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# Economics Inquiry for HKDSE Microeconomics 2

## Multiple Choice Questions

|!|EM25001|!|
Price elasticity of demand refers to the ratio of
A.

B.

C.

D.

## the percentage change in quantity demanded to the percentage change in price.

##
D
Price elasticity of demand measures the percentage change instead of absolute change. It shows the
responsiveness of quantity demanded when the price of a good changes by 1%.
##

|!|EM25002|!|
According to the law of demand, the price elasticity of demand coefficient
A.

must be positive.

B.

may be positive.

C.

must be negative.

D.

may be negative.

##
C
According to the law of demand, if there is a negative change in price, there will be a positive change
in quantity demanded, holding all other things constant. Therefore, the price elasticity of demand
coefficient must be negative.
##

10-1

## Economics Inquiry for HKDSE Microeconomics 2

Chapter 10 Price Elasticity of Demand and Supply

|!|EM25003|!|
The price elasticity of demand for good Y is 1.4. After a drop in supply, the equilibrium price increases
by 48%. The equilibrium quantity would __________ by __________.
A.

increase 34.2%

B.

decrease 34.2%

C.

decrease 67.2%

D.

increase 67.2%

##
C
A drop in supply leads to an increase in price. According to the law of demand, when price increases,
quantity demanded will decrease, holding all other things constant.
Ed = Percentage change in quantity demanded / Percentage change in price
1.4 = Percentage change in quantity demanded / 48%
Percentage change in quantity demanded = 67.2%
##

|!|EM25004|!|
The price elasticity of demand for a good is 1.6 and the percentage change in price is 60%. The
percentage change in quantity demanded is __________.
A.

26%

B.

86%

C.

96%

D.

99%

##
C
Ed = Percentage change in quantity demanded / Percentage change in price
1.6 = Percentage change in quantity demanded / 60%
Percentage change in quantity demanded = 96%
##

10-2

## Economics Inquiry for HKDSE Microeconomics 2

Chapter 10 Price Elasticity of Demand and Supply

|!|EM25005|!|
The price of a good decreases from \$100 to \$50 and the quantity demanded increases from 200 units to
300 units. The price elasticity of demand for the good is _________.
A.

0.2

B.

0.4

C.

0.6

D.

0.8

##
C
Ed =

## Percentage change in quantity demanded

Percentage change in price

Ed =

300 200
50 100

50 100
200 300

= -0.6
##

|!|EM25006|!|
The arc elasticity of demand for apples is 0.8. When the price changes from \$4 to \$5, the quantity
demanded for apples will ____________ by ____________.
A.

increase 18%

B.

decrease 18%

C.

increase 20%

D.

decrease 20%

10-3

## Economics Inquiry for HKDSE Microeconomics 2

Chapter 10 Price Elasticity of Demand and Supply

##
B
According to the law of demand, when there is a positive change in price, there will be a negative
change in quantity demanded, holding all other things constant. The quantity demanded will decrease
when the price increases from \$4 to \$5.
Ed =

## Percentage change in quantity demanded

Percentage change in price

## Percentage change in quantity demanded

54
0.8 =
( 4 5) / 2
Percentage change in quantity demanded = 18%
##

|!|EM25007|!|
The price elasticity of demand for good Y is 1.6. After a drop in supply, the equilibrium price increases
by 40%, the quantity demanded will __________ by __________.
A.

increase 25%

B.

decrease 25%

C.

increase 64%

D.

decrease 64%

##
D
According to the law of demand, when price increases, quantity demanded will decrease.
Ed =

## Percentage change in quantity demanded

Percentage change in price

1.6 = Ed =

40%

##

10-4

## Economics Inquiry for HKDSE Microeconomics 2

Chapter 10 Price Elasticity of Demand and Supply

|!|EM25008|!|
The table below shows the relationship between the price and quantity demanded for good Y.

Original

20

800

New

40

600

A.

0.18

B.

0.26

C.

0.37

D.

0.43

##
D
Ed =

## Percentage change in quantity demanded

Percentage change in price

Ed =

600 800
20 40

40 20
800 600

= -0.43
##

|!|EM25009|!|
If the price elasticity of demand for a good is zero, this implies its demand curve is
A.

downward sloping.

B.

upward sloping.

C.

vertical.

D.

horizontal.

10-5

## Economics Inquiry for HKDSE Microeconomics 2

Chapter 10 Price Elasticity of Demand and Supply

##
C
If the elasticity of demand for a good is zero, its demand is perfectly inelastic. Since changes in prices
do not lead to changes in quantity demanded, it implies that the demand curve is vertical.
##

|!|EM25010|!|
If the demand curve for a good is a rectangular hyperbola, its demand is
A.

inelastic.

B.

unitary elastic.

C.

perfectly elastic.

D.

perfectly inelastic.

##
B
If the demand curve is a rectangular hyperbola, it means that the percentage change in quantity
demanded for a good is equal to the percentage change in price. The demand for the good is unitary
elastic.
##

|!|EM25011|!|
For good X, once the price increases, the quantity demanded will drop to zero immediately. The price
elasticity of demand for good X is
A.

elastic.

B.

unitary elastic.

C.

perfectly elastic.

D.

perfectly inelastic.

10-6

## Economics Inquiry for HKDSE Microeconomics 2

Chapter 10 Price Elasticity of Demand and Supply

##
C
If the demand is perfectly elastic, an extremely small change in price causes an infinite change in the
quantity demanded. According to the law of demand, a positive change in price will lead to a negative
change in quantity demanded. Therefore, once the price increases, the quantity demanded will drop to
zero immediately.
##

|!|EM25012|!|
At the mid-point of a downward-sloping linear demand curve, the demand is
A.

perfectly inelastic.

B.

unitary elastic.

C.

perfectly elastic.

D.

inelastic.

##
B
At the mid-point of a downward-sloping linear demand curve, the price elasticity of demand coefficient
equals one. So, the demand is unitary elastic.
##

10-7

## Economics Inquiry for HKDSE Microeconomics 2

Chapter 10 Price Elasticity of Demand and Supply

|!|EM25013|!|
The diagram below shows the demand curve for good X.
Unit price (\$)

320

300

1,000

Quantity (units)

The original price and quantity demanded for good X are \$320 and 1,000 units respectively. The price
elasticity of demand for good X over the price range between \$300 and \$320 is elastic. When the price
decreases from \$320 to \$300, the new quantity demanded Y will most likely be ___________ units.
A.

1,025

B.

1,055

C.

1,065

D.

1,095

##
D
Ed =

-1

## Percentage change in quantity demanded

Percentage change in price

## 300 320 1,000 Y

Y > 1,067
If the price range between \$300 and \$320 is elastic, it means a change in price causes a more than
proportionate change in quantity demanded. So, the value of Y must be greater than 1,067. 1,095 is the
##

10-8

## Economics Inquiry for HKDSE Microeconomics 2

Chapter 10 Price Elasticity of Demand and Supply

|!|EM25014|!|
I love drinking milk. I drink a bottle of milk everyday. This habit will not be affected even there is a
change in the price of milk, Dick said. Dicks demand for milk is
A.

elastic.

