income, so that households buy the same amount whatever their income level happens to be.
    • It is a complement, because the value is negative, which means that the good is always bought together with another good in the market.
    • It is a luxury good, because the value is negative and so demand for the good rises sharply as household incomes increase in the market.

  10. Cross elasticity of demand (XED) between goods A and B is defined as:

    • the percentage change in quantity demanded of good A divided by the percentage change in consumer income, which measures income response.
    • the change in price of good A divided by the change in quantity supplied of good A, measured across all sellers in the market.
    • the percentage change in quantity demanded of good A divided by the percentage change in price of good B.
    • the percentage change in price of good A divided by the percentage change in quantity demanded of good B, the reciprocal of XED.

  11. The price of Pepsi rises by 10% and the quantity of Coca-Cola demanded rises by 8%. What is the XED and what is the relationship?

    • XED = -0.8, complements.
    • XED = 0.8, complements.
    • XED = 0.8, substitutes.
    • XED = 1.25, substitutes.

  12. The price of printers rises by 20% and the quantity of ink cartridges demanded falls by 15%. What is the XED and what is the relationship?

    • XED = -1.33, substitutes, which is the value obtained by dividing the price change of printers by the change in cartridge quantity.
    • XED = 0.75, complements, which would be the value if the sign of the calculation were reversed for the two goods in the market.
    • XED = 0.75, substitutes, which would be the value if cartridge demand rose when printer prices rose by the same percentage.
    • XED = -0.75, complements.

  13. Two goods are close substitutes with an XED of +2.5. If the price of the rival good falls by 4%, what happens to demand for the firm's good?

    • It rises by 1.6%.
    • It falls by 1.6%.
    • It rises by 10%.
    • It falls by 10%.

  14. Which of the following factors is most likely to make demand more price elastic?

    • There are many close substitutes available.
    • The good is a necessity with no close substitutes.
    • The good takes up a very small share of the consumer's budget and is needed daily.
    • Consumers have strong brand loyalty to the good.

  15. Which of the following is most likely to have a price inelastic demand?

    • A particular model of car with many similar models available, which buyers can replace with a close alternative if its price changes.
    • A luxury holiday abroad, which households can easily postpone or replace with a cheaper trip in a different country if prices rise.
    • A medicine that patients must take and for which there is no close substitute.
    • A specific brand of soft drink with many close rivals, which consumers can easily switch to if its price rises in the shop.

  16. A firm's demand is price inelastic. What should it expect if it raises its price?

    • Total revenue will fall, because demand is very responsive to price, so the proportional fall in quantity outweighs the rise in price.
    • Quantity demanded will rise, because price is inelastic and so consumers buy more of the good when its price goes up in the market.
    • Total revenue will remain the same regardless of the change, since the firm's sales are fixed by the level of its production capacity.
    • Total revenue will rise, because quantity demanded falls proportionately less than price rises.

  17. Which statement best evaluates the usefulness of PED for a government considering a tax on a good?

    • PED helps predict how much quantity demanded will fall and the revenue raised, though estimates depend on the data and period.
    • PED is irrelevant to tax policy because tax revenue never depends on demand, so elasticity need not be considered.
    • PED shows the exact tax rate that should be charged to all consumers, so one rate can apply to every good.
    • PED is only relevant for income taxes, which are paid by households, and it has no bearing on indirect taxes on goods bought in shops.

  18. Which of the following correctly interprets a YED of 1.6 for a good?

    • Demand falls as income rises, so the good is inferior, which means consumers buy less of it when they become richer in the economy.
    • Demand is unaffected by income changes, since a YED of 1.6 shows that consumers' income has no effect on the quantity of the good bought.
    • Demand rises by more than income rises, so the good is a luxury.
    • Demand is income inelastic, because the value is above zero, so that the good's demand changes only slightly when household income changes.

  19. The XED between two goods is -0.9. Which statement is the best evaluation of the relationship?

    • The goods are unrelated, because XED is close to zero.
    • The goods are strong substitutes, so a rise in the price of one increases demand for the other.
    • The goods are normal goods, because XED is negative.
    • The goods are strong complements, so a rise in the price of one reduces demand for the other.

  20. A good has a YED of 0.6 and household incomes rise by 10%. What happens to demand for the good?

    • Demand rises by 6%, so the good is a normal necessity whose demand grows more slowly than household incomes do.
    • Demand falls by 6%, so the good is inferior and households buy less of it as their incomes increase over the period in question.
    • Demand rises by 60%, so the good is a luxury whose demand responds much more strongly to income than the rise in incomes itself.
    • Demand is unchanged at 10%, because the value of 0.6 shows that income has no effect on household purchases of the good.

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