Deck 4: Demand

Question 1

Assume the demand function for SeatComfy's table chairs is as given in the previous question (Q = 5,000 - 25P + 4I +10P_A - 15P_T). Moreover, assume that currently P = 10, P_A = 15, I = 500, P_T = 100. Which of the following is true?

A) If SeatComfy increases its price by 1%, sales will increase as well as total revenues.
B) If SeatComfy decreases its price by 1%, sales will increase, while total revenues will decrease.
C) If SeatComfy increases its price by 1%, sales will decrease, while total revenues will increase.
D) If SeatComfy increases its price by 1%, sales will decrease as well as total revenues.

Answer 1

C

Question 2

The identification problem in using regression analysis to estimate a demand curve emerges when:

A) factors affecting the demand for the product are highly correlated.
B) the demand for the product has not been stable over time.
C) the demand for the product has been relatively stable over time.
D) the supply of the product has been relatively unstable over time

Answer 2

B

Question 3

A demand function depicts how the consumer demand of a product varies with:

A) available income.
B) cost of raw materials
C) the price of oil
D) amount available in the market

Answer 3

A

Question 4

Assume SeatComfy Inc. estimates the demand for its table chairs to be Q = 5,000 - 25P + 4I +10P_A - 15 P_T, where P = the price of SeatComfy's chairs; P_A = average price of competitors' chairs; P_T = price of tables; and I = average income of SeatComfy's customers. Which of the following is true?

A) SeatComfy's chairs are inferior goods; SeatComfy's chairs and tables are complements, while SeatComfy's and competitors' chairs are substitutes. SeatComfy's sales decrease by 250 units for each $10 increase in their own price.
B) SeatComfy's chairs are normal goods; SeatComfy's and competitors' chairs are substitutes, while SeatComfy's sales are not affected by the pricing decisions of tables' producers. SeatComfy's sales increase by 50% if the price decreases by $2.
C) SeatComfy's chairs are a normal good; SeatComfy's chairs and tables are complements, while SeatComfy's and competitors' chairs are substitutes. SeatComfy's sales decrease by 25 units for each dollar increase in price.
D) SeatComfy's chairs are a normal good; SeatComfy's chairs and tables are complements, while SeatComfy's and competitors' chairs are substitutes. SeatComfy's sales decrease by 250 units for each dollar increase in price.

Question 5

Assume the demand function for skin care products is given by Q = 1,000 - 20 P + 5I. If P=$25 and I=$1,000 currently, then:

A) skin care products are a normal good.
B) the elasticity of demand is equal to 11.
C) skin care products are inferior.
D) The price is too high

Question 6

Assume Pyrotex Inc. estimates the demand for its fireworks to be linear. If the current price charged by Pyrotex is such that the elasticity of demand is equal to 2.5, which of the following statements is true?

A) Pyrotex will surely increase its profits by decreasing the price of fireworks.
B) Pyrotex will surely increase its profits by increasing the price of fireworks.
C) Pyrotex cannot increase its profits by changing the price of fireworks.
D) Not enough information is provided to determine whether Pyrotex is currently maximizing its profits.

Question 7

Fast food is believed to be an inferior good. This means that:

A) the quantity of fast food consumed decreases as income increases.
B) the income elasticity of demand for fast food is positive.
C) the quantity of fast food consumed will always be high
D) fast food is really not quality food

Question 8

BrightLight Ltd. estimates the demand curve for its table lamps to be Q = 1,000 - 4 P. That is, P = 250- .25Q. Which of the following is NOT true?

A) The maximum total revenue BrightlLight can obtain is $62,500.
B) The Marginal Revenue curve for BrightLight's table lamps is given by MR = 250 - ½ Q.
C) The elasticity of demand for BrightLight's table lamps is equal to 7.5 when their price is $125.
D) BrightLight maximizes its total revenues when selling 500 lamps.

Question 9

Assume the demand curve for t-shirts is Q = 180 - 15P or P = 12 - .0667 Q. When are total revenues maximized?

A) When the price is $3.00.
B) When the price is $6.00.
C) When the price is $8.00.
D) When the price is $6.66

Question 10

Assume the demand curve for skirts in Europe is P = 100 - Q_E (or Q_e=100 - P), while the U.S demand is P = 100 - ¼Q_US. (or Q_us = 400 - 4P). Over the range of prices which demand is more price elastic?

A) U.S. demand is more elastic.
B) European demand is more elastic.
C) It depends on the price level.
D) U.S. and European demand have the same elasticity for any price level.

Question 11

The long-run price elasticity of demand for a product is generally _________ the short-run elasticity for the same product.

A) lower than
B) equal to
C) higher than
D) not comparable to

Question 12

Sales of shampoo by CleanHair, Inc. have recently decreased from 1,300 to 1,100 units in response to a price decrease from $7 to $5 by its main competitor. Assuming that everything else is being held constant, we can infer that:

A) the cross-price ARC-elasticity (midpoints formula) between the two products is -2.
B) the cross-price ARC-elasticity (midpoints formula) between the two products is -½.
C) the cross-price ARC-elasticity (midpoints formula) between the two products is ½.
D) the cross-price ARC-elasticity (midpoints formula) between the two products is 2.

Question 13

If the demand for product A displays high and positive cross-price elasticity with respect to the price of product B, then:

A) the demand for product A is likely to have a low price elasticity.
B) products A and B are substitutes.
C) products A and B are complements
D) the demand for product B is likely to have a low price elasticity.