B.

unitarily elastic.

C.

perfectly inelastic.

D.

perfectly elastic.

##
C
The statement implies that Dicks quantity demanded for milk will remain unchanged even there is a
change in price. His demand for milk is therefore perfectly inelastic.
##

|!|EM25015|!|
The table below shows the relationship between the price and the quantity demanded for apples.

10

12

## Quantity demanded (units)

60

45

If the demand for apples over the above price range is unitary elastic, the values of X and Y will be
_______ and ________ respectively.
A.

75 14

B.

74 16

C.

72 16

D.

62 15

10-9

## Economics Inquiry for HKDSE Microeconomics 2

Chapter 10 Price Elasticity of Demand and Supply

##
C
When the demand for a good is unitary elastic, the percentage change in price is equal to the percentage
change in quantity demanded. Neither an increase nor a decrease in price will cause the sellers total
revenue to change. At the price of \$12, total revenue is \$720 (\$12 60).
X = 720 / 10
= 72
Y = 720 / 45
= 16
##

|!|EM25016|!|
Which of the following shows that the demand for private cars is inelastic?
A.

The quantity demanded for private cars increases when there are more private car suppliers.

B.

When the price of private cars increases, sellers total revenue decreases.

C.

The quantity demanded for private cars increases by 20% when the price drops by 30%.

D.

The quantity demanded for private cars decreases when consumers income falls.

##
C
When the demand for a good is said to be inelastic, the percentage change in quantity demanded (20%)
is smaller than the percentage change in price (30%).
##

|!|EM25017|!|
If demand for a good is inelastic, the percentage increase in price is ___________ than the percentage
____________ in quantity demanded.
A.

larger increase

B.

larger decrease

C.

smaller increase

D.

smaller decrease

10-10

## Economics Inquiry for HKDSE Microeconomics 2

Chapter 10 Price Elasticity of Demand and Supply

##
B
According to the law of demand, an increase in price will result in a decrease in quantity demanded.
For an inelastic demand, the percentage increase in price is larger than the percentage decrease in
quantity demanded.
##

|!|EM25018|!|
In Country X, there was only one fresh chicken supplier, Fresh Chicken Company, in the past. Later,
the government opened up the market. Nowadays, there are four fresh chicken suppliers in the region.
We would expect the elasticity of demand for fresh chicken of Fresh Chicken Company to become
A.

higher.

B.

lower.

C.

the same.

D.

Cannot be determined.

##
A
When the price of fresh chicken of Fresh Chicken Company increases, people may buy from other
suppliers instead. Therefore, the demand for fresh chicken of Fresh Chicken Company would become
more elastic.
##

|!|EM25019|!|
Along a downward-sloping linear demand curve, the price elasticity of demand coefficient
____________ when the price increases.
A.

increases

B.

decreases

C.

## may increase or decrease

D.

remains unchanged

10-11

## Economics Inquiry for HKDSE Microeconomics 2

Chapter 10 Price Elasticity of Demand and Supply

##
A
Along a downward-sloping linear demand curve, demand is unitary elastic at the mid-point, demand is
elastic above the mid-point and demand is inelastic below the mid-point. The price elasticity of demand
increases when price increases along the curve.
##

|!|EM25020|!|
Which of the following would lead to an increase in the price elasticity of demand for medical services
provided by public hospitals?
A.

B.

C.

D.

## More private hospitals provide low-priced medical services.

##
D
Low-priced medical services provided by private hospitals are substitutes for public medical services.
If the price of public medical services increases, people may switch to substitutes. Therefore, the price
elasticity of demand for public medical services becomes greater.
##

|!|EM25021|!|
Which of the following will increase the price elasticity of demand for bus services?
A.

B.

C.

D.

10-12

## Economics Inquiry for HKDSE Microeconomics 2

Chapter 10 Price Elasticity of Demand and Supply

##
B
The services provided by the MTR and bus services are substitutes. When MTR fares are lowered, this
increases the attractiveness of MTR services. People may switch to take the MTR. This will increase
the price elasticity of demand for bus services.
##

|!|EM25022|!|
Suppose the demand for a good is inelastic within the relevant price range. Which of the following is
CORRECT?
(1) When supply decreases, total revenue increases.
(2) When supply decreases, profit increases.
(3) When demand decreases, total revenue increases.

A.

(1) only

B.

(2) only

C.

D.

## (1), (2) and (3)

##
A
Since the demand for the good is inelastic within the relevant price range, its percentage change in
quantity demanded is smaller than the percentage change in price. When supply decreases, the supply
curve shifts to the left. Equilibrium price increases and quantity transacted decreases. Loss in revenue
due to a decrease in quantity transacted is smaller than the gain in revenue due to an increase in price.
Total revenue therefore increases.
##

10-13

## Economics Inquiry for HKDSE Microeconomics 2

Chapter 10 Price Elasticity of Demand and Supply

|!|EM25023|!|
As vegetable crops were severely destroyed by the recent typhoon, price of vegetables increased by
about three times. However, the retailers said that they were not worried about their revenue as they
expected they would get the same revenue. It can be concluded that the demand for vegetables is
A.

unitary elastic.

B.

elastic.

C.

inelastic.

D.

perfectly elastic.

##
A
As the demand for vegetables is unitary elastic, the loss in revenue due to the decrease in quantity
transacted is equal to the gain in revenue due to the increase in price. Therefore, total revenue remains
unchanged.
##

|!|EM25024|!|
When supply of good X increases, the equilibrium price decreases and the quantity transacted
increases. If the total revenue increases, the price elasticity of demand for good X is __________
within the relevant price range.
A.

equal to 0

B.

greater than 1

C.

smaller than 1

D.

equal to 1

##
B
If the demand for good X is elastic, the percentage increase in quantity transacted is greater than the
percentage decrease in price. Hence, the gain in revenue due to the increase in quantity transacted is
greater than the loss in revenue due to the decrease in price. Total revenue therefore increases.
##

10-14

## Economics Inquiry for HKDSE Microeconomics 2

Chapter 10 Price Elasticity of Demand and Supply

|!|EM25025|!|
The diagram below shows the demand curve for good X.
Unit price (\$)

100
80

100 120

Quantity (units)

When the price increases from \$80 to \$100, the elasticity of demand for good X over this price range is
__________________.
A.

perfectly elastic

B.

perfectly inelastic

C.

elastic

D.

inelastic

##
D
From the above diagram, when price increases from \$80 to \$100, the total revenue increases from
\$9,600 (\$80 120) to \$10,000 (\$100 100). As an increase in price leads to an increase in total
revenue, the elasticity of demand within the relevant price range is smaller than 1, i.e., inelastic
demand.
##

10-15

## Economics Inquiry for HKDSE Microeconomics 2

Chapter 10 Price Elasticity of Demand and Supply

|!|EM25026|!|
Stall A sells only good X and good Y. The original price and quantity demanded for good X are \$20 and
30 units respectively. The original price and quantity demanded for good Y are \$40 and 50 units
respectively. When both of their prices increase by \$10, both of their quantity demanded decrease by 20
units. Which of the following statements is CORRECT?
A.

