Deck 3: Demand Analysis and Optimal Pricing

Question 1

If the price of a good or service increases, what happens to the firm's demand curve?

A) The demand curve shifts inward toward the origin.
B) The demand curve shifts outward away from the origin.
C) There is an upward movement along the demand curve.
D) There is a downward movement along the demand curve.
E) The slope of the demand curve changes.

Answer 1

C

Question 2

A product's point price elasticity has been estimated at -1.5. At the initial price of $20, the quantity demanded was 10 units. If the firm cuts the price to $17.50, quantity demanded and sold is expected to increase by _____.

A) 18.75%
B) 6.67%
C) 8.75%
D) 10.33%
E) 12.5%

Answer 2

A

Question 3

When Rita was a student, she consumed beer with her dinner. Over the years, as her income increased, she substituted beer for a glass of wine. From this information, one can imply that:

A) the law of demand does not hold for beer.
B) wine and beer are complementary goods.
C) Rita considers beer an inferior good.
D) the price elasticity of demand for beer is high.
E) Rita gets more utility from beer than from wine.

Answer 3

C

Question 4

If the income elasticity of demand for a good is greater than one, it implies that:

A) as consumers' incomes increase, the quantity demanded of the good falls.
B) sales of the good are highly sensitive to changes in consumers' income.
C) the quantity demanded of the good increases during a recession.
D) an increase in consumers' income will lead to a proportionate increase in sales of the good.
E) sales of the good are highly sensitive to changes in the prices of other goods.

Question 5

A firm's demand equation is given by: Q = 60 - 60P + 2Y, where Q is quantity, P is price, and Y is income. If price increases by $2 and income increases by $80, then quantity demanded will:

A) increase by 160 units.
B) increase by 80 units.
C) decrease by 120 units.
D) increase by 40 units.
E) decrease by 60 units.

Question 6

A firm's demand curve is estimated to be Q = 400 - 5P, where Q is quantity and P is the price of the good. At P = $20, the point elasticity of demand is _____.

A) -0.25
B) -0.067
C) -0.33
D) -.67
E) -1.33

Question 7

The price elasticity of demand is defined as the ratio of the _____ other factors held constant.

A) percentage change in quantity demanded to the percentage change in price
B) percentage change in the price of an input to the percentage change in the price of the good
C) change in the price of a good to the change in the total revenue
D) percentage change in price of the good to the percentage change in the consumers' income
E) percentage change in quantity demanded to the percentage change in the price of a competitor's good

Question 8

The cross-price elasticity between two products is estimated to be 2. If the price of the first product is increased by 8%, demand for the second product will _____.

A) increase by 8%
B) decrease by 4%
C) increase by 4%
D) increase by 16%
E) decrease by 8%

Question 9

When the demand for a product is said to be perfectly inelastic, it implies that:

A) the sales of the product are very sensitive to changes in price.
B) the demand curve for the product is relatively flat.
C) the profit per-unit increases with an increase in price.
D) with a change in price, change in quantity demanded is zero.
E) as price increases, the quantity demanded increases.

Question 10

Given that digital music players are used to play music downloaded from the Internet, a fall in the price of digital music players will lead to:

A) an increase in the price of a song download.
B) an increase in the demand for downloaded songs.
C) an increase in the price of broadband plans.
D) a fall in the demand for digital music players.
E) an increase in the price of personal laptops.

Question 11

If the demand for a good is price-elastic, a cut in price will:

A) lead to an increase in quantity demanded and an increase in the firm's revenue.
B) not affect the total revenue of the firm.
C) lead to a fall in the firm's revenue but an increase in quantity demanded.
D) lead to a decrease in quantity demanded.
E) decrease the firm's revenue by the same percentage as the cut in price.

Question 12

Assume that demand for a service depends upon price and income, where the price elasticity of demand is EP = -0.6 and income elasticity is EY = 1.2. If price falls by 4% and income rises by 2%, the quantity demanded of the service will _____.