Question 14

Computer equipment is believed to be a normal good. This means that:

A) the quantity of computer equipment consumed decreases as income increases.
B) the income elasticity of demand for computer equipment is negative.
C) the quantity of computer equipment increases as income increases.
D) the quantity of computer equipment increases as income decreases.

Question 15

Assume D₁ represents the current demand curve for skis. Which of the following would be likely to cause D₁ to shift to D₂?

A) An increase in the price of snowboards.
B) An increase in the price of ski boots and clothing.
C) A decrease in the price of skis.
D) An increase in the price of skis.

Question 16

Assume Pyrotex Inc. estimates the demand for its fireworks to be linear. If the current price charged by Pyrotex is such that the elasticity of demand is equal to 2.5, which of the following statements is true?

A) Pyrotex will increase its revenues by decreasing the price of fireworks.
B) Pyrotex will increase its revenues by increasing the price of fireworks.
C) Pyrotex cannot increase its revenues by changing the price of fireworks.
D) Not enough information is provided to determine whether or not Pyrotex is currently maximizing its profits.

Question 17

Which of the demand curves depicted below has constant price elasticity?

A) All of them.
B) None of them.
C) (1) and (3).
D) (2) and (3).

Question 18

FarAwayDrive Inc. has recently increased the price of its golf balls from $4.00 to $6.00. In response to this increase in price, sales decreased from 2,200 to 1,800 units. If no other information concerning the demand is available, which of the following is true about the sensitivity of demand (using the ARC or mid-points formula) for FarAwayDrive's golf balls?

A) The ARC-elasticity (midpoints formula) of demand is 2.0.
B) The ARC-elasticity (midpoints formula) of demand is ½ or .50.
C) The ARC-elasticity (midpoints formula) of demand is 2/3 or .667.
D) The ARC-elasticity (midpoints formula) of demand is 4/11 or .364.

Question 19

Let Ed_GIrefer to the income elasticity for gasoline. Suppose Ed_GI= 2, then this means that

A) if income increases by 2%, then Qd_Gwill increase by 1%
B) if income decreases by 1%, then Qd_Gwill decrease by 2%
C) if income increases by $1, then Qd_Gwill decrease by 2%
D) if income decreases by 2%, then Qd_Gwill decrease by 1%

Question 20

Assume that several firms compete in the market for cellular phones, and that the price elasticity for this industry is equal to 0.75. Based on this information, would you advise a firm in this industry to increase its price? If so, what is the percentage loss in total sales this firm should expect to experience?

A) Definitely yes. Total revenues would increase, since < 1. Sales would decrease by only .75% for each 1% increase in price.
B) Not enough information is provided to make a sound decision. For the same reason it is not possible to predict what the loss in sales for one firm would be.
C) Definitely no. Each 1% increase in price would result in 7.5% reduction in total sales, negatively affecting total revenues.
D) Definitely no. Each 1% increase in price would result in 7.5% reduction in total sales, affecting total revenues positively.

Question 21

Ed_t = - 5. This means that if

A) P_t increases by 5%, then Qd_t will decrease by 1%
B) Qd_t increases by 5%, P_t will decrease by 1%
C) P_t increases by 1%, Qd_t will decrease by 5%
D) P_t decreases by $1.00, Qd_t will decrease by 5 units

Question 22

As we move down a linear demand curve, demand becomes

A) More elastic
B) More inelastic
C) Unitary elastic
D) Perfectly elastic

Question 23

Price elasticity is defined as the change in quantity demanded relative to a change in:

A) the price of substitute products.
B) consumer income.
C) the price of complementary products.
D) the price of the product.

Question 24

Let Ed_t = -2. This implies that the demand for movie tickets is

A) Inelastic, because a 1% change in P_t changes Qd_t by 2 units
B) Inelastic, because a 1% change in P_t changes Qd_t by 1%
C) Elastic, because a 1% change in P_t changes Qd_t by 1%
D) Elastic, because a 1% change in P_t changes Qd_t by 2%

Question 25

Price elasticity of demand tells us the responsiveness of

A) Quantity demanded, to a $1 change in price
B) Quantity demanded, to a 5% change in price
C) Price, to a 1% change in quantity demanded
D) Quantity demanded, to a 1% change in price

Question 26

The shape of a perfectly inelastic demand curve is

A) Horizontal, Ed =
B) Horizontal, Ed = 0
C) Horizontal, Ed = -1
D) Vertical, Ed = 0

Question 27

The shape of a perfectly elastic demand curve is

A) Horizontal, Ed = infinity
B) Horizontal, Ed = 0
C) Horizontal, Ed = -1
D) Vertical, Ed = 0

Question 28

Which ONE of the following statements correctly expresses the elasticity formula for Ed_t?

A)
B)
C)
D)

Question 29

Let Ed_t = -0.5. This implies that the demand for t is

A) Elastic, because if P_t increases by 1%, Qd_t will decrease by 0.5%
B) Elastic, because if P_t decreases by 1%, Qd_t will decrease by 0.5%
C) Inelastic, because if P_t decreases by $1, Qd_t will increase by 0.5 units
D) Inelastic, because if P_t decreases by 1%, Qd_t will increase by 0.5%

Question 30

If the demand for movie tickets is elastic, then

A) Ed > 1
B) Ed < 1
C) Ed = 1
D) Ed = 0

Question 31

"Inelastic demand" means that

A) Quantity demanded is very sensitive to price
B) Quantity demanded is not very sensitive to price
C) Price is very sensitive to quantity demanded
D) Price is not very sensitive to quantity demanded