Deck 4: Demand Theory

Question 1

Which of the following is not a determinant of the demand for a good?

A) Its cost of production
B) Expectations
C) The prices of related products
D) Preferences

Answer 1

Its cost of production

Question 2

The price of a firm's product increases from $5 to $6. As a result, the quantity demanded of the product declines from 600,000 to 500,000. The arc price elasticity of demand for the good is equal to

A) -5.
B) -3.
C) -1.
D) 0.1.

Answer 2

-1.

Question 3

The demand function for a product is defined as Q = 24 - 2P. If price is equal to 6, then the price elasticity of demand is

A) elastic.
B) unit elastic.
C) inelastic.
D) There is not enough information to determine the answer.

Answer 3

unit elastic.

Question 4

The demand function for a product is defined as Q = 24 - 2P. If price is equal to 4, then the price elasticity of demand is

A) elastic.
B) unit elastic.
C) inelastic.
D) There is not enough information to determine the answer.

Question 5

The demand function for a product is defined as Q = 24 - 2P. If price is equal to 8, then the price elasticity of demand is

A) elastic.
B) unit elastic.
C) inelastic.
D) There is not enough information to determine the answer.

Question 6

If a firm reduces the price of its product from $6 to $4 and the quantity demanded of the product increases from 45,000 to 55,000 units per week, then the arc price of elasticity is equal to

A) -10.
B) -1.
C) 0.
D) -0.5.

Question 7

A firm faces a linear demand function defined as Q = 120 - 4P. If the price is 5, what is the point price elasticity of demand?

A) 0
B) -0.2
C) -1
D) -2

Question 8

A firm faces a linear demand function defined as Q = 100 - 3P. If the price is 20, what is the point price elasticity of demand?

A) 0
B) -0.5
C) -1.5
D) -5

Question 9

The price of a firm's product declines from $15 to $9. As a result, the quantity demanded of the product increases from 60,000 to 100,000. The arc price elasticity of demand for the good is equal to

A) -100.
B) -10.
C) -1.
D) -0.1.

Question 10

The price of a firm's product increases from $2.30 to $2.60. As a result, the firm's total revenue decreases from $460,000 to $208,000. The arc price elasticity of demand for the good is equal to

A) -70.
B) -7.
C) -0.7.
D) 0.

Question 11

As the economy emerged from the most recent recession, household income rose by 6 percent. Over the same period, total expenditures on beef increased by 3 percent. Assuming that all other economic variables were held constant,

A) the income elasticity of demand must be equal to 2.
B) beef must be a normal good.
C) beef must be an inferior good.
D) Both A and B are correct.

Question 12

As the economy descended into the most recent recession, household income fell by 5 percent. Over the same period, total expenditures on automobile repairs increased by 3 percent. Assuming that all other economic variables were held constant,

A) the income elasticity of demand is equal to 0.6.
B) automobile repairs must be a normal good.
C) automobile repairs must be an inferior good.
D) Both A and B are correct.

Question 13

The level of household income rose from $28,000 to $30,000 and the number of eggs consumed annually per capita increased from 140 to 150. Assuming that all other economic variables were held constant,

A) the arc income elasticity of demand is equal to 5.
B) the arc income elasticity of demand is equal to 1.
C) the arc income elasticity of demand is equal to -5.1
D) eggs are an inferior good and none of the above is correct.

Question 14

An increase in the price of hot dogs from $1.60 to $2.00 per pound increased the average number of hamburgers demanded per capita per week from 1 to 1.4. Assuming that all other economic variables were held constant, the arc cross-price elasticity of demand between hot dogs and hamburgers is

A) -1.5, which indicates that the two goods are substitutes.
B) -1.5, which indicates that the two goods are complements.
C) 1.5, which indicates that the two goods are substitutes.
D) 1.5, which indicates that the two goods are complements.

Question 15

The price elasticity of demand for a firm's product is equal to -1.8. The firm currently sells 4,000 units per day at a price of $2. If the firm increases its product price by 10 percent, then it can expect to sell approximately

A) 4,280 units.
B) 3,280 units.
C) 2,720 units.
D) 1,980 units.

Question 16

If the price elasticity of demand for a firm's product is -2 and the product's price is $4, then marginal revenue is equal to

A) $4.
B) $3.
C) $2.
D) $1.

Question 17

If marginal revenue is $20 when the price of a product is $40, then the price elasticity of demand is

A) -2.
B) -1.
C) -0.50.
D) -0.25.

Question 18

If the price elasticity of demand for a product is -5.0, and the income elasticity of demand for the product is 2.5, then the firm's total revenue will remain constant if a 1 percent decrease in consumer income is accompanied by a

A) 0.5 percent increase in product price.
B) 0.5 percent decrease in product price.
C) 2 percent increase in product price.
D) 2 percent decrease in product price.