A) not be affected as the change in price will cancel the change in income
B) increase by 6%
C) increase by 4.8%
D) decrease by 9.6%
E) decrease by 2.4%

Question 13

A good that has highly elastic demand is most likely to:

A) have a large number of substitutes.
B) be purchased by low-income consumers.
C) be sold at a high price level.
D) be produced by a single firm.
E) be a necessary good.

Question 14

An increase in the demand for motorcycles has led to an increase in the demand for motorcycle helmets. Based on this information, which of the following is likely to be true?

A) Motorcycles and motorcycle helmets are considered to be substitute goods.
B) The increase in demand for helmets will be represented as a movement along the demand curve for motorcycle helmets.
C) Helmets are considered to be inferior goods.
D) With an increase in the demand for motorcycles, the demand curve will shift inward toward the origin.
E) In the demand equation for helmets, the coefficient associated with the price of motorcycles will be negative

Question 15

A firm will maximize profits and revenues at the same price when:

A) the marginal cost is negligible or zero.
B) the fixed costs are zero.
C) the marginal revenue is zero.
D) the demand for the good is unit elastic.
E) the demand for the good is highly elastic.

Question 16

Which of the following firms faces a pure selling problem in pricing?

A) A firm that faces a very high fixed cost of production
B) A firm that incurs a small or negligible variable cost of production
C) A firm that faces a highly elastic demand curve
D) A firm that is undercut by competitors and priced out of the market
E) A firm that has a negligible share in the market

Question 17

The initial price for an item is $5.00, and the quantity demanded is 400 units. When the price is raised to $5.25, the quantity demanded falls to 350 units. The absolute value of the point elasticity of demand is _____.

A) 2.25
B) 2.5
C) 3.5
D) 2.0
E) 1.5

Question 18

Assume that the price and income elasticities of demand for luxury cars are EP = -0.52 and EY = 3.2 respectively. In the coming year, car prices are expected to rise by 2 percent and income by 8 percent. Based on this information, sales of cars are expected to _____.

A) fall by 0.52%
B) increase by 24.56%
C) increase by 5%
D) fall by 3.04%
E) fall by 32.84%

Question 19

A profit-maximizing firm's total cost is given by C = 50 + 25Q where Q is the quantity produced. Given that the firm sells 40 units of the good at $55 each, what is the firm's contribution?

A) $2,200
B) $200
C) $1,200
D) $1,000
E) $2,100

Question 20

Other factors constant, a change in _____ will cause a shift in a firm's demand curve.

A) the price of the good or service
B) the quantity of the good offered for sale
C) the wages paid to labor employed
D) the general income level of consumers
E) the technology used in the production of the good or service

Question 21

Which of the following is true of an information good or service?

A) In order to maximize profits, firms should set a high price because information goods are expensive to produce.
B) The profit-maximizing price should be equal to the average fixed cost of producing the information good.
C) Information goods are provided for free because the production cost of an information good is zero.
D) The smaller the number of consumers using an information good, the higher the value obtained by other consumers.
E) Information goods or services are characterized by high fixed costs but low or negligible marginal costs.

Question 22

When a firm practices price discrimination in two market segments, the firm:

A) must be able to identify market segments that have different price elasticities.
B) will typically charge higher prices in the larger market segment.
C) must be selling a heterogeneous product.
D) must choose market segments that have inelastic demand.
E) sets price according to the different costs of serving different market segments.

Question 23

Mathematically explain the relationship between marginal revenue and price elasticity.

Question 24

What would happen to a firm's price elasticity of demand if additional competitors enter the market and achieve significant market shares? Explain briefly.

Question 25

Which of the following settings approximate pure selling problems? Explain why or why not.
(i) A toll bridge
(ii) CD sales in a music store
(iii) Selling advertising time on a commercial radio station
(iv) Checking account services
(v) Seats on the subway
(vi) Frozen vegetables in a store
(vii) Fresh fish at the end of the business day

Question 26

If customer income increases over time, (while price is held constant), what is the most likely impact on unit sales of a firm? Explain.