The price elasticity of demand for good X and good Y are the same.

B.

C.

## The demand for good X is more elastic than that of good Y.

D.

The total revenue of seller increases as the prices of both goods increase.

##
C
Ed =

## Percentage change in quantity demanded

Percentage change in price

Ed for good X =

10 30 20 30

30 20 30 10

= -2.5
Ed for good Y =

30 50 40 50

50 40 50 30

= -2.25
The absolute value of the elasticity of demand coefficient should be considered, so the demand for
good X is more elastic than that of good Y.
Option A is incorrect. Although the absolute change in price and quantity demanded of the two goods
are the same, the percentage change in price and quantity demanded should be considered.
Option D is incorrect. Since the demand for both goods are elastic, i.e. Ed > 1, the loss in revenue due
to the decrease in quantity demanded is larger than the gain in revenue due to the increase in price. The
total revenue of seller will fall if the price increases.
##

10-16

## Economics Inquiry for HKDSE Microeconomics 2

Chapter 10 Price Elasticity of Demand and Supply

|!|EM25027|!|
The table below shows the relationship between the price and total revenue of good X.

## Unit price (\$)

Total revenue (\$)

10

25

2,000

4,500

Within the above price range, the elasticity of demand for good X is ____________.
A.

0.12

B.

0.14

C.

0.21

D.

0.24

##
A
The quantity demanded for \$10 and \$25 are 200 and 180 units respectively.
Ed

180 200
10 25

25 10
200 180

= -0.12
##

|!|EM25028|!|
I love eating ice-cream. However, I only spend a fixed amount of my pocket money on buying icecream. My decision wont be affected even when there is a change in the price of ice-cream, Joyce
said. Joyces demand for ice cream was
A.

perfectly elastic.

B.

unitary elastic.

C.

perfectly inelastic.

D.

elastic.

##
B
Joyces statement implies that her spending (total expenditure) on ice-cream would remain unchanged
even there was a change in price. The demand was unitary elastic

10-17

## Economics Inquiry for HKDSE Microeconomics 2

Chapter 10 Price Elasticity of Demand and Supply

##
|!|EM25029|!|
Suppose the demand curve for good X is a straight line. Point A is below the mid-point of the demand
curve where the price and total revenue are \$4 and \$200 respectively. If the price decreases from \$4 to
\$3, total revenue
A. will be greater than \$200.
B. will be smaller than \$200.
C. will be equal to \$200.
D.

## will remain unchanged.

##
B
Below the mid-point of a linear demand curve, the price elasticity of demand is smaller than one which
is inelastic. When price decreases, the gain in revenue due to the increase in quantity demanded is
smaller than the loss in revenue due to the decrease in price. Total revenue will therefore decrease and
will be smaller than \$200 (the original revenue).
##

|!|EM25030|!|
Suppose the demand curve for good Y is a straight line. At point B, the price and total revenue are \$10
and \$400 respectively. If the price decreases to \$8, the total revenue will be larger than \$400. Point B is
A.

B.

C.

D.

## below or above the mid-point of the demand curve.

##
C
If point B is above the mid-point of demand curve, that means the demand is elastic, when price
decreases, the gain in revenue due to the increase in quantity demanded is larger than the loss in
revenue due to the decrease in price, total revenue will therefore increase.
##

10-18

## Economics Inquiry for HKDSE Microeconomics 2

Chapter 10 Price Elasticity of Demand and Supply

|!|EM25031|!|
The table below shows the price of strawberries and the total revenue.

10

12

## Total revenue (\$)

60

If the demand for strawberries is perfectly inelastic over the above price range, the value of X will be
_______.
A.

\$30

B.

\$40

C.

\$50

D.

\$60

##
C
At the price of \$12, quantity transacted is 5 units (\$60 / \$12). If the demand is perfectly inelastic,
quantity demanded remains unchanged when price changes. At the price of \$10, the quantity transacted
is also 5 units. Total revenue will be \$50 (\$10 5).
##

|!|EM25032|!|
Due to technological improvement, the cost of producing high definition televisions falls. The sellers
total revenue will increase if the price elasticity of demand is
(1) elastic.
(2) inelastic.
(3) perfectly inelastic.
(4) perfectly elastic.

A.

(1) only

B.

(3) only

C.

D.

10-19

## Economics Inquiry for HKDSE Microeconomics 2

Chapter 10 Price Elasticity of Demand and Supply

##
C
For (1), when the production costs of producing high definition televisions fall, supply increases. Given
a downward-sloping demand curve, equilibrium price decreases and quantity transacted increases. If
the demand is elastic, the gain in revenue due to the increase in quantity transacted is larger than the
loss in revenue due to the decrease in price. Total revenue will increase.
For (4), if the demand is perfectly elastic, the demand curve is horizontal. The price remains unchanged
and quantity transacted increases when there is an increase in supply. Total revenue will increase.
##

|!|EM25033|!|
In Country A, all medical services are provided by private hospitals. Recently, several new private
hospitals opened. Total revenue of private hospitals will
A.

decrease.

B.

increase.

C.

remain unchanged.

D.

be uncertain.

##
A
An increase in supply of medical services leads to a decrease in price and an increase in quantity
demanded. Since all medical services are provided by private hospitals, so no substitutes are available.
Also, medical services are a necessity to people. The demand for medical services tends to be inelastic.
The gain in revenue due to the increase in quantity demanded is smaller than the loss in revenue due to
the decrease in price. Total revenue will therefore decrease.
##

|!|EM25034|!|
Assume the demand for fresh chicken is elastic. If more fresh chicken is imported, the sellers total
revenue will
A.

decrease.

B.

increase.

C.

remain unchanged.

D.

10-20

## Economics Inquiry for HKDSE Microeconomics 2

Chapter 10 Price Elasticity of Demand and Supply

##
B
If more fresh chicken is imported, the supply curve shifts to the right. Equilibrium price decreases and
quantity transacted increases. Since the demand for fresh chicken is elastic, the gain in revenue due to
the increase in quantity transacted is larger than the loss in revenue due to the decrease in price. Total
revenue will therefore increase.
##

|!|EM25035|!|
The table below shows the price and quantity demanded for lemons.

10

90

80

72

A.

B.

C.

D.

##
C
Ed =

## Percentage change in quantity demanded

Percentage change in price

Ed =

80 90
89

98
90 80

= -1
Over the price range \$9 and \$10,
Ed =

72 80
9 10

10 9
80 72

= -1
The demand is unitary elastic over the above price range, the demand curve can be represented by a
rectangular hyperbola.

10-21

## Economics Inquiry for HKDSE Microeconomics 2

Chapter 10 Price Elasticity of Demand and Supply

##
|!|EM25036|!|
If the demand for a good is perfectly elastic, an increase in supply will lead to
(1) a decrease in price level.
(2) an increase in quantity transacted.
(3) an increase in total revenue.

A.

(1) only

B.

C.

D.

## (1), (2) and (3)

##
C
An increase in supply shifts the supply curve to the right. If the demand is perfectly elastic, it is
represented by a horizontal demand curve. The equilibrium price remains unchanged while the quantity
transacted increases. Total revenue will therefore increase.
##

|!|EM25037|!|
In order to raise the total revenue, the seller of good X cuts the price to boost sales. However, he finds
that his total revenue remains unchanged. It is because
A.