Question 19

If the price elasticity of demand for a product is -1.0, and the cross-price elasticity of demand for the product with respect to a competitor's product is 5.0, then the firm's total revenue will remain constant if a 1 percent increase in the price of the competitor's product is accompanied by

A) a 1 percent increase in the price of the firm's product.
B) a 5 percent decrease in the price of the firm's product.
C) a 5 percent increase in the price of the firm's product.
D) None of the above is correct.

Question 20

A firm's marginal cost is equal to $8 for all levels of production. If the firm's price elasticity of demand is equal to -2.0, what price should be charged in order to maximize profit?

A) $16
B) $12
C) $8
D) $4

Question 21

Electronic commerce refers to

A) the purchase and sale of kilowatt-hours of electricity by public-utility companies.
B) any business activities conducted over the Internet.
C) the exchange of electronic mail and instant messages.
D) catalog sales using 800 numbers.

Question 22

Electronic commerce is a significant channel for sales in all of the following except

A) travel services.
B) books.
C) computer products.
D) construction materials.

Question 23

The growth of electronic commerce is attributable to all of the following except

A) declining importance of brand-name recognition in retail purchasing decisions.
B) reduced costs of executing retail sales.
C) increased shopping convenience.
D) availability of relatively low-cost access to the Internet.

Question 24

Which of the following is not a determinant of a consumer's demand for a commodity?

A) Income
B) Population
C) Prices of related goods
D) Tastes

Question 25

The law of demand refers to the

A) inverse relationship between the price of a commodity and the quantity demanded of the commodity per time period.
B) direct relationship between the desire a consumer has for a commodity and the amount of the commodity that the consumer demands.
C) inverse relationship between a consumer's income and the amount of a commodity that the consumer demands.
D) direct relationship between population and the market demand for a commodity.

Question 26

If the price of a good increases, then

A) the demand for complementary goods will increase.
B) the demand for the good will increase.
C) the demand for substitute goods will increase.
D) the demand for the good will decrease.

Question 27

If consumer income declines, then the demand for

A) normal goods will increase.
B) inferior goods will increase.
C) substitute goods will increase.
D) complementary goods will increase.

Question 28

Which of the following will cause a decrease in quantity demanded while leaving demand unchanged?

A) An increase in the price of a complementary good
B) An increase in income when the good is inferior
C) A decrease in the price of a substitute good
D) An increase in the price of the good

Question 29

Which of the following will not decrease the demand for a commodity?

A) The price of a substitute decreases.
B) Income falls and the good is normal.
C) The price of a complement increases.
D) The commodity's price increases.

Question 30

Demand curves have a negative slope because

A) firms tend to produce less of a good that is more costly to produce.
B) the substitution effect always leads consumers to substitute higher quality goods for lower quality goods.
C) the substitution effect always causes consumers to try to substitute away from the consumption of a commodity when the commodity's price rises.
D) an increase in price reduces real income and the income effect always causes consumers to reduce consumption of a commodity when income falls.

Question 31

If a good is normal, then a decrease in price will cause a substitution effect that is

A) positive and an income effect that is positive.
B) positive and an income effect that is negative.
C) negative and an income effect that is positive.
D) negative and an income effect that is negative.

Question 32

If the consumption decisions of individual consumers are independent, then

A) the market demand curve will be flatter because of the bandwagon effect.
B) the market demand curve will be steeper because of the snob effect.
C) the market demand curve will not be equal to the horizontal summation of the demand curves of individual consumers.
D) None of the above is correct.

Question 33

If the demand curve for a firm's output is perfectly elastic, then the firm is

A) a monopolist.
B) perfectly competitive.
C) an oligopolist.
D) monopolistically competitive.

Question 34

Firms in an industry that produces a differentiated product

A) are either monopolists or oligopolists.
B) are either monopolistically competitive or perfectly competitive.
C) are either monopolistically competitive or oligopolists.
D) are either perfectly competitive or oligopolists.

Question 35

The type of industry organization that is characterized by recognized interdependence and nonprice competition among firms is called

A) monopoly.
B) perfect competition.
C) oligopoly.
D) monopolistic competition.

Question 36

The demand by a firm for inputs used in the production of a commodity that the firm offers for sale

A) is called a derived demand.
B) is directly related to the demand for the commodity.
C) is negatively sloped.
D) is all of the above.

Question 37

If the price elasticity of demand for a firm's output is elastic, then the firm's marginal revenue is

A) positive, and an increase in price will cause total revenue to increase.
B) positive, and an increase in price will cause total revenue to decrease.
C) negative, and an increase in price will cause total revenue to increase.
D) negative, and an increase in price will cause total revenue to decrease.