Question 27

Which of the following is an example of a good with positive network externalities?

A) A high-end car that has a long waiting list of prospective buyers
B) A shaving cream that is sold along with a pair of free razor blades
C) An online dating service that only allows registered users to use the service
D) An all-you-can-eat buffet at a restaurant
E) A movie screening that requires customers to buy tickets to watch the movie

Question 28

Carefully define the term demand function, and explain its importance to the study of managerial economics.

Question 29

For a parking garage of fixed capacity, the owner sets different parking rates for cars that are parked for less than 24 hours (short-term) and for those that are parked for more than 24 hours (long-term). To maximize revenue, the operator should set prices and target the number of places for each segment such that:

A) the marginal revenues from the segments are equal.
B) the total revenues from each of the segments are equal.
C) the average revenues from the segments are equal.
D) the long-term consumers pay a higher hourly price.
E) the price paid by both short-term and long-term consumers is equal.

Question 30

Suppose that a firm is selling a good with a marginal cost of $35. Management estimates demand elasticity to be -2. What is the appropriate price to set in order to maximize profit?

Question 31

Assume that a profit-maximizing firm practices price discrimination in two different market segments. If the marginal cost of producing the good is the same, the price:

A) will be lower in the segment with lower cross price elasticity of demand.
B) will be higher in the segment with higher income elasticity of demand.
C) will be lower in the segment with lower fixed costs.
D) will be higher in the segment with more inelastic demand.
E) will be higher in the segment with higher marginal revenue.

Question 32

The Juice Shop sells iced soft drinks. Management has found that demand is estimated by the equation: Q = 1,000 - 240P + 80PC, where Q denotes the number of drinks sold per day, P is the drink's price, and PC is the price of drinks at a nearby café.
(a) How many drinks will be sold if P = $1.50 and P_C = $1.20?

Question 33

Which of the following correctly defines second-degree price discrimination?

A) The seller offers each individual customer a different price.
B) The seller sells differentiated goods at different prices.
C) The seller sets the price of the good equal to the marginal cost of production.
D) The seller offers different prices and customers choose the one that best suits them.
E) The seller sets different prices for different market segments.

Question 34

Which of the following is true of full-cost pricing?

A) Full-cost pricing uses the marginal cost of a product as its base.
B) Since fixed costs do not affect optimal price and quantity, full-cost pricing is error-prone.
C) Firms that use full-cost pricing are producing at the optimum level of output.
D) Full-cost pricing is based on the markup of price over average variable cost.
E) Full-cost pricing takes into account the price elasticity of demand for the product.

Question 35

Suppose that a firm faces the inverse demand curve: P = 20 - Q/40, where Q is quantity demanded and P is price. Now suppose there is a reduction in demand. Provide a new inverse demand equation consistent with this shift. How does the reduction in demand affect the firm's revenue-maximizing output and price?

Question 36

A company produces a hand-held global positioning system (GPS) used for hiking and sells it for $350 per unit in the United States. The same GPS unit is also sold in Europe at a price of $250 Euros (the equivalent of about $290). Several competing European producers have charged the company with dumping GPS units at unfairly low prices in Europe. What economic defense would the company's lawyer submit for the company's pricing practice?

Question 37

Maria is a sales manager of an appliance store and she sometimes visit outlets run by competing stores. Six months ago, she noticed that rivals' prices were very close to the prices at her store. However, in the last six months, her competitors have lowered their prices to about 15 percent below the prices at her store. Nevertheless, the total unit sales at her store have increased slightly during this time period. Assuming rational buyers and no deceptive advertising, what is the rational explanation for this?

Question 38

Derek is the co-owner of a small gift shop. His colleague, Ron wants the shop to hold a sale and reduce most prices by 10% to 20%. His parents owned a convenience store, and they said that they could always count on increased traffic when they cut prices. If a 10% price cut didn't bring enough purchases, then cut by 20%, and the cash flow would cover all their needs. Is Ron's suggestion economically viable? Why or why not?

