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Exam questions

Elasticity: exam-style questions

Written in the style of A-level papers. 42 marks. Work on screen and open the answers as you go, or print a copy.

Section A: multiple choice

1Price elasticity of demand is calculated as: [1]

  1. % change in quantity demanded ÷ % change in price
  2. % change in price ÷ % change in quantity demanded
  3. change in quantity demanded ÷ change in price
  4. % change in quantity demanded ÷ % change in income
Answer

A. PED compares the percentage response of quantity demanded with the percentage change in price. The last option is income elasticity.

2The price of a good rises by 10% and quantity demanded falls by 5%. Demand is: [1]

  1. price inelastic, with PED of −0.5
  2. price elastic, with PED of −2
  3. price elastic, with PED of −0.5
  4. price inelastic, with PED of −2
Answer

A. −5% ÷ 10% = −0.5. A value between 0 and −1 is price inelastic.

3Demand for a good is price elastic. A cut in its price will: [1]

  1. raise total revenue
  2. lower total revenue
  3. leave total revenue unchanged
  4. lower quantity demanded
Answer

A. With elastic demand, quantity rises by a larger percentage than price falls, so total revenue rises.

4The cross elasticity of demand between two goods is −0.8. The goods are: [1]

  1. complements
  2. substitutes
  3. both inferior goods
  4. unrelated
Answer

A. A negative XED means a rise in the price of one good reduces demand for the other, so they are used together.

5A good has an income elasticity of demand of +2.1. It is: [1]

  1. an inferior good
  2. a normal good that is income inelastic
  3. a normal good that is income elastic (a luxury)
  4. a good with price elastic demand
Answer

C. YED is positive, so the good is normal, and above 1, so demand rises by a larger percentage than income.

Section B: data and short answer

A cinema raises the price of an evening ticket from £8 to £10. The number of evening tickets it sells each week falls from 2,000 to 1,700.

6Calculate the price elasticity of demand for evening tickets. Show your working. [2]

Mark guidance
  • % change in price = +25% and % change in quantity = −15% (1 mark)
  • PED = −15 ÷ 25 = −0.6 (1 mark)

7Calculate the change in the cinema’s weekly revenue from evening tickets. [2]

Mark guidance
  • Revenue before = £16,000 and after = £17,000 (1 mark)
  • Revenue rises by £1,000 a week (1 mark)

8Explain whether the price rise was in the cinema’s interest. [3]

Mark guidance
  • Demand is price inelastic, so revenue from tickets rose (1 mark)
  • Fewer customers may also lower some costs, such as staff, so profit on tickets may rise further (1 mark)
  • But 300 fewer customers a week means fewer sales of food and drinks, which may outweigh the £1,000 gain (1 mark)

9Incomes in a town rise by 4% and the number of bus journeys falls by 2%. Calculate the income elasticity of demand for bus travel and state what type of good it is. [2]

Mark guidance
  • YED = −2 ÷ 4 = −0.5 (1 mark)
  • Negative, so bus travel is an inferior good in this town (1 mark)

10Explain two reasons why demand for petrol is likely to be price inelastic. [4]

Mark guidance
  • Few close substitutes for drivers who already own a petrol car (1 mark), so they cannot switch away when the price rises (1 mark)
  • It is a necessity for many journeys, such as getting to work (1 mark), so the quantity bought falls by less than the price rises, at least in the short run (1 mark)

11Draw a diagram to show why the same increase in demand raises price more when supply is price inelastic than when it is price elastic. [4]

Mark guidance
  • Two supply curves through the same starting point, one steeper (inelastic) and one flatter (elastic) (1 mark)
  • The same rightward shift of demand drawn on both (1 mark)
  • New equilibria shown, with the price rise larger on the inelastic supply curve (1 mark)
  • Quantity rises more with elastic supply (1 mark)

Section C: extended answer

12Evaluate the importance of price elasticity of demand to a firm deciding whether to change its price. [20]

Mark guidance

A typical split is knowledge 6, application and analysis 6, evaluation 8; check your own board’s scheme.

Analysis could include

  • Link between PED and total revenue: raise price when demand is inelastic, cut it when demand is elastic
  • Use of diagrams showing revenue areas before and after the change
  • Factors that make demand inelastic, such as brand loyalty and few substitutes, and how a firm can create them
  • Use of PED in price discrimination: higher prices in the inelastic market

Evaluation could include

  • Estimates of PED are often unreliable and based on past data
  • PED changes along a straight-line demand curve and over time, being more elastic in the long run
  • Firms care about profit, not revenue: costs change as output changes
  • Rivals’ reactions matter, especially in oligopoly, so ceteris paribus rarely holds
  • Other aims such as market share or reputation may matter more

Levels

Top band: a range of points developed in full chains of reasoning, applied to the context, with judgements that are weighed and supported ("it depends on..."). Middle band: some developed chains but evaluation is one-sided or asserted. Bottom band: points listed or described without chains, little or no evaluation.

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