AP Microeconomics Review: Price Elasticity of Demand Questions

📚 Quick Study Guide

• 📈 Price Elasticity of Demand (PED) measures the responsiveness of the quantity demanded of a good or service to a change in its price.
• ➗ Formula: $PED = \frac{\% \; Change \; in \; Quantity \; Demanded}{\% \; Change \; in \; Price}$
• 🧮 Calculating Percentage Change: $\% \; Change = \frac{New \; Value - Old \; Value}{Old \; Value} * 100$
• 📏 PED > 1: Elastic (Quantity demanded is highly responsive to price changes).
• 📉 PED < 1: Inelastic (Quantity demanded is not very responsive to price changes).
• 🤝 PED = 1: Unit Elastic (Percentage change in quantity demanded is equal to the percentage change in price).
• ♾️ PED = ∞: Perfectly Elastic (Consumers will buy all of a product at a certain price, but none if the price increases).
• 🚫 PED = 0: Perfectly Inelastic (Quantity demanded does not change when the price changes).
• ⭐ Determinants of PED: Availability of substitutes, necessity vs. luxury, proportion of income spent on the good, and time horizon.

Practice Quiz

1. Which of the following best describes a good with a price elasticity of demand of 2.5?

   1. Inelastic
   2. Unit elastic
   3. Elastic
   4. Perfectly inelastic

2. If the price of a product increases by 10% and the quantity demanded decreases by 5%, what is the price elasticity of demand?

   1. -0.5
   2. -2
   3. 0.5
   4. 2

3. Which of the following goods is most likely to have an inelastic demand?

   1. Luxury car
   2. Movie tickets
   3. Prescription medication
   4. Designer clothing

4. If a business increases the price of its product and total revenue decreases, the demand for its product is:

   1. Inelastic
   2. Elastic
   3. Unit elastic
   4. Perfectly inelastic

5. Which of the following factors tends to make demand more elastic?

   1. The good is a necessity.
   2. There are few available substitutes.
   3. The time horizon is short.
   4. The good represents a large portion of the consumer's income.

6. What does it mean if the price elasticity of demand for a good is 0?

   1. Demand is perfectly elastic.
   2. Demand is unit elastic.
   3. Demand is perfectly inelastic.
   4. Demand is elastic.

7. Suppose the price of gasoline increases from $3.00 to $3.30 per gallon, and the quantity demanded falls from 1000 to 900 gallons. What is the price elasticity of demand for gasoline?

   1. -0.33
   2. -0.5
   3. -1.0
   4. -2.0