Cambridge International AS Level · Economics (9708)

Price elasticity, income elasticity and cross elasticity of demand: Practice Questions

5 multiple-choice questions marked as you go, and 2 written questions with worked solutions. All on Price elasticity, income elasticity and cross elasticity of demand.

7 questions16 marksFree, no account

Question 1

1 mark

If two goods are complements, what is the expected sign of their cross-price elasticity of demand $ (XED) $?

Question 2

1 mark

A firm faces a price elasticity of demand (PED) of $0.6$ for its product. If the firm decides to increase the price of the product by $10\%$, which of the following correctly describes the impact on the quantity demanded and the firm\'s total revenue?

Question 3

1 mark

A specific good is found to have an income elasticity of demand (YED) of $-1.5$ and a cross elasticity of demand (XED) of $+0.8$ with respect to a related Good Z. How should this good and its relationship with Good Z be classified?

Question 4

1 mark

The diagram shows a downward-sloping linear demand curve. As we move down the curve from the price axis (y-intercept) toward the quantity axis (x-intercept), how does the price elasticity of demand (PED) change?

Question 5

1 mark

A company identifies that its product has a price elasticity of demand (PED) of $-1.25$ and an income elasticity of demand (YED) of $+2.0$. If a recession causes average consumer incomes to fall by $5\%$, by what percentage must the company change its price to ensure the quantity demanded remains constant?

Question 6

4 marks

A firm determines that the cross elasticity of demand ($XED$) for its product with respect to a competitor's price is $+1.8$, and its income elasticity of demand ($YED$) is $-0.6$. Explain the economic relationship between the two products and the classification of the firm's product, justifying your answer using the provided coefficients.

Write your answer out first, then check it against the worked solution.

Question 7

7 marks

A manufacturing firm produces two goods: Good A and Good B. The firm currently sells 5,000 units of Good A per month at a price of $\$10$. Market research reveals the following elasticity coefficients for Good A:
- Price Elasticity of Demand (PED): $-0.8$
- Income Elasticity of Demand (YED): $+1.5$
- Cross Elasticity of Demand (XED) with respect to the price of Good B: $-0.5$

(a) If the firm decides to increase the price of Good A by $10\%$, calculate the new quantity demanded and explain the effect on the firm's total revenue. [3]
(b) The economy enters a period of growth where consumer incomes rise by $4\%$. Calculate the resulting percentage change in quantity demanded for Good A and classify the type of good. [2]
(c) Explain the economic relationship between Good A and Good B based on the XED coefficient and describe how a $20\%$ decrease in the price of Good B would affect the demand for Good A. [2]

Write your answer out first, then check it against the worked solution.

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