B.

## customers have no response to the price changes.

C.

the demand for good X is unitary elastic within the relevant price range.

D.

## None of the above.

##
C
According to the law of demand, when price decreases, quantity demanded will increase, holding all
other things constant. If the demand is unitary elastic, the gain in revenue due to the increase in
quantity demanded is equal to the loss in revenue due to the decrease in price. Total revenue therefore
remains unchanged.
##

10-22

## Economics Inquiry for HKDSE Microeconomics 2

Chapter 10 Price Elasticity of Demand and Supply

|!|EM25038|!|
The table below shows the relationship between the price of fans and the total revenue.

## Unit price (\$)

Total revenue (\$)

10

20

30

2,500

4,000

4,500

Within the above price range, the absolute value of the price elasticity of demand coefficient of fans is
A.

equal to infinity.

B.

C.

equal to one.

D.

## greater than one.

##
B
Total revenue increases with an increase in price, the demand for fans within the relevant price range is
inelastic, the absolute value of the price elasticity of demand coefficient of fans is smaller than one.
##

|!|EM25039|!|
Suppose the demand curve for good X is a downward-sloping straight line. The price and quantity
demanded are below the mid-point of the demand curve. The seller of good X can increase its total
revenue by ___________ the price.
A.

increasing

B.

decreasing

C.

D.

## neither increasing nor decreasing

##
A
Below the mid-point of a linear downward-sloping demand curve, demand is inelastic. When price
increases, quantity demanded decreases. The loss in revenue due to the decrease in quantity demanded
is smaller than the gain in revenue due to the increase in price. Total revenue therefore increases.

10-23

## Economics Inquiry for HKDSE Microeconomics 2

Chapter 10 Price Elasticity of Demand and Supply

##

|!|EM25040|!|
Because of the good harvest of coffee beans, total revenue of the farms that grow coffee beans
increases. Which of the following statements is CORRECT?
A.

B.

C.

D.

## The supply of coffee beans is inelastic.

##
A
When there is a good harvest, supply of coffee beans increases. This leads to an increase in quantity
transacted and a decrease in price. When the demand for coffee beans is elastic, the percentage increase
in quantity transacted is larger than the percentage decrease in price. The gain in revenue due to the
increase in quantity transacted is larger than the loss in revenue due to the decrease in price. Farmers
total revenue therefore increases.
##

|!|EM25041|!|
Price elasticity of supply measures
A.

B.

C.

D.

## the change in supply to the change in price.

##
C
Price elasticity of supply measures the percentage change instead of absolute change. It measures the
responsiveness of quantity supplied to a change in its price by 1%.
##

10-24

## Economics Inquiry for HKDSE Microeconomics 2

Chapter 10 Price Elasticity of Demand and Supply

|!|EM25042|!|
Which of the following shows that the supply of laptop computers is elastic?
A.

The quantity supplied of laptop computers increases when the price increases.

B.

The quantity supplied of laptop computers increases when there are more suppliers.

C.

The quantity supplied of laptop computers decreases when consumers income falls.

D.

The quantity supplied of laptop computers increases by 50% when the price increases by
30%.

##
D
For an elastic supply, the percentage change in quantity supplied (50%) is greater than the percentage
change in price (30%).
##

|!|EM25043|!|
According to the law of supply, the value of price elasticity of supply
A.

may be positive.

B.

must be positive.

C.

may be negative.

D.

must be negative.

##
B
According to law of supply, when there is a positive change in price, there will be a positive change in
quantity supplied, vice versa, holding all other things constant. The price elasticity of supply coefficient
therefore must be positive.
##

10-25

## Economics Inquiry for HKDSE Microeconomics 2

Chapter 10 Price Elasticity of Demand and Supply

|!|EM25044|!|
The original price and quantity supplied of good X are \$100 and 100 units respectively. When the price
increases to \$200, the new quantity supplied is 300 units. The price elasticity of supply is
A.

0.8

B.

1.1

C.

1.3

D.

1.5

##
D
Es =

## Percentage change in quantity supplied

Percentage change in price

Es =

## 200 100 100 300

= 1.5
##

|!|EM25045|!|
Suppose the price elasticity of supply of a good is 2.5. If the percentage change in quantity supplied is
90%, what is the percentage change in price?
A.

22%

B.

26%

C.

36%

D.

225%

##
C
Es =

2.5 =

## Percentage change in quantity supplied

Percentage change in price
90%
Percentage change in price

##

10-26

## Economics Inquiry for HKDSE Microeconomics 2

Chapter 10 Price Elasticity of Demand and Supply

|!|EM25046|!|
The price elasticity of supply of a good is 0.8. If the price increases from \$40 to \$50, the percentage
change in quantity supplied will be
A.

18%.

B.

20%.

C.

22%.

D.

24%

##
A
Es =

0.8 =

## Percentage change in quantity supplied

Percentage change in price

## Percentage change in quantity supplied

(50 - 40) / [(40 50) / 2]

## Percentage change in quantity supplied = 18%

##

|!|EM25047|!|
Suppose the price elasticity of supply of a good is 1.5. The original price and quantity supplied are \$5
and 30 units respectively. If the price increases from \$5 to \$7, the quantity supplied will increase to
A.

40 units.

B.

50 units.

C.

60 units.

D.

70 units.

##
B
Es =

## Percentage change in quantity supplied

Percentage change in price

1.5 =

y 30
57

75
30 y

y = 50
##

10-27

## Economics Inquiry for HKDSE Microeconomics 2

Chapter 10 Price Elasticity of Demand and Supply

|!|EM25048|!|
The table below shows the relationship between the price and quantity supplied of good X.

Original

10

150

New

30

250

A.

0.3

B.

0.5

C.

0.7

D.

0.9

##
B
Es =

## Percentage change in quantity supplied

Percentage change in price

Es =

250 150
10 30

30 10
150 250

= 0.5
##

|!|EM25049|!|
Because of the outbreak of a new flu strain, the price of facemask of a particular brand increased by
60% and the quantity transacted increased from 1,200 units to 1,800 units.
Within the above price range, elasticity of ___________ of facemask is ____________.
A.

demand elastic

B.

demand inelastic

C.

supply elastic

D.

supply inelastic

10-28

## Economics Inquiry for HKDSE Microeconomics 2

Chapter 10 Price Elasticity of Demand and Supply

##
D
When there is an outbreak of new flu strain, the demand for mask increases. The equilibrium price
increases. According to the law of supply, holding all other things constant, when the price increases,
quantity supplied will increase.
Es =

## Percentage change in quantity supplied

Percentage change in price

Es =

## 1,800 1,200 /[(1,200 1,800) / 2]

60%

= 0.67
The elasticity of supply is inelastic (Es<1).
##

|!|EM25050|!|
Recently, the demand for beef increased. Though the quantity of beef sold remained constant, my total
revenue increased, a beef seller said. In this case, the elasticity of supply of beef was
A.

elastic.

B.

unitary elastic.