Question 38

If a firm that produces carrots operates in a perfectly competitive industry, then

A) the demand for the firm's carrots must be horizontal.
B) the demand by individual consumers for carrots must be horizontal.
C) the market demand for carrots must be horizontal.
D) All of the above must be true.

Question 39

If a firm raises its price by 10 percent and total revenue remains constant, then

A) the price elasticity of demand for its output is unitary.
B) marginal revenue is equal to zero.
C) quantity demanded had decreased by 10 percent.
D) All of the above are correct.

Question 40

The price elasticity of demand for a good will tend to be more elastic if

A) the good is broadly defined (e.g., the demand for food as opposed to the demand for carrots).
B) the good has relatively few substitutes.
C) a long period of time is required to fully adjust to a price change in the good.
D) None of the above is true.

Question 41

If a good is inferior, then

A) the income elasticity of demand will be negative.
B) the income elasticity of demand will be zero.
C) the income elasticity of demand will be positive.
D) a decrease in income will cause demand to decrease.

Question 42

The cross-price elasticity of demand between two differentiated goods produced by firms in the same industry will be

A) negative and large.
B) negative and small.
C) positive and large.
D) positive and small.

Question 43

Which of the following is not viewed by firms as an advantage of electronic commerce over traditional commerce?

A) Consumers have the ability to easily compare product prices.
B) The cost of executing a transaction is much lower.
C) Firms have the ability to gather useful information about buyers.
D) Firms can reduce their reaction times to changing market conditions and increase their sales reach.

Question 44

Electronic commerce is a significant market channel for the sale of

A) travel services.
B) books.
C) computer products.
D) All of the above are correct.

Question 45

Consider a scenario where two countries (countries A and B) are net exporters to another country (country C). Also assume that the exports from country A are perceived as normal goods by residents of country C, while the exports from country B are considered as inferior goods. All else held constant, what will happen if country C experiences a severe recession and the consumer incomes in country C experience sharp declines?

A) The recession will spread to both, country A and B through trade
B) The recession will spread to country A, but country B may even be positively impacted
C) The recession will spread to country B, but country A may remain unaffected
D) The recession will not impact countries A and B at all

Question 46

During the last few years we have seen a rise in the production of natural gas in the United States. This lead to a decline in the price of natural gas. If we assume that the price of oil remained roughly the same, this also lead to a reduction in the ratio of the price of natural gas to the price of oil. This resulted in a substitution from oil to natural gas in some production processes. Which of the following statements is incorrect in describing this scenario (assume that all else is held constant):

A) The demand for oil decreased
B) The quantity demanded of natural gas increased
C) The quantity demanded of oil decreased
D) The demand for oil changed

Question 47

Consider a scenario where the demand is estimated to be represented by the following equation:
,
$$Q _ { x } = 1000 - 10 P _ { x } + 0.1 I + 10 P _ { y }$$ Where Px is the price of X, I represents the income of the consumer, Py is the price of another related in consumption good, and Qx is the quantity demanded of X.
Based on this demand function, what can be concluded about X?

A) X is a normal good
B) X is an inferior good
C) The demand for X is not affected by changed in the consumer's income
D) Not enough information is provided to determine anything about X

Question 48

Consider a scenario where the demand is estimated to be represented by the following equation: ,
$$Q _ { x } = 1000 - 10 P _ { x } + 0.1 I + 10 P _ { y }$$ where Px is the price of X, I represents the income of the consumer, Py is the price of another related in consumption good, and Qx is the quantity demanded of X. Based on this, what can be concluded about the relationship between good X and Y?

A) They are substitutes in consumption
B) They are complements in consumption
C) They are unrelated in consumption
D) There is not enough information provided to make any conclusion

Question 49

A patent protects the holder from other producers copying the product. This effectively reduces the competition faces by the firm, thereby making the demand faced by the firm

A) Relatively more price-elastic
B) Relatively less price-elastic
C) Unchanged
D) None of the above

Question 50

Consider a scenario where the demand is estimated to be represented by the following equation $$Q _ { X } = 60 - 2 P _ { X } - 0.2 I - 10 P _ { Y }$$ :, where Px is the price of X, I represents the income of the consumer, Py is the price of another related in consumption good, and Qx is the quantity demanded of X.
Based on this demand function, what can be concluded about X?

A) X is a normal good
B) X is an inferior good
C) The demand for X is not affected by changed in the consumer's income
D) Not enough information is provided to determine anything about X

Question 51

Consider a scenario where the demand is estimated to be represented by the following equation: $$Q _ { X } = 60 - 2 P _ { X } - 0.2 J - 10 P _ { Y }$$ , where Px is the price of X, I represents the income of the consumer, Py is the price of another related in consumption good, and Qx is the quantity demanded of X. Based on this, what can be concluded about the relationship between good X and Y?

