Question 1

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 = $15,the point elasticity of demand is _____.
A)-0.23
B)-0.013
C)-0.85
D)-4.35
E)-5.00

Accepted Answer

The point elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in price. At P = $15, the quantity demanded is Q = 400 - 5(15) = 250. If the price increases by 1%, the new price will be $15.15 and the new quantity demanded will be Q = 400 - 5(15.15) = 248.75. The percentage change in quantity demanded is (248.75 - 250) / 250 = -0.005. The percentage change in price is (15.15 - 15) / 15 = 0.01. Therefore, the point elasticity of demand is -0.005 / 0.01 = -0.5.

Question 2

A good that has a high price elasticity of 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.

Accepted Answer

A good with a high price elasticity of demand means consumers are sensitive to changes in price and will seek out substitutes if the price increases. Therefore, the presence of a large number of substitutes is likely to increase the price elasticity of demand.

Question 3

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.

Accepted Answer

A fall in the price of digital music players would make them more affordable, leading to an increase in demand for downloaded songs as more people would have access to the players to use them. This would likely lead to competition between music providers and could actually lead to a decrease in the price of song downloads, as providers try to attract more customers to their services. There is no direct relationship between the price of digital music players and the price of broadband plans, laptops, or the demand for digital music players.

Question 4

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 100 units.
C)decrease by 120 units.
D)decrease by 40 units.
E)decrease by 60 units.

Accepted Answer

To determine the effect of a change in price and income on quantity demanded, we need to calculate the price and income elasticities of demand. The price elasticity of demand can be found by taking the derivative of the demand equation with respect to price and multiplying by price and quantity. The income elasticity of demand can be found by taking the derivative of the demand equation with respect to income and multiplying by income and quantity.

Price elasticity of demand = (P/Q)(dQ/dP) = (P/Q)(-60) = -60 + 2Y/P
Income elasticity of demand = (Y/Q)(dQ/dY) = (Y/Q)(2) = 60 - 60P + 2Y)/Y

At the initial point, when P = 0.5 and Y = 100, the price elasticity of demand is:

-60 + 2(100)/0.5 = 280

This means that demand is price inelastic, and a 1% increase in price leads to a less than 1% decrease in quantity demanded. The income elasticity of demand is:

(60 - 60(0.5) + 2(100))/100 = 1

This means that demand is income elastic, and a 1% increase in income leads to a greater than 1% increase in quantity demanded.

When P increases by $2 and Y increases by $80, we can use the price and income elasticities of demand to estimate the change in quantity demanded. The change in price is 2/0.5 = 4 times the initial price, so the change in quantity demanded due to the price increase is:

-280(4) = -1120

This means that quantity demanded decreases by 1,120 units due to the price increase. The change in income is 80/100 = 0.8 times the initial income, so the change in quantity demanded due to the income increase is:

1(0.8) = 0.8

This means that quantity demanded increases by 0.8 units due to the income increase. Therefore, the net change in quantity demanded is:

-1120 + 0.8 = -1119.2

Rounding to the nearest hundred, we get that quantity demanded increases by 100 units. Therefore, the correct answer is B: increase by 100 units.

Question 5

If the demand for a good is price-elastic,an increase in price will:
A)lead to a fall in quantity demanded but 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 an increase in quantity demanded.
E)decrease the firm's revenue by the same percentage as the increase in price.

Accepted Answer

When the demand for a good is price-elastic, an increase in price will cause consumers to decrease the quantity demanded. However, the decrease in price is proportionately greater than the increase in price, resulting in a decrease in the firm's revenue. In other words, the increase in price leads to a larger decrease in demand, which results in a decrease in total revenue. However, the decrease in revenue may not be as significant as the decrease in quantity demanded, resulting in an increase in the firm's revenue.

Question 6

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%

Accepted Answer

The answer of A product's point price elasticity has been...

Question 7

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.

Accepted Answer

When the demand for a product is perfectly inelastic, it means that a change in price will not affect the quantity demanded. So, with a change in price, the change in quantity demanded is zero, making option D the correct choice. A has the opposite meaning, B and E indicate imperfectly elastic demand, and C is not necessarily true for perfectly inelastic demand.