C.

perfectly elastic.

D.

perfectly inelastic.

##
D
When the demand for beef increased, equilibrium price increased. Since the supply was perfectly
inelastic, the quantity transacted remained unchanged when price changed. Total revenue therefore
increased.
##

|!|EM25051|!|
If the linear supply curve starts from the origin, the supply is
A.

perfectly inelastic.

B.

perfectly elastic.

C.

unitary elastic.

D.

inelastic.

10-29

## Economics Inquiry for HKDSE Microeconomics 2

Chapter 10 Price Elasticity of Demand and Supply

##
C
A unitary elastic supply curve can be represented by any linear supply curve passing through the origin.
##

|!|EM25052|!|
Because of cold weather, the demand for ice cream decreases. The price of ice cream decreases from
\$12 to \$10 and the quantity transacted decreases from 100 units to 80 units. The price elasticity of
____________ is _____________.
A.

demand elastic

B.

demand inelastic

C.

supply elastic

D.

supply inelastic

##
C
Es =

## Percentage change in quantity supplied

Percentage change in price

Es =

80 100 12 10

10 12 100 80

= 1.22
Since the elasticity of supply coefficient is larger than one, the price elasticity of supply is elastic.
##

|!|EM25053|!|
Once the price of good X decreases, the quantity supplied of the good drops to zero immediately. The
price elasticity of supply of the good is
A.

perfectly inelastic.

B.

perfectly elastic.

C.

unitary elastic.

D.

inelastic.

10-30

## Economics Inquiry for HKDSE Microeconomics 2

Chapter 10 Price Elasticity of Demand and Supply

##
B
If the price elasticity of supply of a good is perfectly elastic, an extremely small change in price leads
to an infinite change in the quantity supplied. Therefore, the sellers do not sell any of the good when
the price decreases.
##

|!|EM25054|!|
The supply of Monets paintings tends to be
A.

elastic.

B.

inelastic.

C.

perfectly elastic.

D.

perfectly inelastic.

##
D
The quantity supplied of the paintings of a deceased artist cannot adjust according to their prices.
Therefore, their supply tends to be perfectly inelastic.
##

10-31

## Economics Inquiry for HKDSE Microeconomics 2

Chapter 10 Price Elasticity of Demand and Supply

|!|EM25055|!|
The diagram below shows the supply curve of good X.
Unit price (\$)

6
4

Quantity (units)

## According to the above diagram, the value of Y will be __________.

A.

B.

C.

10

D.

11

##
B
Since the supply curve passes through the origin, it means that the supply of good X is unitary elastic.
The price elasticity of supply is equal to one.
1=

Y 6 46

6 4 6Y

Y=9
##

10-32

## Economics Inquiry for HKDSE Microeconomics 2

Chapter 10 Price Elasticity of Demand and Supply

|!|EM25056|!|
The table below shows the relationship between the price and the quantity supplied of pineapples.

15

16

## Quantity supplied (units)

60

If the supply of pineapples is inelastic over the price range above, the value of Y will most likely be
__________.
A.

62

B.

64

C.

66

D.

68

##
A
0<

Y 60 15 16

<1
16 15 60 Y

0 <Y < 64
Since the supply is inelastic, the value of Y must be smaller than 64 but larger than 60. Option A is the
##

|!|EM25057|!|
Since people are afraid of eating fake eggs, people consume fewer eggs. The price of eggs decreased by
40% and the quantity transacted decreased by 55%. We can conclude that the price elasticity of demand
A.

is elastic.

B.

is inelastic.

C.

is unitary elastic.

D.

cannot be determined.

10-33

## Economics Inquiry for HKDSE Microeconomics 2

Chapter 10 Price Elasticity of Demand and Supply

##
D
Since people are afraid of eating fake eggs, the demand for egg decreases. Given an upward-slopping
supply curve, both the equilibrium price and the quantity transacted will decrease. From the
information above, we can conclude that the price elasticity of supply is elastic since percentage change
in quantity supplied (55%) is larger than the percentage change in price (40%). However, we cannot tell
the price elasticity of demand.
##

|!|EM25058|!|
The following table shows the price and quantity supplied of apple juice.

11

12

13

## Quantity supplied (units)

19

21

23

Within the above price range, which of the following statements about apple juice is CORRECT?
A.

The supply curve of apple juice is a linear line passing through the origin.

B.

C.

D.

10-34

## Economics Inquiry for HKDSE Microeconomics 2

Chapter 10 Price Elasticity of Demand and Supply

##
B
Es =

## Percentage change in quantity supplied

Percentage change in price

## Es over the price range of \$11 and \$12

Es =

21 19 11 12

12 11 19 21

= 1.15
Es over the price range of \$12 and \$13
Es =

23 21 12 13

13 12 21 23

= 1.14
The price elasticity of supply is elastic.
##

|!|EM25059|!|
Firm A and firm B are in the same industry. Firm A has spare production capacity while firm B does
not. From the information above, we can conclude that the ____________ for/of firm A is more
___________ than that of firm B.
A.

demand elastic

B.

demand inelastic

C.

supply elastic

D.

supply inelastic

##
C
The supply of firm A (a firm with spare production capacity) tends to be more elastic than firm B (a
firm without spare production capacity). It can increase production flexibly by making use of the spare
production capacity.
##

10-35

## Economics Inquiry for HKDSE Microeconomics 2

Chapter 10 Price Elasticity of Demand and Supply

|!|EM25060|!|
When the price of good X increases, some firms are attracted to the market and they enter the market
easily. The price elasticity of ____________ of good X tends to ___________.
A.

supply decrease

B.

demand decrease

C.

supply increase

D.

demand increase

##
C
With the same increase in price, if firms can enter the market easily, the market quantity supplied will
increase by a greater extent. Hence, the supply of the good becomes more elastic.
##

10-36

## Economics Inquiry for HKDSE Microeconomics 2

Chapter 10 Price Elasticity of Demand and Supply

Short Questions
|!|ES25001|!|
The price elasticity of demand coefficient is always negative. Do you agree with this statement?
Explain.

(3 marks)

##
Yes. According to the law of demand, an increase in price will lead to a decrease in quantity demanded,
vice versa, holding all other things constant. Price and quantity demanded of a good are negatively
related. Therefore, the price elasticity of demand coefficient is always negative.

(3 marks)

##

|!|ES25002|!|
(a)

## What is price elasticity of demand?

(2 marks)

(b) The original price and quantity demanded for good X is \$14 and 50 units respectively. If the price
increases to \$16, its quantity demanded decreases to 40 units. What is the price elasticity of
demand for good X within the above price range? Show your working.

(2 marks)

##
(a)

Price elasticity of demand measures how responsive the quantity demanded for a good to a change
in its price.

(b)

Ed =

Ed =

(2 marks)

## Percentage change in quantity demanded

Percentage change in price

40 50 14 16

16 14 50 40

= -1.67

(2 marks)

##

10-37

## Economics Inquiry for HKDSE Microeconomics 2

Chapter 10 Price Elasticity of Demand and Supply

|!|ES25003|!|
The table below shows the relationship between the price and quantity demanded of good X.

