Week 2 Exercise
IG Economics
Part A Multiple-choice Questions (1 point for each)
1. Which one of the following best describes the type of goods with an
income elasticity of demand (YED) of -1.3?
A. Inferior
B. Unitary
C. Luxury
D. Normal
2. Which one of the following values shows perfectly price elastic
demand?
A. -1
B. -0.5
C. Zero
D. Infinity
3. Which one of the following is the formula to calculate total revenue?
A. Quantity sold ×price
B. Profit – price
C. Profit ÷ price
D. Quantity sold ÷ price
4. Income elasticity of demand (YED) for a product is -0.43 and the
price elasticity of demand (PED) for the same product is -0.27.
The data above shows that the product is
A. an inferior good and demand is price inelastic
B. an inferior good and demand is price elastic
C. a normal good and demand is price inelastic
D. a normal good and demand is price elastic
5. State the name for price elasticity of demand (PED) with numerical
value of -1.
Part B Calculation (2 points for each)
6. Calculate, to two decimal places, the price elasticity of supply (PES)
for a good if price decreases by 9.4% and quantity supplied
decreased by 3.7%. You are advised to show your working.
7. Calculate, to two decimal places, the income elasticity of supply
(YED) for a good if income increases by 7% and quantity demanded
increase by 11%. You are advised to show your working.
8. Calculate the percentage change in quantity demanded for a
product if the price elasticity of demand (PED) is -1.9 and price falls
by 10%. You are advised to show your working.
Part C Diagram question (3 points for each)
9. Using the diagram below, draw a price elastic demand (PED) curve.
Label the curve and show the impact on both axes from a change in
price.
Part D Open-answer Questions
10. Six months after the price for a soft drink increased, its price
elasticity of demand (PED) changed from -1.5 to -2.0.
Explain one reason why demand for a product, such as a soft drink,
usually becomes more price elastic over time. (3’)
11. Marina Café is popular with tourists and locals in the town of
Budva, Montenegro. It is situated next to the sea, with views of the
surrounding mountains. Customers can enjoy their drinks whilst
benefitting from the pleasant surroundings buy pay €2.00 for a cup
of coffee. The same brand coffee can be bought for €0.80 a cup in
some other cafés in Budva.
With reference to the data above and your knowledges of
economics, analyse why price elasticity of demand (PED) may be
relatively inelastic at Marina Café. (6’)
12. Many firms in Bangladesh produce textiles. In the factories,
cotton shirts, knitwear and suits are produced. These factories are
often operating below capacity.
About 40% of the Bangladeshi population is employed in the
agricultural sector. Crops such as wheat, corn and fruit are produced
annually by this sector.
With reference to the data above and your knowledges of
economics, assess whether supply is likely to more price elastic for
textiles than for agricultural products. (9’)