Question 1

The more substitutes that exist in a market,

Accepted Answer

The more substitutes that exist in a market, the more sensitive consumers will be to changes in the price of a particular product. This is because if a product becomes too expensive, consumers may switch to a cheaper substitute. Therefore, the demand for the original product is more elastic, or responsive, to changes in price.

Question 2

Marketers spend millions of dollars annually trying to create or reinforce brand loyalty. Brand loyalty changes the demand curve for the firm's products by

Accepted Answer

Brand loyalty reduces the price elasticity of demand, meaning that consumers are less sensitive to changes in price and more willing to pay a higher price for a preferred brand. This can lead to increased revenue and profitability for the firm.

Question 3

For which of the following is demand likely to be most sensitive to price increases?

Accepted Answer

In general, demand for a specific brand of soft drink is likely to be more sensitive to price increases compared to the other items listed. This is because soft drinks are typically non-essential items with many substitutes available. Consumers are more likely to switch to a different brand or choose another beverage altogether when prices increase. In contrast, items like prescription drugs, hospital care, and electricity are essential goods or services with fewer substitutes, making demand less sensitive to price changes. College tuition for last-semester seniors may also be less sensitive to price increases because students may have fewer options to switch schools or defer graduation.

Question 4

Wilson's Heating and Air Conditioning Company specializes in electric heat pumps. The owner should keep track of the price of natural gas, knowing that

Accepted Answer

Wilson's Heating and Air Conditioning Company specializing in electric heat pumps will benefit from an increase in the price of natural gas as it will increase the demand for his electrical heating systems. This is because when the price of natural gas is high, consumers tend to switch to more cost-effective alternatives such as electric heat pumps, which will lead to an increase in demand for the company's products.

Question 5

Raymond owns Pederson's computer repair service. He has observed over the years that customers keep their older-model computers longer when the economy is doing poorly, creating demand for his maintenance and repair service. Raymond has observed the impact of ________ on demand for his service.

Accepted Answer

The income effect refers to the impact of a change in consumer income on their demand for a particular good or service. In this case, Raymond has observed that when the economy is doing poorly (i.e. consumers have lower incomes), they tend to keep their older computers rather than purchasing new ones, resulting in higher demand for his repair and maintenance services.

Question 6

Kendra always buys and uses Wilson brand tennis balls. If she finds a Penn or Dunlop ball on the court, she gives it away. Brand-loyal tennis players like Kendra allow Wilson to charge a higher price and not lose many sales. By building a strong brand, Wilson has effectively

Accepted Answer

Brand-loyal customers like Kendra are not very sensitive to changes in price, which means that the demand for Wilson tennis balls is relatively inelastic. This allows Wilson to charge a higher price without losing many sales, ultimately reducing the price elasticity of demand for its products.

Question 7

Gail operates on a tight budget. She buys store or generic brands to save money. Recently, Gail was given a substantial pay raise. Now, she has altered her shopping patterns and regularly buys more expensive, name-brand goods. This is an example of

Accepted Answer

The change in Gail's shopping patterns due to her increased income is an example of the income effect. This effect refers to the change in consumer behavior that can be attributed to a change in income level. In this case, Gail's increased income has allowed her to buy more expensive brands.

Question 8

Phillip is a luxury RV dealer in the midwestern United States. For years he has had difficulty selling these RVs locally because there were few places for customers to store the RVs off-season. RVs and spaces to store them are an example of

Accepted Answer

RVs and spaces to store them are complementary products. Selling an RV without a place to store it off-season would not be practical for many customers, which is why Phillip has had difficulty selling the RVs locally. By offering a storage solution as well, he can market the RVs more effectively and meet the needs of his customers.

Question 9

There are many options available to consumers when it comes to toothpaste. So, if Procter & Gamble significantly increases the price of Crest toothpaste, consumers are more apt to buy alternate toothpaste instead. This illustrates which concept?

Accepted Answer

The scenario described in the question is an example of the substitution effect, which refers to the tendency of consumers to switch to a substitute or alternative product if the price of their preferred brand or product increases. In this case, if Procter & Gamble increases the price of Crest toothpaste, consumers are likely to switch to a cheaper alternative toothpaste. Therefore, the substitution effect is the most relevant concept illustrated in this scenario.

