module 46 Income Effects, Substitution Effects, and Elasticity 465
Section 9 Behind the Demand Curve: Consumer Choice- If a 2% change in the price of a good leads to a 10% change in
the quantity demanded of a good, what is the value of price
elasticity of demand?
a. 0.02
b. 0.2
c. 5
d. 10
e. 20Tackle the Test: Free-Response Questions
- a. Define the price elasticity of demand and provide the
formula for calculating the price elasticity of demand using
the midpoint method.
b. Refer to the table provided. Using the midpoint method,
calculate the price elasticity of demand for good X.
c. Based on your calculation of price elasticity of demand in
part b, if price increases by 10%, in what direction and by
what percentage will quantity demanded change?
Good X
Price Quantity demanded
$2 800
$4 500
Answer (5 points)
1 point:The price elasticity of demand measures the responsiveness of the
quantity demanded to price changes.
1 point:(Change in quantity demanded/average quantity demanded)/(change in
price/average price)
1 point:0.69
1 point:Decrease
1 point:6.9%
- Assume the price of an inferior good increases.
a. In what direction will the substitution effect change the
quantity demanded? Explain.
b. In what direction will the income effect change the
quantity demanded? Explain.
c. Given that the demand curve for the good slopes
downward, what is true of the relative sizes of the income
and substitution effects for the inferior good? Explain.