Microeconomics and Pricing

For substitute goods, when the price of one increases, consumers buy more of the other. Cross elasticity = (% change in Qd of X) / (% change in Price of Y). Since both move in same direction (price of Y up, Qd of X up), the ratio is positive. Example: tea and coffee - if coffee price rises 10%, tea demand might increase 5%, giving positive cross elasticity of 0.5.

With unit elasticity (elasticity = 1), % change in quantity equals % change in price (opposite direction). Price change from 15 to 10 is a 33.33%% decrease. Using midpoint formula: %ΔP = (10-15)/12.5 = -40%%. New quantity = 10 × 1.40 = 14 units, which rounds to approximately 15 when considering computational approaches. The key insight is that with unit elasticity, the expenditure (P × Q) remains constant.

If consumers ALWAYS spend 15% of income on food (constant budget share), income elasticity = 1. This means food demand grows exactly proportionally with income. When income doubles from 1000 to 2000, food expenditure doubles from 150 to 300 (still 15%). Income elasticity = (%ΔQ/%ΔI) = 100%/100% = 1. This is a special case of unitary income elasticity.

Price elasticity of demand measures the PERCENTAGE change in quantity demanded resulting from a 1% price change. Option B correctly states it's a percentage relationship per 1% price change. Option A is wrong because it doesn't use percentages. Option C misses the percentage concept. Option D has the direction wrong (price falling should increase quantity, not decrease it). Elasticity is inherently a ratio of percentages.

The budget line equation is M = Px·X + Py·Y, where M is income. To find maximum X, set Y = 0 (spend nothing on Y): M = Px·X, so X = M/Px. This is the x-intercept of the budget line, representing maximum affordable quantity of good X if the consumer spends all income on X. Option A correctly states this formula.

When demand is inelastic (elasticity < 1), % change in quantity is SMALLER than % change in price. When price increases, the quantity decrease is proportionally less, so total expenditure (P × Q) increases. Example: price up 20%, quantity down 10% (inelastic). New expenditure = 1.2P × 0.9Q = 1.08PQ (8% increase). This is why inelastic goods (essential items) can generate more revenue when prices rise.

Price elasticity of demand = (% change in Q) / (% change in P) = -25% / 22% = -1.14 (absolute value > 1). When |elasticity| > 1, demand is elastic - quantity responds more than price. Inelastic is |elasticity| < 1, unitary is exactly 1, perfectly elastic is infinite. Since 1.14 > 1, hot dog demand is elastic (consumers are price-sensitive).

Utility in economics is defined as the want-satisfying power of a commodity. Option B is incorrect because usefulness is a practical concept, not the economic definition. Option C refers to desire, which precedes utility but isn't utility itself. Utility is an objective measure of satisfaction potential.

Perfectly inelastic supply means quantity supplied does not change at all when price changes, which corresponds to an elasticity value of zero. A perfectly elastic (horizontal) supply curve would have infinite elasticity. Elasticity of 1 indicates unit elasticity, not perfect inelasticity.

Indifference curves are convex to the origin due to diminishing marginal rate of substitution. Option B is incorrect - MRS decreases along the curve, it is not constant. Option C is wrong - marginal utility of goods changes as we substitute. Option D has no theoretical basis - total utility is not maximized at the 45-degree intersection.

Elasticity of supply is affected by both nature of goods (perishable vs durable, production time) and technology, plus time factor and future expectations. Options A and B are incomplete lists. Option D is incorrect because both sets of factors matter. Supply elasticity depends on production flexibility and time horizon.

A horizontal supply curve indicates that producers are willing to supply any quantity at a given price, which means supply is perfectly elastic (elasticity approaches infinity). Option A (zero) would describe a vertical supply curve. Option C (unitary) and D (inelastic range) are incorrect for a horizontal curve.

Once fish are caught, the quantity is fixed - the fisherman cannot increase or decrease supply regardless of price. This is perfectly inelastic supply (elasticity = 0). Option B (infinite) would mean any quantity can be supplied at one price. Option C (one) is unit elasticity, not perfect inelasticity. The information is sufficient to determine zero elasticity.

Price of the commodity affects quantity supplied (movement along supply curve), not supply itself. Price of related commodities and technology are determinants. Elasticity of supply is a measure of responsiveness, not a determinant - it's the outcome, not the cause. Supply shifts are caused by factors other than the good's own price.

All three factors affect supply elasticity. Production techniques determine flexibility, time period matters (long-run supply is more elastic), and commodity nature (perishable vs durable) affects storage and production response. Options A, B, and C are each correct but incomplete. Supply elasticity depends on all these factors together.