Deck 2: Demand Theory

Question 1

The quantity demanded of a commodity will decrease if

A) the price of a compliment increases.
B) income rises and the good is inferior.
C) the price of a substitute decreases.
D) the commodity's price increases.

Answer 1

the commodity's price increases.

Question 2

Most goods are normal.

Answer 2

True

Question 3

If the independent individual consumer demand curves for a commodity are horizontally summed, the result is the market demand curve for the commodity.

Answer 3

True

Question 4

If the consumption decisions of individual consumers are not independent, then the horizontal sum of individual consumer demand curves is the market demand curve for the commodity.

Question 5

If consumers expect the price of a commodity to increase in the future, then demand for the commodity will decrease.

Question 6

Consumers find it easier to postpone the purchase of a durable good than to postpone the purchase of a nondurable good, so the demand for the durable goods is more unstable than the demand for nondurable goods.

Question 7

The arc price elasticity of demand measures the price elasticity at a point on the demand curve.

Question 8

If a firm is a perfect competitor, then its marginal revenue is equal to the price of its commodity.

Question 9

If a firm is not a perfect competitor, then its marginal revenue is greater than the price of its commodity.

Question 10

An increase in the number of available substitutes for a commodity will decrease the price elasticity of demand for the commodity.

Question 11

The long-run price elasticity of demand for a commodity is generally greater than the short-run price elasticity of demand for the commodity.

Question 12

The cross-price elasticity of demand measures the percentage change in the demand for one good that results from a one percent change in the quantity demanded of a second good.

Question 13

If two goods are very close complements, then the cross-price elasticity of demand between the two goods will be large and negative.

Question 14

It is likely that the cross-price elasticity of demand between two goods produced by different firms in the same industry will be positive and large.

Question 15

Estimates of demand elasticities are used by firms to determine optimal operational policies.

Question 16

Decreased barriers to international trade have increased the differences in consumer preferences between countries.

Question 17

The international convergence in tastes has progressed to the point where there are virtually no international differences in consumer preferences.

Question 18

Improved telecommunication technology has contributed to the globalization of markets.

Question 19

Middle-class life styles are fundamentally different in different countries.

Question 20

Electronic commerce currently accounts for no more than 10% of total U.S. retail sales.

Question 21

About 90% of the total world revenue accounted for by electronic commerce in 1999 involved business-to-business transactions.

Question 22

A firm has estimated the following demand function for its product:
Q=58 - 2 P +0.10 I + 15 A
Where Q is quantity demanded per month in thousands, P is product price, I is an index of consumer income, and A is advertising expenditures per month in thousands. Assume that P=$10, I=120, and A=10. Use the point formulas to complete the elasticity calculations indicated below.
(i) Calculate quantity demanded.
(ii) Calculate the price elasticity of demand. Is demand elastic, inelastic, or unit elastic?
(iii) Calculate the income elasticity of demand. Is the good normal or inferior? Is it a necessity or a luxury?
(iv) Calculate the advertising elasticity of demand.

Question 23

A firm has estimated the following demand function for its product:
Q = 100 - 5 P + 5 I + 15 A
Where Q is quantity demanded per month in thousands, P is product price, I is an index of consumer income, and A is advertising expenditures per month in thousands. Assume that P=$200, I=150, and A=30. Use the point formulas to complete the elasticity calculations indicated below.
(i) Calculate quantity demanded.
(ii) Calculate the price elasticity for demand. Is demand elastic, inelastic, or unit elastic?
(iii) Calculate the income elasticity of demand. Is the good normal or inferior? Is it a necessity or a luxury?
(iv) Calculate the advertising elasticity of demand.

Question 24

A firm has kept track of the quantity demanded of its output (Good X) during four time periods. The price of X and the prices of two other goods (Good Y and Good Z) were also recorded for each time period. The information is provided in the table that follows. Use it to calculate the own-price arc elasticity of demand and the two cross-price elasticities of demand. Determine whether Good Y and Good Z are complements or substitutes for Good X.

Question 25

A firm has estimated the following demand function for its product:
Q = 8 - 2 P + 0.10 I +A
Where Q is quantity demanded per month in thousands, P is product price, I is an index of consumer income, and A is advertising expenditures per month in thousands. Assume that P=$10, I=120, and A=10. Use the point formulas to complete the elasticity calculations indicated below.
(i) Calculate quantity demanded.
(ii) Calculate the price elasticity of demand. Is demand elastic, inelastic, or unit elastic?
(iii) Calculate the income elasticity of demand. Is the good normal or inferior? Is it a necessity or a luxury?
(iv) Calculate the advertising elasticity of demand.

Question 26

A firm has estimated the following demand function for its product:
Q = 400 - 5 P + 5 I + 10 A
Where Q is quantity demanded per month in thousands, P is product price, I is an index of consumer income, and A is advertising expenditures per month in thousands. Assume that P=$200, I=100, and A=20. Use the point formulas to complete the elasticity calculations indicated below.
(i) Calculate quantity demanded.
(ii) Calculate the price elasticity of demand. Is demand elastic, inelastic, or unit elastic?
(iii) Calculate the income elasticity of demand. Is the good normal or inferior? Is it a necessity or a luxury?
(iv) Calculate the advertising elasticity of demand.