A) They are substitutes in consumption
B) They are complements in consumption
C) They are unrelated in consumption
D) There is not enough information provided to make any conclusion

Question 52

Linear demand curve at the midpoint is

A) elastic.
B) inelastic.
C) unitary elastic.
D) none of the above.

Question 53

Linear demand curve below the midpoint is

A) elastic.
B) inelastic.
C) unitary elastic.
D) none of the above.

Question 54

Linear demand curve above the midpoint is

A) elastic.
B) inelastic.
C) unitary elastic.
D) none of the above.

Question 55

If a firm raises its price by 7 percent and total revenue increases, then

A) the demand is elastic at the prices the firm is charging.
B) the demand is unitary at the prices the firm is charging.
C) the demand is inelastic at the prices the firm is charging.
D) All of the above are correct.

Question 56

If the demand for a firm's output is inelastic, then the firm's marginal revenue is

A) positive, and an increase in price will cause total revenue to increase.
B) positive, and an increase in price will cause total revenue to decrease.
C) negative, and an increase in price will cause total revenue to increase.
D) negative, and an increase in price will cause total revenue to decrease.

Question 57

What is the most likely to be an inferior good?

A) Public transportation.
B) Cars.
C) Taxi services.
D) Private plane.

Question 58

Which of the following statements about income elasticity is correct?

A) Income elasticity in the short-run is greater than in the long-run.
B) Income elasticity in the long-run is greater than in the short-run.
C) Income elasticity is the same in the short-run and the long-run.
D) There is no clear relationship between the short-run and the long-run.

Question 59

Which one of the following goods is most likely to be a luxury good?

A) Potatoes
B) Flour
C) Chicken
D) Wine

Question 60

If cross-price elasticity between goods A and B is determined to be exactly zero, which of the following statements is correct?

A) Goods A and B are substitutes
B) Goods A and B are complements
C) Goods A and B are comparatives
D) Goods A and B are independent

Question 61

The increase in price of good A from $1 to $2 caused a decrease in quantity of good B demanded from 10 to 5. Ceteris paribus, the arc cross price elasticity between these two goods is

A) -0.50
B) -1.00
C) -2.00
D) -2.50

Question 62

In a regression of Q on income (i)and other explanatory variables, the coefficient for income was found to be 0.15. This means that the good is

A) a necessity.
B) an inferior good.
C) a luxury.
D) substitute to an expensive good.

Question 63

Which of the following is NOT one of the challenges to long-time traditional sellers due to arrival of e-commerce?

A) Greatly squeezed profits due to comparison shopping.
B) Suppliers entering the retail market themselves via online selling.
C) Auctions and other selling methods lowering prices.
D) All of the above are challenges to traditional sellers.

Question 64

What a seller facing unitary elastic demand for its product should do to increase revenue?

A) Increase price
B) Decrease price
C) Nothing. Keep the price as is
D) Not enough information provided.

Question 65

The cost of production is a major determinant of consumer demand.

Question 66

Managerial economics is primarily concerned with the market demand for an individual firm's output.

Question 67

The quantity of a commodity demanded by a consumer is influenced by the price of the commodity.

Question 68

The demand for an individual firm's output depends on the demand for the industry's output, the number of firms in the industry, and the structure of the industry.

Question 69

The quantity of a commodity demanded by a consumer is influenced by the number of consumers in the market.

Question 70

The quantity of a commodity demanded by a consumer is influenced by the prices of related commodities.

Question 71

The law of demand refers to the relationship between consumer income and the quantity of a commodity demanded per time period.

Question 72

An increase in price of a commodity will generally lead to a decrease in the quantity of the commodity demanded per time period.

Question 73

Inferior goods are generally purchased at low levels of income but not at high levels of income.

Question 74

If an increase in the price of one commodity leads to an increase in the demand for a second commodity, then the two commodities are complements.

Question 75

An individual's demand curve is formulated under the assumption that price is held constant and all other determinants of demand are allowed to vary.

Question 76

The substitution effect holds that an increase in the price of a commodity will cause an individual to search for substitutes.

Question 77

The income effect holds that a decrease in the price of a commodity is, in some respects, the same as an increase in income.

Question 78

A change in the price of a commodity will cause the demand curve for that commodity to shift.

Question 79

If a decrease in income causes an individual's demand curve for a good to shift to the left, then the good is inferior.

Question 80

If a good is normal, then both the substitution effect and the income effect cause quantity demanded to change in the same direction.