Question 1

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

A)  2.25 
B)  2.5 
C)  3.5 
D)  2.0 
E)  1.5

Question 2

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

Accepted Answer

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

Question 3

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

Accepted Answer

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.

Question 4

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)  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.

Question 5

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

Accepted Answer

A)  A firm that faces a very high fixed cost of 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

Question 6

Carefully define price discrimination. What conditions must exist for it to be possible and profitable? Explain.

Accepted Answer

The answer of Carefully define price discrimination. What conditions must...

Question 7

For a good that has a price elasticity of demand of -1.5 and a marginal cost of $50 per unit, the profit-maximizing price should be approximately _____.

Accepted Answer

A)  $200 
B)  $168 
C)  $150 
D)  $50 
E)  $134

Question 8

Firm Z is a U.S. based firm that sells farm equipment and faces demand given by P = 3,000 - Q, where P denotes price in dollars and Q is quantity of units sold per month. In its East coast factory, the firm's fixed costs are $250,000 per month, and its marginal cost of manufacturing the equipment is $1,000 per unit.
(a) Find the firm's profit-maximizing output and price. What is its profit?
(b) Over the last year, the US dollar has appreciated (gained value) versus the Japanese yen with the result that Japanese imports of farm equipment to the US have increased. Firm Z’s marketing department judges that it now would have to cut price by $500 per unit in order to sell the same profit-maximizing quantity as estimated earlier (The price equation will shift inward toward the origin). Is the price-cut consistent with a profit-maximizing strategy?
Explain.
(c) Suppose that a new market for the firm's product emerges in South America. Firm Z has begun selling the equipment in several test markets there and has found the elasticity of demand to be EP = –3 for a wide range of prices (between $1,500 and $2,500). The cost of shipping to South America is $200 per unit. One manager argues that the foreign price should be set at $200 above the earlier profit-maximizing price to cover the transportation cost. Do
you agree that this is the optimal foreign price? Justify your answer.
(d) Suppose that the firm has produced the optimal level of output in part (a). But before this quantity is sold, demand unexpectedly falls to: P = 2,800 - 2Q, (equivalently Q = 1,400 - 0.5P). One manager recommends cutting price to sell the entire inventory; another favors maintaining the price in part (a) (selling less than the total inventory). Do you agree with
either manager? What optimal price would you set?

Accepted Answer

The answer of Firm Z is a U.S. based firm...

Question 9

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

A)  fall by 0.52% 
B)  increase by 24.56% 
C)  increase by 5% 
D)  fall by 3.04% 
E)  fall by 32.84%

Question 10

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

Accepted Answer

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.

Question 11

You are the marketing manager of a firm that produces titanium and sells this metal to two distinct kinds of customers: aircraft producers and golf club manufacturers. Demand for titanium by these two market segments is quite different, as described by the respective price equations: PA = 10 - QA/600 and PG = 12 - QG/100, where annual quantities [QA and QG] are in thousands of pounds and prices [PA and PG] are in dollars. Your firm estimates the marginal cost of titanium production at $4 per pound.
(a) For each segment, determine the firm's profit-maximizing price and output. Is the firm practicing price discrimination?

Accepted Answer

The answer of You are the marketing manager of a...

Question 12

The Juice Shop sells iced soft drinks. Management has found that demand is estimated by the equation: Q = 1,000 - 240P + 80PC, where Q denotes the number of drinks sold per day, P is the drink's price, and PC is the price of drinks at a nearby café. (a) How many drinks will be sold if P = $1.50 and P_C = $1.20? (b) Write down the equation for the firm’s demand curve for P_C = $1.20. (c) If the other café’s price increases to $1.50, what is the effect on Juice Shop’s demand curve?

Accepted Answer

The answer of The Juice Shop sells iced soft drinks....

Question 13

For a parking garage of fixed capacity, the owner sets different parking rates for cars that are parked for less than 24 hours (short-term) and for those that are parked for more than 24 hours (long-term). To maximize revenue, the operator should set prices and target the number of places for each segment such that:

Accepted Answer

A)  the marginal revenues from the segments are equal. 
B)  the total revenues from each of the segments are equal. 
C)  the average revenues from the segments are equal. 
D)  the long-term consumers pay a higher hourly price. 
E)  the price paid by both short-term and long-term consumers is equal.

Question 14

Demand for DVD rentals at a video store is described by the equation: Q = 4,000 - 500P, where Q denotes the number of DVDs rented per week and P is the rental price in dollars.
(a) Determine the point price elasticity of demand at P = $3.
(b) What is the new point price elasticity if price is raised to P = $4.50? Comment on the change in elasticity.

Accepted Answer

The answer of Demand for DVD rentals at a video...

Question 15

Mathematically explain the relationship between marginal revenue and price elasticity.

Accepted Answer

The answer of Mathematically explain the relationship between marginal revenue...

Question 16

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

Accepted Answer

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.

Question 17

Suppose that a firm faces the inverse demand curve: P = 20 - Q/40, where Q is quantity demanded and P is price. Now suppose there is a reduction in demand. Provide a new inverse demand equation consistent with this shift. How does the reduction in demand affect the firm's revenue-maximizing output and price?

Accepted Answer

The answer of Suppose that a firm faces the inverse...

Question 18

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

A)  -0.25 
B)  -0.067 
C)  -0.33 
D)  -.67 
E)  -1.33

Question 19

If customer income increases over time, (while price is held constant), what is the most likely impact on unit sales of a firm? Explain.

Accepted Answer

The answer of If customer income increases over time, (while...

Question 20

Assume that Insite Corporation produces advanced analytic software for computer simulations called Model-It. Based on an analysis of product sales over a two-year period, Insite's marketing department estimates the demand for Model-It to be QM = 1,200 - 8PM + 4PS, where QM denotes units sold of Model-It software, PM denotes Model-It's price, and PS denotes the price of a best-selling statistical software package (with both prices in dollars). (a) Currently, P_M = $200 and P_S = $300. What is the predicted demand for Model-It software?

Accepted Answer

The answer of Assume that Insite Corporation produces advanced analytic...

Exam 3: Demand Analysis and Optimal Pricing