The Price of a New Toy Increases from $5 to $7

question 145

Multiple Choice

The price of a new toy increases from $5 to $7 and the quantity demanded decreases from 12,000 to 6,000 per month as a result. Based on this information, the price elasticity of demand (in absolute terms) is estimated to be equal to:

• A)​0.5, indicating relatively elastic demand.
• B)​0.5, indicating relatively inelastic demand.
• C)​2.0, indicating relatively elastic demand.
• D)​2.0, indicating relatively inelastic demand.

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Definitions:

Market Price

The amount of money for which a good or service is offered, sold, or bought in the market.

Perfectly Competitive

A market structure characterized by many sellers and buyers, homogeneous products, and free entry and exit, leading to price takers.

Marginal Revenue

The additional income received for selling one more unit of a good or service.

Profit-Maximizing Output

The level of production at which a company can achieve the maximum difference between total revenue and total costs, leading to the highest possible profit.