Question 39

Demand for DVD rentals at a video store is described by the equation: Q = 4,000 - 500P, where Q denotes the number of DVDs rented per week and P is the rental price in dollars.
(a) Determine the point price elasticity of demand at P = $3.

Question 40

For a good that has a price elasticity of demand of -1.5 and a marginal cost of $50 per unit, the profit-maximizing price should be approximately _____.

A) $200
B) $168
C) $150
D) $50
E) $134

Question 41

Firm Z is a U.S. based firm that sells farm equipment and faces demand given by P = 3,000 - Q, where P denotes price in dollars and Q is quantity of units sold per month. In its East coast factory, the firm's fixed costs are $250,000 per month, and its marginal cost of manufacturing the equipment is $1,000 per unit.
(a) Find the firm's profit-maximizing output and price. What is its profit?

Question 42

Give examples of how a bookstore would practice the different forms of price discrimination.

Question 43

Seasons Four Equipment Corporation sells 200 riding lawn mowers per month at a sales price of $1,800 each. Overall, mower demand is described by the price equation: P = 2,600 - 4Q, where P is the price of a mower and Q is the quantity of mowers demanded. The firm's estimated marginal cost is $1,000 per mower. The head of marketing points out that mower demand is quite elastic at the current $1,800 price. Therefore, he recommends cutting price in order to increase revenue and profit. Compute the point price elasticity for mower. Is the marketing chief correct?

Question 44

You are the marketing manager of a firm that produces titanium and sells this metal to two distinct kinds of customers: aircraft producers and golf club manufacturers. Demand for titanium by these two market segments is quite different, as described by the respective price equations: PA = 10 - QA/600 and PG = 12 - QG/100, where annual quantities [QA and QG] are in thousands of pounds and prices [PA and PG] are in dollars. Your firm estimates the marginal cost of titanium production at $4 per pound.
(a) For each segment, determine the firm's profit-maximizing price and output. Is the firm practicing price discrimination?

Question 45

Carefully define price discrimination. What conditions must exist for it to be possible and profitable? Explain.

Question 46

Will a profit-maximizing firm typically sell a good at a price that is in the inelastic portion of a demand curve? Explain

Question 47

Assume that Insite Corporation produces advanced analytic software for computer simulations called Model-It. Based on an analysis of product sales over a two-year period, Insite's marketing department estimates the demand for Model-It to be QM = 1,200 - 8PM + 4PS, where QM denotes units sold of Model-It software, PM denotes Model-It's price, and PS denotes the price of a best-selling statistical software package (with both prices in dollars).
(a) Currently, P_M = $200 and P_S = $300. What is the predicted demand for Model-It software?

Question 48

Amalgamated Popcorn, Inc. sells bags of flavored gourmet popcorn in a popular mall. As shop owner and operator, Rhea estimates the demand for flavored popcorn to be: Q = 1,200 - 800P + 2A, where A denotes advertising weekly spending (in dollars), Q is the bags of popcorn demanded and P is the price of a bag of popcorn. She is currently charging $1.50 per bag of popcorn (for which the marginal cost is $0.75) and spending $500 per week on advertising.
(a) Compute the store's price elasticity and advertising elasticity.

Question 49

Recently, the major firms in the United States cigarette industry joined with the government in a settlement of liability claims. Under the tentative agreement, the industry would curb advertising and pay the equivalent of about $15 billion per year (for smoking-related state Medicaid expenses) in exchange for protection against smoker lawsuits.
(a) Before the settlement, a leading cigarette manufacturer estimated its marginal cost at $1.00 per pack and its elasticity of demand at -2. What is its optimal price? The firm's share of the industry payment (based on its historic market share) will raise its average total cost per pack by $0.60. What effect will this have on its optimal price?