Deck 4: Demand

Question 1

In the small town of Springfield,Duffman observes that the price of beer has fallen.Duffman concludes that the total amount of money spent buying beer has to fall since the price of beer is lower now.Is he correct? Why or why not? Clearly explain your answer.

Answer 1

Duffman is incorrect in arguing that a lower cost of beer has to reduce the total amount of money spent on buying beer.Total spending on beer (total revenue to the industry)is the product of price and quantity.A lower price of beer certainly reduces per-unit revenue,but the law of demand implies more people will drink beer at the lower price.So the quantity of beer demanded increases.It is uncertain whether total spending on beer will increase or decrease: It depends on the elasticity of demand for beer.If the demand for beer is inelastic,then total spending would drop.But if the demand for beer is elastic,then total spending on beer would increase at the lower price,as the quantity sold would have increased substantially.

Question 2

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

A)The maximum total revenue BrightLight can obtain is $62,500.
B)The marginal revenue curve for BrightLight's table lamps is given by MR = 250 - ½P.
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.

Answer 2

C

Question 3

Always Round Tire finds that their demand curve is P = 50 − .02 Q.What price and quantity combination will maximize the firm's revenue? What are the total revenue and price elasticity at this point?

Answer 3

Marginal revenue has twice the slope of the demand curve: MR = 50 − 0.04Q.The quantity that maximizes revenue is where marginal revenue equals zero: 50 − 0.04Q = 0
Solving,Q = 50/0.04 = 1,250.P = 50 − 0.02 * (1,250)= $25.Hence,revenue will be maximized when they produce 1,250 units and charge a price of $25.At this revenue maximizing quantity and price,the total revenue is: TR = P * Q = 25 * 1,250 = $31,250.The price elasticity of demand is equal to (% change in Q)/ (% change in P).If the price increases from $25 to $26,the quantity demanded is 26 = 50 - 0.02Q = 24/0.02 = Q = 1,200.Therefore,the price elasticity of demand = (1,200 - 1,250/1,250)/ (26 - 25 / 25)= 0.04 / 0.04 = 1.

Question 4

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 5

Assume the demand function for SeatComfy's table chairs is 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 percent,sales as well as total revenues will increase.
B)If SeatComfy decreases its price by 1 percent,sales will increase,while total revenues will decrease.
C)If SeatComfy increases its price by 1 percent,sales will decrease,while total revenues will increase.
D)If SeatComfy increases its price by 1 percent,sales as well as total revenues will decrease.

Question 6

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 as sales would decrease by only .75 percent for each 1 percent 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 percent increase in price would result in 7.5 percent reduction in total sales,negatively affecting total revenues.
D)Definitely no.Each 1 percent increase in price would result in 7.5 percent reduction in total sales,affecting total revenues positively.

Question 7

ALC,Inc.,has,in recent years,opened large markets of new customers,experienced strong competition from substitutes,and survived a nasty national recession.When the chief economist statistically estimated the company's product demand using data from the past five years,she found a statistically significant positive (direct)relationship between price and quantity.What according to you led to this finding?

Question 8

The manager of Viking Sports finds that the price elasticity of baseball bats is −0.77.He wants to hold a sale to get rid of his inventory.What will you advise him?

Question 9

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)Demand in the United States is more elastic.
B)Demand in Europe is more elastic.
C)It depends on the price level.
D)Demand in the United States and Europe has the same elasticity for any price level.

Question 10

Which of the following is true of the demand curves shown below?

A)All of them have constant price elasticity.
B)None of them have constant price elasticity.
C)Curves (1)and (3)have constant price elasticity.
D)Curves (2)and (3)have constant price elasticity.

Question 11

Suppose that the current market price of VCRs is $300,that the average consumer disposable income is $30,000,and that the price of DVDs (a substitute for VCRs)is $500.Under these conditions annual U.S.demand for VCRs is 5 million per year.Statistical studies have shown that for VCRs the own-price elasticity of demand is -1.3.The income elasticity of demand for VCRs is 1.7.The cross-price elasticity of demand for VCRs with respect to DVDs is 0.8.Use this information to predict the annual number of VCRs sold under the following conditions:
(1)Increasing competition from Asia causes VCR prices to fall to $270 with income and the price of DVDs remaining unchanged.
(2)Income tax reductions raise average disposable personal income to $31,500 with prices unchanged.
(3)An inventor in Menlo Park invents a cheaper way to produce DVDs,reducing the price of a DVD to $400,with the price of VCRs and income unchanged.
(4)All of the events described in parts 1−3 occur simultaneously.

Question 12

The law of demand states the basic price/quantity relationship of consumption incentives.What does the concept of "price elasticity" add to that knowledge?

Question 13

Analyze the demand function for a dinner at FancyFoods,a restaurant,given the four changes listed below:
(a)The restaurant down the street,Gourmet Meals,features a two-for-one meal special.
(b)The opera provides a coupon offering a 15 percent discount at FancyFoods with each ticket for the 6:00 p.m.show.
(c)Always Round Tire runs a special on tires; a 30 percent reduction in price if you buy four tires.
(d)The main employer in town provides a large increase in salaries for white-collar workers.

