Unit 1 Microeconomics – Elasticity Test – January 2013
(The first 8 questions require explanations for 4 marks; the final two questions require only the
correct key selected.)
1. If the income elasticity of demand for bus travel is -0.2 and for private car use if +0.5, then a
10% increase in real incomes will lead to:
a) A 2% decrease in demand for bus travel and a 0.5% increase in demand for private car use
b) A 0.2% increase in demand for bus travel and a 5% increase in demand for private car use
c) A 2% increase in demand for bus travel and a 5% decrease in demand for private car use
d) A 2% decrease in demand for bus travel and a 5% increase in demand for private car use
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2. A mobile phone company has 1 million subscribers to its package of services when a monthly
price of £25 is set. The company conducts market research and estimates that the price
elasticity of demand for its subscription services is -2. A price reduction of £5 can be expected
to have what effect on monthly revenue?
a) A reduction of £3 million per month
b) A reduction of £2 million per month
c) An increase of £3 million per month
d) An increase of £2 million per month
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3. The following table shows the income elasticities of demand for selected UK holiday
destinations. It may be deduced from the data that:
Holiday Destination
Bournemouth
Newquay
Margate
Clacton-on-Sea
Income elasticity of demand
2.0
0.6
- 0.4
0.3
a) An increase in UK real income will lead to a less than proportionate increase in demand
for holidays in Bournemouth
b) Holidays in Newquay and Clacton-on-Sea are substitutes
c) Holidays in Margate are an inferior good
d) A decrease in UK real income will lead to a more than proportionate decrease in demand
for holidays in Clacton-on-Sea
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4. The cross elasticity of demand for motor travel following a change in price of rail travel is
likely to be:
a) Positive
b) Zero
c) Negative
d) Unrelated
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5. If the price elasticity of demand for coffee is -0.4 and the cross elasticity of demand between
tea and coffee is 1.4, then a 10% decrease in the price of coffee will cause a:
a) 4% fall in the demand for coffee and the demand for tea to rise by 14%
b) 4% rise in the demand for coffee and the demand for tea to fall by 14%
c) 4% rise in the demand for coffee and the demand for tea to rise by 14%
d) 0.4% rise in the demand for coffee and the demand for tea to fall by 1.4%
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6. Which of the following goods is likely to have the lowest price elasticity of supply?
a) Fresh cut flowers
b) Newspapers
c) Motor vehicles
d) DVD players
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7. In 2004 the price of a barrel of crude oil rose from $20 to $40, leading to a 5% fall in demand
in the UK. The best estimate for price elasticity of demand is:
a) -0.05
b) -0.5
c) -5
d) +0.5
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8. When the manager of a nightclub halved the price of admission he was surprised to find that,
despite reducing his prices by such a large amount, his weekly takings actually rose. This was
because:
a) The demand curve was price elastic
b) The demand curve was perfectly price inelastic
c) The demand curve was unitary price elastic
d) The demand curve was price inelastic
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9. The cross elasticity of demand for DVDs will be negative with respect to:
a) CDs
b) Income
c) Supply of DVDs
d) DVD players
10. The diagram shows how the price elasticity of supply for a renewable good may vary over
time. Which of the following is most likely to be true?
P
S1
S2
Q
a) S1 is a perfectly inelastic supply curve and S2 is a perfectly elastic supply curve
b) S1 is likely to be the short-run and S2 the long-run supply curve
c) S1 is a unitary price elastic supply curve and S2 is a price elastic supply curve
d) Price elasticity of supply remains constant along the supply curve