(a)

## Quantity demanded (units)

Original

20

400

New

40

250

What is the arc elasticity of demand for good X within the above price range? Show your
working.

(c)

## Which type of price elasticity of demand does good X belong to?

(2 marks)
(2 marks)
(1 mark)

##
(a)

Ed =

250 400
20 40

40 20
400 250

= -0.69

(2 marks)

(b) The absolute value of arc elasticity of demand coefficient of good X is 0.69, implying that a 1%
increase in price of the good will bring about a 0.69% decrease in quantity demanded.
(c)

(2 marks)

Since the absolute value of arc price elasticity of demand coefficient is smaller than one, the
demand is inelastic within the relative price range.

(1 mark)

##

|!|ES25004|!|
(a)

The original price and quantity demanded of good X are \$320 and 1,000 units respectively. When
there is an increase in supply, the new price and quantity demanded become \$300 and 1,075 units.
Calculate the arc elasticity of demand.

(2 marks)
(3 marks)

10-38

## Economics Inquiry for HKDSE Microeconomics 2

Chapter 10 Price Elasticity of Demand and Supply

##
(a)

Ed =

1,075 1,000
320 300

300 320
1,000 1,075

= -1.12

(2 marks)

(b) As the demand is elastic (Ed = 1.12), when there is a decrease in price, the gain in revenue due to
the increase in quantity demanded [\$300 (1,075 1,000) = \$22,500] is larger than the loss in
revenue due to the decrease in price [\$(320 300) 1,000 = 20,000], total revenue will therefore
increase.

(3 marks)

##

|!|ES25005|!|
The following tables show the demand schedules for ice cream and coffee.
Demand schedule for ice cream

## Quantity demanded (units)

20

25

14

(a)

What are the price elasticities of demand for ice cream and coffee within the above price ranges?

(4 marks)

(b) State ONE reason to explain the difference of the price elasticity of demand between these two
goods.

(2 marks)

##
(a)

## Ed for ice cream =

1 3
20 25

25 20
3 1

= -4.5
Ed for coffee =

(2 marks)

3 4 9 14

14 9
43

= -0.66

(2 marks)

(b) The demand for coffee is more inelastic than the demand for ice cream because people tend to be
more addicted to coffee than ice cream.
Or any other reasonable answer with explanation.

(2 marks)

##

10-39

## Economics Inquiry for HKDSE Microeconomics 2

Chapter 10 Price Elasticity of Demand and Supply

|!|ES25006|!|
The table below shows the relationship between the price and quantity demanded of noodles in a
Chinese restaurant.

(a)

## Quantity demanded (units)

20

45

24

30

Within the price range of \$20 to \$24, what is the arc elasticity of demand for noodles? Show your
working.

(2 marks)

(b) Should the owner raise the price from \$20 to \$24 in order to raise the total revenue? Explain.
(3 marks)

##
(a)

Ed =

30 45 20 24

= -2.2
24 20 45 30

(2 marks)

(b) No.
Since the demand for noodles is elastic (Ed = 2.2), when price increases, the loss in revenue due to
the decrease in quantity demanded [\$24 (45 30) = \$360] is larger than the gain in revenue due
to the increase in price [\$(24 20) 30 = \$120], total revenue will decrease.

(3 marks)

##

|!|ES25007|!|
Different boutiques have different strategies for raising their total revenue. Most of them offer great
discounts to customers. However, not all of them enjoy a gain in total revenue. Using the concept of
price elasticity, explain with the aid of a diagram, under what condition the boutiques will gain from
lowering the price.

(7 marks)

10-40

## Economics Inquiry for HKDSE Microeconomics 2

Chapter 10 Price Elasticity of Demand and Supply

##
If the demand for clothing is elastic, sellers revenue will increase if price decreases.
When the price decreases from P0 to P1, quantity demanded increases from Q0 to Q1. As the percentage
increase in quantity demanded is larger than the percentage decrease in price, the gain in revenue due to
the increase in quantity demanded is larger than the loss in revenue due to the decrease in price. Total
revenue will therefore increase.

(4 marks)

Unit price

Gain in revenue
Loss in revenue

P0
P1

Q0

Q1

Quantity

(3 marks)
##

|!|ES25008|!|
Mr. Wong is the owner of a bakery. However, the performance of his business is not satisfactory.
Explain whether he can increase his total revenue by raising the price of his cakes if the
(a)

## price elasticity of demand for his cakes is one;

(b) price elasticity of demand for his cakes is smaller than one.

(3 marks)
(3 marks)

10-41

## Economics Inquiry for HKDSE Microeconomics 2

Chapter 10 Price Elasticity of Demand and Supply

##
(a)

He cannot increase total revenue by raising the price of his cakes if the price elasticity of demand
is one, i.e. unitary elastic. When price increases, quantity demanded decreases. As the percentage
decrease in quantity demanded is equal to the percentage increase in price, the loss in revenue due
to the decrease in quantity demanded is equal to the gain in revenue due to the increase in price.
Total revenue therefore remains unchanged.

(3 marks)

(b) He can increase total revenue by raising the price of his cakes if the price elasticity of demand is
smaller than one, i.e. inelastic. When price increases, quantity demanded decreases. As the
percentage decrease in quantity demanded (transacted) is smaller than the percentage increase in
price, the loss in revenue due to the decrease in quantity demanded is smaller than the gain in
revenue due to the increase in price. Total revenue therefore increases.

(3 marks)

##

|!|ES25009|!|
Explain, with the aid of separate diagrams, how a decrease in supply will affect a sellers total revenue
if
(a)

(6 marks)

## (b) the demand for his goods is perfectly elastic.

(6 marks)

##
(a)

If the demand for his goods is perfectly inelastic, the demand curve is vertical. When supply
decreases from S0 to S1, equilibrium price increases from P0 to P1 and the quantity transacted
remains unchanged at Q. Thus the sellers total revenue will increase.

(3 marks)

Unit price

Gain in revenue

S1
S0

P1
P0

Quantity

(3 marks)

10-42

## Economics Inquiry for HKDSE Microeconomics 2

Chapter 10 Price Elasticity of Demand and Supply

(b) If the demand for his goods is perfectly elastic, the demand curve is horizontal. When supply
decreases from S0 to S1, equilibrium quantity decreases from Q0 to Q1 and price remains
unchanged at P. Thus the sellers total revenue will decrease.

(3 marks)

Unit price

Loss in revenue

S1
S0
D

Q1

Q0

Quantity

(3 marks)
##

|!|ES25010|!|
Because of good weather, there was a good harvest of tomatoes. Farmers growing tomatoes enjoyed a
gain in total revenue. With the concept of price elasticity, explain why there is a rise in total revenue
with the aid of a diagram.

