Elasticity and Market Outcomes — High School Economics practice questions

The price of a life-saving insulin rises 15% and quantity demanded falls just 1.5%. Price elasticity of demand is:

1. About 0.1 — highly inelastic, consistent with a necessity with no close substitutes
2. About 10 — highly elastic
3. About 1 — unit elastic
4. Zero — perfectly inelastic

Answer: A — About 0.1 — highly inelastic, consistent with a necessity with no close substitutes

A) |Ed| = |−1.5% / 15%| = 0.1, deeply inelastic. Matches insulin (necessity, no substitutes, small budget share for many). B) Reverses the ratio — classic trap. C) Would require equal percentage changes. D) Only zero if quantity didn't change AT ALL.

If the price of gasoline rises by 10% and quantity demanded falls by 2%, the price elasticity of demand is:

1. About 5 — highly elastic
2. About 1 — unit elastic
3. About 0.2 — inelastic, consistent with gasoline as a short-run necessity with few substitutes
4. Exactly zero — perfectly inelastic

Answer: C — About 0.2 — inelastic, consistent with gasoline as a short-run necessity with few substitutes

C) |%ΔQ / %ΔP| = |−2% / 10%| = 0.2, which is inelastic (|E|<1). Matches gasoline's textbook short-run profile. A) Would require quantity falling 50%. B) Equal % changes. D) Quantity did change.

Consumer surplus in a competitive market is best described as:

1. The total revenue earned by producers
2. The government's tax revenue
3. The area under the demand curve and ABOVE the equilibrium price, up to the equilibrium quantity
4. Producer's profit

Answer: C — The area under the demand curve and ABOVE the equilibrium price, up to the equilibrium quantity

C) Consumer surplus = willingness to pay MINUS what they actually pay, summed across all units bought. A) Total revenue is P×Q. B) Tax revenue is a policy outcome. D) Producer surplus, a different concept.

A tax imposed on a good with PERFECTLY INELASTIC demand will be borne:

1. Entirely by consumers — they cannot reduce quantity, so producers pass 100% of the tax through
2. Entirely by producers
3. Equally between consumers and producers
4. By neither party — inelastic goods can't be taxed

Answer: A — Entirely by consumers — they cannot reduce quantity, so producers pass 100% of the tax through

A) Perfectly inelastic demand = vertical demand curve. Buyers absorb the full tax through higher prices; quantity is unchanged. B) Reverses the incidence. C) 50/50 only under specific elasticity conditions. D) They can be taxed — heavily.

Deadweight loss from a per-unit tax will be LARGEST when:

1. Demand and supply are both perfectly inelastic
2. Both demand and supply are relatively ELASTIC — small tax pushes big changes in quantity, wasting many mutually beneficial trades
3. Demand is elastic but supply is perfectly inelastic
4. The tax is very small

Answer: B — Both demand and supply are relatively ELASTIC — small tax pushes big changes in quantity, wasting many mutually beneficial trades

B) Elastic sides mean quantity shrinks a lot, wiping out many gains-from-trade — DWL is large. A) Inelastic sides = quantity barely changes = DWL near zero. C) Perfectly inelastic supply → no quantity change → no DWL. D) Larger tax = larger DWL.

For a good with ELASTIC demand (|Ed| > 1), a price INCREASE will:

1. Raise total revenue
2. Have no effect on total revenue
3. Increase quantity demanded
4. Reduce total revenue — quantity falls by a larger percentage than price rises

Answer: D — Reduce total revenue — quantity falls by a larger percentage than price rises

D) Elastic demand: %ΔQ (down) exceeds %ΔP (up), so P×Q falls. A) That's the inelastic-good response (classic trap). B) Only unit-elastic goods have no revenue change. C) Reverses the law of demand.

Fiscal policy refers to:

1. The Fed's adjustments to interest rates
2. Government spending and taxation decisions intended to influence the economy
3. Bank lending standards
4. Stock market regulation

Answer: B — Government spending and taxation decisions intended to influence the economy

Fiscal policy involves federal spending and taxation by Congress and the President — distinct from monetary policy run by the Fed.

If supply decreases, what happens to equilibrium price and quantity?

Price rises, quantity falls.

Why is the market system efficient (per Adam Smith's 'invisible hand')?

Self-interested actors, guided by prices, allocate resources to their most valued uses without central planning.

What is consumer surplus?

The difference between what consumers are willing to pay and what they actually pay. Area under the demand curve, above the price.