Question 14

Currently,the demand equation for baseball bats is Q = 100 - 2P.The current price is $15 per bat.Is this the best price to charge in order to maximize revenues?

Question 15

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 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 revenues.

Question 17

FarAwayDrive Inc.has recently increased the price of its golf balls from $40 to $6.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 midpoints 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 18

Always Round Tire finds the following cross elasticity:
(a)Demand for tires/price of batteries = 0.45.
(b)Demand for tires/price of brake jobs = −0.70.
(c)Demand for tires/price of an oil change = 0.002.
Discuss how the pricing of batteries,brakes,and oil changes will affect the sales of tires.

Question 19

A demand function depicts how consumer demand for a product varies with

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

Question 20

Assume that 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 21

"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.

Question 22

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

A)
B)
C)
D)

Question 23

Let Ed_GI refer to the income elasticity for gasoline.Suppose Ed_GI= 2; then this means that if income

A)increases by 2 percent,Qd_G will increase by 1 percent.
B)decreases by 1 percent,Qd_G will decrease by 2 percent.
C)increases by $1,Qd_G will decrease by 2 percent.
D)decreases by 2 percent,Qd_G will decrease by 1 percent.

Question 24

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)the quantity of fast food supplied decreases as income increases.

Question 25

Goods and services for which network concerns are important have ______ demand.

A)relatively inelastic
B)relatively elastic
C)perfectly inelastic
D)unitary elastic

Question 26

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

A)inelastic,because a 1 percent change in P_t changes Qd_t by 2 units.
B)inelastic,because a 1 percent change in P_t changes Qd_t by 1 percent.
C)elastic,because a 1 percent change in P_t changes Qd_t by 1 percent.
D)elastic,because a 1 percent change in P_t changes Qd_t by 2 percent.

Question 27

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 table producers.SeatComfy's sales increase by 50 percent if the price decreases by $2.
C)SeatComfy's chairs are normal goods; SeatComfy's chairs and tables are complements,while SeatComfy's and competitors' chairs are substitutes.SeatComfy's sales decrease by 25 units as price increases by $1.
D)SeatComfy's chairs are normal goods; SeatComfy's chairs and tables are complements,while SeatComfy's and competitors' chairs are substitutes.SeatComfy's sales decrease by 250 units as price increases by $1.

Question 28

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 29

Ed_t = - 5.This means that if

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

Question 30

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

A)An increase in the price of snowboards
B)A decrease in the price snowboards
C)A decrease in the price of skis
D)An increase in the price of skis

Question 31

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 32

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 normal goods.
B)the elasticity of demand is equal to 11.
C)skin care products are inferior goods.
D)the elasticity of demand is equal to 10.

Question 33

Price elasticity of demand tells us the responsiveness of

A)quantity demanded to a change in the price of a substitute good.
B)quantity demanded to a change in quantity supplied of a good.
C)price to a 1 percent change in quantity demanded.
D)quantity demanded to a 1 percent change in price.

Question 34

BaseBall Inc.is a leader in the industry for baseball bats.If new firms enter the industry and BaseBall Inc.experiences a fall in market share,we can say that the product of the company is in the ______ phase.

A)decline
B)maturity
C)growth
D)introductory

Question 35

Which of the following describes the difference between the demand faced by a firm and the demand faced by an industry?

A)The demand facing individual firms tend to be more price-elastic than those for the entire industry.
B)The elasticity of demand for a firm and for an industry is the same.
C)The demand facing individual firms tend to be less price-elastic than those for the entire industry.
D)The income elasticity of demand faced by a firm is higher than the income elasticity of demand faced by an industry.

Question 36

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 37

If the demand for movie tickets is elastic,then

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

Question 38

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 39

At the midpoint of a linear demand curve,the elasticity of demand is

A)zero.
B)one.
C)greater than one.
D)less than zero.

Question 40

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

A)elastic,because if P_t increases by 1 percent,Qd_t will decrease by 0.5 percent.
B)elastic,because if P_t decreases by 1 percent,Qd_t will decrease by 0.5 percent.
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 percent,Qd_t will increase by 0.5 percent.

Question 41

Which of the following is a limitation of demand estimation through price experimentation?

A)Consumers have incentives to be less truthful in their reaction to price changes,which will provide flawed data.
B)Direct market tests like price experimentation are controlled experiments and will not reflect the effects of other changes in the market.
C)This approach is comparatively <>more expensive than the other approaches of demand estimation.
D)There is no uniform result as the demand will differ,depending on whether customers anticipate that a price change is permanent or temporary.

Question 42

The omitted-variable problem in statistical analysis occurs when

A)excluded variables are correlated with explanatory variables that are included in the analysis.
B)the demand for the product has not been stable over time.
C)the price of the product has been relatively unstable over time.
D)there is no uniform result because the accounted variables are not affected by changes in other variables.

Question 43

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.