Question 10

If the price for a product increases, the demand for the complementary product will

Accepted Answer

When the price for a product increases, consumers tend to buy less of that product, which in turn reduces demand for complementary products that are typically purchased with that product. Thus, the demand for complementary products will decrease.

Question 11

________ products are products whose demands are positively related and as such, they rise or fall together.

Accepted Answer

Complementary products are products that are usually used together, and thus their demand is positively related. Examples include razor blades and razors or printers and ink cartridges. When the price of one complementary product increases, the demand for the other complementary product decreases because the overall cost of using the products together has increased. Likewise, when the price of one complementary product decreases, the demand for the other complementary product increases.

Question 12

If a 1 percent decrease in price results in less than a 1 percent increase in the quantity demanded, demand is

Accepted Answer

If a 1 percent decrease in price results in less than a 1 percent increase in the quantity demanded, demand is price inelastic. This means that the change in price has a small impact on the quantity demanded, making it less responsive to price changes.

Question 13

Assume the demand for electricity, a necessity with few substitutes, is −0.2. If the cable company raised its rates by 10 percent, we would expect a

Accepted Answer

Since the demand for electricity is highly inelastic (with few substitutes), a 10% increase in cable rates would lead to approximately a 2% decrease in quantity demanded (0.2 x 10 = 2%). Therefore, the answer is D.

Question 14

Geoff customizes Trek trail bikes. No two bikes are alike. He notices that very few customers even ask the price of his trail bikes before they decide to purchase them. Demand for his trail bikes is probably

Accepted Answer

The fact that very few customers even ask the price indicates that they are willing to pay whatever price Geoff sets for his trail bikes. This suggests that the demand for his bikes is not very responsive to changes in price, making it price inelastic.

Question 15

Sonja's Sub Shop is located in a business district that has few customers on the weekend. To attract customers on Saturday and Sundays, it reduces its prices on these two days. This is an example of

Accepted Answer

This is an example of dynamic pricing, which is the practice of adjusting prices based on factors such as demand, competition, and time. In this case, Sonja's Sub Shop is adjusting its prices on the weekends to attract more customers during a time when there is typically less demand.

Question 16

A study found that, among addicted smokers, a 10 percent increase in the price of cigarettes resulted in a 2 percent decrease in quantity demanded. For these consumers, cigarettes have a(n)________ price elasticity demand.

Accepted Answer

A price elasticity of demand coefficient of less than 1 indicates that the good has an inelastic demand. In this case, the 10 percent increase in price resulted in a smaller, 2 percent decrease in quantity demanded, indicating that addicted smokers have an inelastic demand for cigarettes.

Question 17

Cross-price elasticity is the

Accepted Answer

Cross-price elasticity measures the responsiveness of quantity demanded of one product to the change in price of another product. It is calculated by taking the percentage change in quantity demanded of Product A and dividing it by the percentage change in price of Product B. Therefore, choice B is the correct answer.

Question 18

What is the most logical example of complementary products?

Accepted Answer

Salad and salad dressing are complementary products as they are often consumed together and one enhances the taste and experience of the other. Hot dogs and hamburgers can also be considered complementary, but they are not as commonly consumed together as salad and dressing. VCRs and DVD players, Honda cars and Toyota cars, and a university and a corporation are not complementary products as they serve different purposes and can be substitutes for each other.

Question 19

Sales of more expensive organic produce tend to increase when the economy is doing well, while sales of lower-priced store brand produce increase when the economy is not doing well. This is an example of how ________ impacts demand for products.

Accepted Answer

The scenario described is an example of the income effect, where consumers' demand for products is influenced by changes in their income levels. When the economy is doing well, consumers may have more disposable income and be more willing to spend money on higher-priced organic produce. Conversely, when the economy is not doing well and consumers have less disposable income, they may opt for lower-priced store brand produce.

Question 20

What situation is occurring if a 1 percent decrease in price results in more than a 1 percent increase in quantity demand?

Accepted Answer

This situation indicates that demand is price elastic, meaning that a small change in price has a significant impact on the quantity demanded. The responsiveness of demand to changes in price is greater than one, indicating that consumers are sensitive to price changes and will adjust their purchasing behavior accordingly.

Quiz 14: Pricing Concepts for Capturing Value