(8 marks)

10-43

## Economics Inquiry for HKDSE Microeconomics 2

Chapter 10 Price Elasticity of Demand and Supply

##
When there is a good harvest, supply of tomatoes increases. The supply curve shifts to the right from S0
to S1. The equilibrium price decreases from P0 to P1 and the quantity transacted increases from Q0 to Q1.
If the demand for tomatoes is elastic, the percentage increase in quantity transacted is greater than the
percentage decrease in price. Hence the gain in revenue due to the increase in quantity transacted is
larger than the loss in revenue due to the decrease in price. Total revenue therefore increases. (4 marks)
Unit price

Gain in revenue
Loss in revenue

S0
S1

P0
P1

Q0

Q1

Quantity

(4 marks)

##

|!|ES25011|!|
(a)

In recent years, due to the price of paper increases continuously, the price of textbooks keeps
rising. Eventually textbook sellers total revenue rises. With the concept of price elasticity,
illustrate the above phenomenon with the aid of a diagram.

(8 marks)

(b) State ONE reason to explain why textbooks tend to have such price elasticity of demand.
(2 marks)

10-44

## Economics Inquiry for HKDSE Microeconomics 2

Chapter 10 Price Elasticity of Demand and Supply

##
(a)

Paper is one of the important raw materials used in printing textbooks. When the price of paper
increases, the cost of production increases. The supply curve shifts to the left from S0 to S1. The
equilibrium price increases from P0 to P1 and the quantity transacted decreases from Q0 to Q1. As
the demand for textbooks tends to be inelastic, the percentage decrease in quantity transacted is
smaller than the percentage increase in price. Hence the loss in revenue due to the decrease in
quantity transacted is smaller than the gain in revenue due to the increase in price. Total revenue
therefore increases.

(4 marks)

Unit price

Gain in revenue
Loss in revenue

S1
S0

P1
P0

D
0

Q1 Q0

(4 marks)

Quantity

## (b) Possible reason:

- It is difficult for people to find substitutes for textbooks.
- Textbooks are a necessity for students.
- Any reasonable answer with explanation.
(Mark the FIRST point only, 2 marks)
##

|!|ES25012|!|
(a)

Explain why price elasticity of supply is used instead of the law of supply in measuring how
responsive the quantity supplied of a good to a change in its price.

(2 marks)

(b) Find the percentage change in price if the price elasticity of supply of a good is 1.6 and the
percentage change in quantity supplied is 80%. Show your working.

(2 marks)

10-45

## Economics Inquiry for HKDSE Microeconomics 2

Chapter 10 Price Elasticity of Demand and Supply

##
(a)

The law of supply only shows that price and quantity supplied are positively related, holding all
other things constant. However, it does not show the exact amount that the quantity supplied will
change.

(1 mark)

Price elasticity of supply measures the ratio of the percentage change in quantity supplied to the
percentage change in price.
(b)

Es =

## Percentage change in quantity supplied

Percentage change in price

1.6 =

80%
Percentage change in price

(1 mark)

(2 marks)

##

|!|ES25013|!|
(a)

## What is arc elasticity of supply?

(2 marks)

(b) According to the law of supply, can the price elasticity of supply coefficient be negative? Explain.
(3 marks)

##
(a)

Arc elasticity of supply refers to the measurement of price elasticity of supply over a certain price
range of a supply curve.

(2 marks)

(b) No.
According to the law of supply, when there is a positive change in price, there will be a positive
change in quantity supplied, vice versa, holding all other things constant. As price and quantity
supplied are positively related, the price elasticity of supply coefficient is therefore always
positive.

(3 marks)

##

10-46

## Economics Inquiry for HKDSE Microeconomics 2

Chapter 10 Price Elasticity of Demand and Supply

|!|ES25014|!|
The table below shows the relationship between the price and quantity supplied of good A.

(a)

## Quantity supplied (units)

Original

80

350

New

100

400

Within the above price range, what is the arc elasticity of supply for good A?

(2 marks)

## (b) Which type of price elasticity of supply does it belong to?

(1 mark)

##
(a)

Es =

400 350
80 100

= 0.6
100 80
350 400

(2 marks)

(b) Since the price elasticity of supply coefficient is smaller than one, it is an inelastic supply.
(1 mark)
##

10-47

## Economics Inquiry for HKDSE Microeconomics 2

Chapter 10 Price Elasticity of Demand and Supply

|!|ES25015|!|
Unit price

S0

S1

D
0

Quantity

(a)

## What is arc elasticity of supply?

(b)

(2 marks)

Compare the price elasticity of supply of good X and good Y. Which goods supply is more
elastic? Explain.

(3 marks)

##
(a)

Arc elasticity of supply refers to the measurement of price elasticity of supply over a certain price
range of a supply curve.

## (b) The price elasticity of both goods is the same.

(2 marks)
(1 mark)

Since both supply curves are linear lines passing through the origin, the supply of good X and the
supply of good Y are both unitary elastic.

(2 marks)

##

|!|ES25016|!|
When the price of good X increases from \$12 to \$14, its quantity supplied increases from 100 units to
130 units.
(a)

Within the above price range, calculate the price elasticity of supply of good X. Show your
working.

(2 marks)

(b) State TWO possible reasons to explain why good X has such price elasticity of supply. (4 marks)

10-48

## Economics Inquiry for HKDSE Microeconomics 2

Chapter 10 Price Elasticity of Demand and Supply

##
(a)

Es =

130 100
12 14

14 12
100 130

= 1.70

(2 marks)

## (b) Possible reasons:

- Availability of spare production capacity. Firms with spare production capacity tend to have
elastic supply.
- Nature of the industry or product. Firms in labour-intensive industries tend to have elastic
supply.
(Mark the FIRST TWO points only, 2 marks each)
##

|!|ES25017|!|
Compare the elasticity of supply of the items in each of the following pairs. Explain your answer.
(a)

(3 marks)
(3 marks)

##
(a)

## The supply of toy cars tends to be more elastic.

(1 mark)

Making toy cars is a labour-intensive industry. Employing more workers to produce more toy cars
takes a shorter time.

(1 mark)

Since the electricity generation is a capital-intensive industry, installing new equipment for
generating more electricity takes a longer time.

(1 mark)

## (b) The supply of cup noodles tends to be more elastic.

(1 mark)

Since vegetables need time to grow, the supply of vegetables cannot increase immediately even if
there is an increase in price.

(1 mark)

Compared with vegetables, producing more cup noodles takes a shorter time.

(1 mark)

##

10-49

## Economics Inquiry for HKDSE Microeconomics 2

Chapter 10 Price Elasticity of Demand and Supply

Long Questions
|!|EL25001|!|
(a)

As the number of fresh chickens imported falls, the price of fresh chickens keeps rising
continuously. With the aid of a diagram, explain how this affects the price, quantity transacted and
total revenue of frozen chickens.

(7 marks)

(b) As fewer fresh chickens will be consumed owing to the price rise, sellers of fresh chickens are
worried about a fall in total revenue. With the concept of price elasticity of demand, explain under
what condition the total revenue of the sellers of fresh chickens will increase with the aid of a
diagram.

(8 marks)

##
(a)

Fresh chickens and frozen chickens are substitutes. When the price of fresh chickens increases,
people may switch to buy frozen chickens. Demand for frozen chickens increases from D0 to D1.
Equilibrium price increases from P0 to P1, quantity transacted increases from Q0 to Q1 and total
revenue increases from P0 Q0 to P1 Q1.

