A shop sells 20 hats per week at $10 each. When it increases the price to $12, the number of hats sold falls to 15 per week. Which of the following statements are correct?

• choice a. When the price increases from $10 to $12, demand increases by 25%.
• choice b. A 20% increase in the price causes a 25% fall in demand.
• choice c. The demand for hats is inelastic.
• choice d. The elasticity of demand is approximately 1.25.

Based on this figure, which of the following statements are correct?

• choice a. At E, demand curve D₁ is less elastic than D₂.
• choice b. The elasticity is the same at A and C.
• choice c. At E, both demand curves have the same elasticity.
• choice d. The elasticity is higher at E than at B.

Suppose that in a small town a multinational retailer is planning to build a new superstore. Which of the following arguments could be correct?

• choice a. The local protestors argue that the close substitutability of some of the goods sold between the new retailer and existing ones means that the new retailer faces inelastic demand for those goods, giving it excessive market power.
• choice b. The new retailer argues that the close substitutability of some of the goods implies a high elasticity of demand, leading to healthy competition and lower prices for consumers.
• choice c. The local protestors argue that once the local retailers are driven out, there will be no competition, giving the multinational retailer more market power and driving up prices.
• choice d. The new retailer argues that most of the goods sold by local retailers are sufficiently differentiated from its own goods that their elasticity of demand will be high enough to protect the local retailers’ profits.

Which of the following is true about the deadweight loss?

• choice a. Deadweight loss is a consequence of market faliure.
• choice b. Deadweight loss is larger if the firm faces a relatively inelastic demand curve.
• choice c. Deadweight loss is smaller if the firm faces a relatively inelastic demand curve.
• choice d. Deadweight loss occurs when price that is set is greater than the marginal cost and as the profit margin increases, the deadweight loss increases further.

Policy makers have used cigarette taxes to curb smoking. However, cigarettes are an inelastic product. This means that

• choice a. An increase in cigarette taxes will lead to a small reduction in sales.
• choice b. An increase in cigarette taxes will most likely increase tax revenue.
• choice c. An increase in cigarette taxes will lead to a large reduction in sales.
• choice d. An increase in cigarette taxes will most likely decrease tax revenue.