Test Bank Demand Chapter 4 7th Edition - Test Bank | Managerial Economics and Organizational Architecture 7th Edition by James Brickley. DOCX document preview.
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1) 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.
2) 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?
3) The law of demand states the basic price/quantity relationship of consumption is sensitive. What does the concept of “price elasticity” add to that knowledge?
4) 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.
5) 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?
6) 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?
7) 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.
8) Suppose that the current market price of laptops is $300, that the average consumer disposable income is $30,000, and that the price of iPads/notebooks (a substitute for laptops) is $500. Under these conditions annual U.S. demand for laptops is 5 million per year. Statistical studies have shown that for laptops the own-price elasticity of demand is –1.3. The income elasticity of demand for laptops is 1.7. The cross-price elasticity of demand for laptops with respect to iPads/notebooks is 0.8. Use this information to predict the annual number of laptops sold under the following conditions:
(1) Increasing competition from Asia causes laptop prices to fall to $270 with income and the price of iPads/notebooks 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 iPads/notebooks, reducing the price of an iPad/notebook to $400, with the price of laptops and income unchanged.
(4) All of the events described in parts 1−3 occur simultaneously.
9) 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?
10) 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.
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
12) 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.
13) 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.
14) 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.
15) 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.
16) Assume the demand function for SeatComfy's table chairs is Q = 5,000 - 25P + 4 I +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.
17) 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.
18) FarAwayDrive Inc. has recently increased the price of its golf balls from $4 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.
19) Assume the demand curve for T-shirts is Q = 180 - 15P or P = 12 - 0.0667Q. 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
20) A new fireworks company has moved into the empty warehouse across town. Assume Pyrotex Inc. estimates the demand for its fireworks to now be marginal. If the current price charged by Pyrotex is such that the demand of elasticity is unitary, which of the following statements is true?
A) Pyrotex has a marginal revenue of one.
B) Pyrotex has a marginal revenue that is negative.
C) Pyrotex has a marginal revenue that is positive.
D) Not enough information is provided to determine whether or not Pyrotex is currently maximizing its revenues.
21) Price elasticity is defined as the percentage change in quantity demanded relative to a percentage change in
A) the price of substitute products.
B) consumer income.
C) the price of complementary products.
D) the price of the product.
22) 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.
23) Which ONE of the following correctly expresses the elasticity formula for Edt?
A)
B)
C)
D)
24) 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.
25) The shape of a perfectly inelastic demand curve is
A) horizontal, Ed = ∞.
B) horizontal, Ed = 0.
C) horizontal, Ed = -1.
D) vertical, Ed = 0.
26) If the demand for movie tickets is elastic, then
A) Ed > 1.
B) Ed < 1.
C) Ed = 1.
D) Ed = 0.
27) 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.
28) 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.
29) 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.
30) 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.
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.
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.
33) 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.
34) 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.
35) 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.
36) 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.
37) Assume D1 represents the current demand curve for skis. Which of the following wouldmost 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
38) 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.
39) 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.
40) 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.
41) Goods and services for which network concerns are important have ________ demand.
A) relatively inelastic
B) relatively elastic
C) perfectly inelastic
D) unitary elastic
42) 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
43) 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.
44) 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.
45) 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.
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Test Bank | Managerial Economics and Organizational Architecture 7th Edition
By James Brickley