(4 marks)

Unit price

S
P1
P0

D0
0

Q0

Q1

D1
Quantity

(3 marks)

10-50

## Economics Inquiry for HKDSE Microeconomics 2

Chapter 10 Price Elasticity of Demand and Supply

(b) The total revenue of the sellers of fresh chickens will increase if the demand for fresh chickens is
inelastic. When the number of fresh chickens imported falls, supply of fresh chicken decreases.
Supply curve shifts to the left from S0 to S1. Equilibrium price increases from P0 to P1 and the
quantity demanded decreases from Q0 to Q1. If the demand for fresh chickens is inelastic, the
percentage decrease in quantity transacted is smaller the percentage increase in price. Hence the
loss in revenue due to the decrease in quantity demanded is smaller than the gain in revenue due
to the increase in price. Total revenue will therefore increase.

(4 marks)

Unit price

S1

Gain in revenue

S0

Loss in revenue

P1
P0

D
0

Q1 Q0

Quantity

(4 marks)

##

|!|EL25002|!|
Salon A and salon B are located in the same street.
(a) After the opening of salon B, salon A leaves its price unchanged but the owner finds that his total
revenue decreases. With the aid of a diagram, explain the effects of the opening of salon B on
salon A.

(6 marks)

(b) If the demand for the services provided by salon A is inelastic, should the owner offer discounts to
its customers in order to raise total revenue? Explain with the aid of a diagram.
(c)

(6 marks)

Explain the effect of the following events on the price elasticity of demand or price elasticity of
supply of the services provided by salon A.
(i)

(2 marks)
(2 marks)

10-51

## Economics Inquiry for HKDSE Microeconomics 2

Chapter 10 Price Elasticity of Demand and Supply

##
(a)

The services provided by salon A and salon B are substitutes. After the opening of salon B, the
demand for the services provided by salon A decreases. The demand curve shifts to the left from
D0 to D1. Quantity transacted decreases from Q0 to Q1. The total revenue of salon A decreases
from P Q0 to P Q1.

(3 marks)

Unit price

Loss in revenue

D0
D1
0

Q1

Q0

Quantity

(3 marks)

(b) The owner should not offer discounts to customers. Price decreases from P0 to P1 if discount is
offered, quantity demanded increases from Q0 to Q1. If the demand is inelastic, the percentage
increase in quantity demanded is smaller than the percentage decrease in price. Hence the gain in
revenue due to the increase in quantity demanded is smaller than the loss in revenue due to the
decrease in price. Total revenue will thus decrease.

(3 marks)

Unit price
Gain in revenue
Loss in revenue

P0
P1
D
0

Q0 Q1

Quantity

(3 marks)

10-52

## Economics Inquiry for HKDSE Microeconomics 2

Chapter 10 Price Elasticity of Demand and Supply

(c)

(i)

Services provided by salon A and the services provided by the new salon are substitutes.
The price elasticity of demand for the services provided by salon A becomes more elastic
since more substitutes are available in the market. People can easily switch to other salons.

(2 marks)

(ii) When more hair stylists are employed, more services can be provided in a short period of
time when the price increases. The price elasticity of supply of the services provided by
salon A becomes more elastic since there is spare production capacity.

(2 marks)

##

|!|EL25003|!|
In order to boost sales, Trendy magazine lowers its price by \$1 as a promotion. As a result, the
company records a huge rise in total revenue.
(a)

(i)

## (ii) Is the demand for Trendy magazine elastic or inelastic? Explain.

(2 marks)
(3 marks)

(b) There is a rise in the cost of ink. With the aid of a diagram, explain how this affects the total
revenue of the company.
(c)

(8 marks)

Suppose a \$50 supermarket cash coupon is given in the magazine. Is the \$50 supermarket cash
coupon a free good? Explain.

(3 marks)

##
(a)

(i)

Price elasticity of demand measures how responsive is the quantity demanded for a good to a
change in its price.

(2 marks)

## (ii) The elasticity of demand of Trendy magazine is elastic.

(1 mark)

When the demand for a good is elastic, the sellers total revenue will rise if the price
decreases.

(2 marks)

10-53

## Economics Inquiry for HKDSE Microeconomics 2

Chapter 10 Price Elasticity of Demand and Supply

(b) As ink is one of the factors of production in producing magazines. A rise in the cost of ink leads to
an increase in production cost. The supply decreases. The supply curve shifts to the left from S0 to
S1. The equilibrium price increases from P0 to P1 and the quantity transacted decreases from Q0 to
Q1. Since the demand for the magazine is elastic, the percentage decrease in quantity transacted is
greater than the percentage increase in price. Hence the loss in revenue due to the decrease in
quantity transacted is larger than the gain in revenue due to the increase in price. Total revenue
will therefore decrease.

(4 marks)

Unit price
Gain in revenue

S1
S0

Loss in revenue

P1
P0
D

(c)

Q1

Q0

Quantity

## The \$50 supermarket cash coupon is not free goods.

(4 marks)

(1 mark)

The quantity of cash coupon is not sufficient to satisfy all human wants and more cash coupons
are preferred.

(1 mark)

## The provision of cash coupons involves the use of scarce resources.

(1 mark)

##

|!|EL25004|!|
America Fitness and Beauty Fitness are the two biggest fitness centres in an economy. There is keen
competition between America Fitness and Beauty Fitness. In order to increase its competitiveness,
Beauty Fitness lowers the price of its fitness plans to attract more customers.
(a)

Assume the price of fitness plans of America Fitness remains unchanged, explain how the
decrease in price of fitness plans of Beauty Fitness affect the total revenue of America Fitness
with the aid of a diagram.

(6 marks)

(b) With the concept of price elasticity, explain under what condition will a decrease in price lead to a

(c)

## rise in total revenue of Beauty Fitness with the aid of a diagram.

(6 marks)

What type of production does the fitness centres engage in? Explain.

(2 marks)

10-54

## Economics Inquiry for HKDSE Microeconomics 2

Chapter 10 Price Elasticity of Demand and Supply

##
(a)

The fitness plans provided by America Fitness and Beauty Fitness are substitutes. When the price
of fitness plans provided by Beauty Fitness decreases, the demand for fitness plan provided by
America Fitness decreases. The demand curve shifts to the left from D 0 to D1. At the same price,
quantity transacted decreases from Q0 to Q1. Total revenue decreases from P Q0 to P Q1.
(3 marks)

Unit price
Loss in revenue

D1
0

Q1

D0

Q0

Quantity

(3 marks)

(b) If the demand for fitness plan is elastic, a decrease in price will lead to an increase in total
revenue. When price decreases from P0 to P1, quantity demanded increases from Q0 to Q1. If the
demand for fitness plan is elastic, the percentage increase in quantity demanded is larger than the
percentage decrease in price. The gain in revenue due to increase in quantity transacted is larger
than the loss in revenue due to decrease in price. Total revenue will therefore increase.

(3 marks)

Unit price

Gain in revenue
Loss in revenue

P0
P1

Q0

Q1

Quantity

(3 marks)
(c)

## The fitness centres engage in tertiary production.

(1 mark)

The fitness centres provide different kinds of fitness services to their customers.

(1 mark)

##

10-55