Test on Economic Elasticity Concepts and Applications

Question 1: Products such as branded clothing, cars, and household appliances are typically categorized as having relatively price inelastic demand.

A. Ano

B. Ne

Explanation: The study materials state that products like branded clothing, cars, and household appliances are examples of luxuries or optional purchases, which fall under 'Relatively Price Elastic Demand' (1 < PED < ∞). Relatively price inelastic demand (0 < PED < 1) is associated with necessities, habit-forming goods, or goods with few substitutes.

Question 2: Which of the following statements accurately describes perfectly price elastic demand?

A. A change in price has no impact on the quantity demanded.

B. The demand for a product at a particular price is infinite.

C. A given percentage change in price will result in an equal percentage change in quantity demanded.

D. The percentage change in price results in a larger percentage change in quantity demanded.

Explanation: Perfectly price elastic demand is defined by PED = ∞, where the demand for a product at a particular price is infinite. An increase in price drops demand to zero, and a decrease in price still results in infinite demand.

Question 3: With Unitary Price Elastic Supply, a given percentage change in price results in an equal percentage change in quantity supplied.

A. Ano

B. Ne

Explanation: Unitary Price Elastic Supply occurs when PES = 1. This means that a given percentage change in price will result in an equal percentage change in quantity supplied.

Question 4: According to the study materials, what is the effect of input scarcity on the price elasticity of supply?

A. If inputs are scarce, supply will be elastic because producers can easily switch to substitutes.

B. Scarcity of inputs ensures that supply remains perfectly elastic, irrespective of price changes.

C. If inputs are scarce, supply will be inelastic, as a change in price will not significantly alter the quantity supplied.

D. The availability of inputs only impacts the long-run elasticity of supply, not the short-run.

Explanation: The study materials state that if inputs are scarce, supply will be inelastic, as a given percentage change in price will not significantly change the quantity supplied because producers cannot easily increase production without available inputs.

Question 5: Weak substitutes are characterized by a high cross-price elasticity of demand.

A. Ano

B. Ne

Explanation: Weak substitutes will have a low cross-price elasticity of demand, meaning an increase in the price of one good will lead to a relatively small increase in demand for the other good.