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Elasticity of Demand · Paper 2 — Free Economics HL Practice Questions
1MasteryLAQPrice elasticity of demand (PED)8 marksPaper 2~12 min
A monthly subscription to the cloud-based video streaming service StreamFlix increased in price from USD 10 to USD 12 in 2024. Following this increase, the number of subscribers fell from 5 million to 4.5 million. The streaming market is highly competitive, with several close substitutes available, including CineHub and PrimeTube.
(a)
Define the term price elasticity of demand (PED). [1 mark]
(b)
Using the data provided, calculate the PED for StreamFlix subscriptions. Show all working. [3 marks]
(c)
Identify and explain two determinants of PED that are relevant to the StreamFlix market. [4 marks]
(d)
Using the concept of total revenue, evaluate whether the price increase was a sound commercial decision for StreamFlix. [2+4]
Solutions
2MasteryLAQPrice elasticity of demand (PED)10 marksPaper 2~15 min
In the country of Andoria, the government is considering imposing a per-unit tax on two goods: insulin, a life-saving medication for diabetics, and tickets to luxury cruise holidays. Market data shows that a increase in the price of insulin leads to a decrease in quantity demanded, while a increase in the price of luxury cruise tickets leads to a decrease in quantity demanded.
(a)
Calculate the Price Elasticity of Demand (PED) for both insulin and luxury cruise tickets. [2 marks]
(b)
Explain why the PED for insulin differs from the PED for luxury cruise tickets, referring to two determinants of PED. [4 marks]
(c)
Evaluate whether the government should prioritise taxing insulin or luxury cruise tickets in order to maximise tax revenue, taking into account both revenue effectiveness and equity. [4 marks]
Solutions
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