Question 8

The initial price for an item is $5.00,and the quantity demanded is 350 units.When the price is raised to $5.25,the quantity demanded falls to 300 units.The absolute value of the point elasticity of demand is _____.
A)2.25
B)2.86
C)3.5
D)4.05
E)5.75

Accepted Answer

The point elasticity of demand is calculated using the formula: (percentage change in quantity demanded) / (percentage change in price). The percentage change in quantity demanded is ((300 - 350) / 350) = -0.1429, and the percentage change in price is ((5.25 - 5.00) / 5.00) = 0.05. The absolute value of the elasticity is |-0.1429 / 0.05| = 2.86.

Question 9

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.

Accepted Answer

The answer of A firm will maximize profits and revenues...

Question 10

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.

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 11

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.

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 12

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

Accepted Answer

To find the firm's contribution, we first need to calculate its total revenue:
Total revenue = price x quantity = $55 x 40 = $2200
Then, we need to calculate the firm's total cost:
Total cost = C = 50 + 25Q = 50 + 25(40) = $1050
Finally, we can calculate the firm's contribution:
Contribution = total revenue - total cost = $2200 - $1050 = $1150
Therefore, the best choice is C.

Question 13

Which of the following firms faces a pure selling problem in pricing?
A)A firm that faces a very high fixed cost or 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

Accepted Answer

A firm with a small or negligible variable cost of production faces a pure selling problem because its main challenge is to determine the optimal price to maximize revenue, as the cost of producing additional units is minimal.

Question 14

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

Accepted Answer

A change in the general income level of consumers will cause a shift in a firm's demand curve because it will affect consumers' ability and willingness to purchase the good or service. If general income level increases, consumers may be more willing to purchase the good, causing an increase in demand and a shift of the demand curve to the right. If general income level decreases, consumers may be less willing to purchase the good, causing a decrease in demand and a shift of the demand curve to the left. The other options listed may affect a firm's production or pricing decisions, but they would not directly cause a shift in the demand curve.

Question 15

Assume that demand for a service depends upon price and income,where price elasticity of demand [EP] = -0.6 and income elasticity [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%

Accepted Answer

Using the price elasticity of demand formula, we can calculate the percentage change in quantity demanded as:

% change in quantity demanded = EP x % change in price
% change in quantity demanded = -0.6 x (-4%) = 2.4%

Using the income elasticity formula, we can calculate the percentage change in quantity demanded as:

% change in quantity demanded = EY x % change in income
% change in quantity demanded = 1.2 x 2% = 2.4%

To find the total percentage change in quantity demanded, we add the percentage changes due to price and income:

Total % change in quantity demanded = 2.4% + 2.4% = 4.8%

Therefore, the quantity demanded of the service will increase by 4.8%, which is option C.

Question 16

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

Accepted Answer

Price elasticity of demand measures the responsiveness of quantity demanded to a change in price. It is calculated by taking the percentage change in quantity demanded and dividing it by the percentage change in price, with all other factors held constant. Therefore, choice A is the correct answer.

Question 17

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%

Accepted Answer

The answer of Assume that the price and income elasticities...

Question 18

Assume that an increase in the demand for motorcycles 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)The coefficient associated with the price of helmets will be negative in the demand equation for motorcycles.

Accepted Answer

The answer of Assume that an increase in the demand...

Question 19

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.

Accepted Answer

The fact that Rita substituted beer for wine as her income increased suggests that she considers beer an inferior good. An inferior good is a good for which demand decreases as income increases, and its substitution with a superior good is a common occurrence as consumers' incomes increase. This implies that as Rita's income increased, beer became less attractive to her relative to wine, suggesting that she considers beer to be of lower quality or status.

Question 20

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%

Accepted Answer

The cross-price elasticity of 2 means that a 1% increase in the price of the first product will result in a 2% increase in the demand for the second product. Therefore, an 8% increase in the price of the first product will lead to a 16% increase in demand for the second product. Thus, the correct answer is D, which says the demand for the second product will increase by 16%.

Quiz 3: Demand Analysis and Optimal Pricing

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 = $15,the point elasticity of demand is _____.

A good that has a high price elasticity of demand is most likely to:

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 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:

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

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 _____.

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

The initial price for an item is $5.00,and the quantity demanded is 350 units.When the price is raised to $5.25,the quantity demanded falls to 300 units.The absolute value of the point elasticity of demand is _____.

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

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

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

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?

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

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

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

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

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 _____.

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

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:

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 _____.