Question 1

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

Accepted Answer

An increase in the price of a good or service results in an upward movement along the demand curve, reflecting a decrease in quantity demanded at the higher price, not a shift of the curve itself.

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 _____.

Accepted Answer

The correct answer is A.The point price elasticity of demand is -1.5, which means that a 1% decrease in price will lead to a 1.5% increase in quantity demanded. If the firm cuts the price from $20 to $17.50, the percentage change in price is (17.50-20)/20 = -12.5%. Therefore, the percentage change in quantity demanded will be -1.5 * -12.5% = 18.75%.

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:

Accepted Answer

From the given information, it can be inferred that Rita considers beer an inferior good, which means as her income increased, she preferred wine over beer. Therefore, her consumption of beer decreased with an increase in income, indicating an inverse relationship between income and demand for beer, consistent with the characteristics of inferior goods.

Question 4

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

Accepted Answer

Income elasticity of demand greater than one indicates that the good is a luxury item, meaning its demand increases more than proportionally as consumer income increases, showing high sensitivity to income changes.

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:

Accepted Answer

The answer of A firm's demand equation is given by:...

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 _____.

Accepted Answer

The answer of A firm's demand curve is estimated to...

Question 7

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

Accepted Answer

The price elasticity of demand is always calculated as the percentage change in quantity demanded divided by the percentage change in price, holding all other factors constant. This formula gives us a measure of how responsive consumers are to changes in price, without being confounded by changes in other factors that might also affect demand.

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 _____.

Accepted Answer

Cross-price elasticity measures the responsiveness of demand for one product to a change in the price of another product. If the cross-price elasticity is positive, the two products are substitutes, meaning if the price of one product goes up, consumers will switch to the other product, increasing demand for it.

In this case, since the cross-price elasticity is 2, we know that the two products are substitutes. If the price of the first product is increased by 8%, we can expect demand for the second product to increase by twice that, or 16%. Therefore, the correct answer is D, "increase by 16%".

Question 9

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

Accepted Answer

When demand for a product is perfectly inelastic, it means that the quantity demanded remains constant regardless of changes in price. In other words, the change in price has no effect on the quantity demanded. This can be represented graphically with a vertical demand curve, indicating that there is no change in quantity demanded as price changes. Therefore, the correct answer is D.

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:

Accepted Answer

A fall in the price of digital music players would make them more affordable and increase their demand. This would likely lead to an increase in the demand for downloaded songs, as more people would be buying digital music players to play them on. However, it would not necessarily lead to an increase in the price of song downloads, as the cost of producing and distributing digital music files is relatively low. The price of broadband plans and personal laptops would also likely remain unaffected.

Question 11

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

Accepted Answer

If the demand for a good is price-elastic, a cut in price will lead to a proportionately larger increase in quantity demanded, resulting in an overall increase in the firm's revenue. This is because the increase in quantity demanded will more than offset the decrease in price, resulting in a net gain for the firm.

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 _____.

Accepted Answer

Using the price elasticity formula, the percentage change in quantity demanded can be calculated as:
EP = %ΔQ / %ΔP
-0.6 = %ΔQ / (-4%)
%ΔQ = (-0.6)(-4%) = 2.4%
Therefore, the quantity demanded will increase by 2.4% in response to a 4% decrease in price.
Using the income elasticity formula, the percentage change in quantity demanded can be calculated as:
EY = %ΔQ / %ΔY
1.2 = %ΔQ / (2%)
%ΔQ = 2.4%
Therefore, the quantity demanded will increase by an additional 2.4% in response to a 2% increase in income.
The total percentage change in quantity demanded is the sum of the two individual changes: 2.4% + 2.4% = 4.8%
Therefore, the quantity demanded will increase by 4.8% in total. The correct answer is C.

Question 13

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

Accepted Answer

When a good has highly elastic demand, it means that a small change in price could result in a significant change in the quantity demanded. This is often the case when there are many substitutes available for the good, as consumers have more options to choose from and can easily switch to a different product if the price of one becomes too high. Therefore, choice A, which states that goods with highly elastic demand are likely to have a large number of substitutes, is the best answer.

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?

Accepted Answer

The answer of An increase in the demand for motorcycles...

Question 15

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

Accepted Answer

The firm will maximize profits and revenues at the same price when the marginal cost is negligible or zero. This is because when the marginal cost is negligible or zero, the firm can produce and sell an additional unit of output at a cost that is less than the price it can sell the unit for. This will lead to an increase in both profits and revenues.

Question 16

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

Accepted Answer

A firm with negligible variable costs faces a pure selling problem because its main concern is maximizing revenue, as production costs are not a significant factor in pricing decisions.

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 _____.

Accepted Answer

We can use the following formula to calculate the point elasticity of demand:
E = (ΔQ/ΔP) * (P/Q)

Where:
ΔQ = change in quantity demanded = 350 - 400 = -50
ΔP = change in price = 5.25 - 5.00 = 0.25
P = average price = (5.25 + 5.00) / 2 = 5.125
Q = average quantity = (350 + 400) / 2 = 375

Plugging in these values, we get:
E = (-50/0.25) * (5.125/375) = -200 * 0.01366666667 = -2.733333333

Since we want the absolute value of E, we can take the absolute value and round to one decimal place:
|E| = 2.7

Therefore, the absolute value of the point elasticity of demand is 2.7, which is closest to choice B (2.5).

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 _____.

Accepted Answer

The correct answer is B. The expected percentage change in quantity demanded is given by:```ΔQd/Qd = EP * ΔP/P + EY * ΔY/Y```where:* ΔQd is the change in quantity demanded* Qd is the initial quantity demanded* EP is the price elasticity of demand* ΔP is the change in price* P is the initial price* EY is the income elasticity of demand* ΔY is the change in income* Y is the initial incomePlugging in the given values, we get:```ΔQd/Qd = -0.52 * 0.02 + 3.2 * 0.08 = 0.2456```This means that sales of cars are expected to increase by 24.56%.

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?

Accepted Answer

The answer of A profit-maximizing firm's total cost is given...

Question 20

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

Accepted Answer

A change in general income level of consumers will cause a shift in a firm's demand curve as it directly affects the buying power of consumers. If the general income level increases, the demand curve will shift to the right, indicating a higher demand for the good or service, and vice versa.

Quiz 3: Demand Analysis and Optimal Pricing