question

Sam owns a taco restaurant, and he conducted a consumer survey that indicates that the price elasticity of demand for his restaurant is 3.5. You would advise Sam to

answer

Lower his price to increase revenue.

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Ceteris paribus, if income increases and as a result, the demand for good X increases and the demand for good Y falls

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Good X is a normal good and good Y is an inferior good.

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If the price increases by 10 percent, and the quantity demanded falls by 5 percent, the absolute value of the price elasticity will be

answer

0.5.

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A grocery store put salt on sale but found that total revenues fell. This can be explained by which of the following?

answer

The demand for salt is inelastic.

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The total revenue effect of a movement along a demand curve can best be predicted using the

answer

Price elasticity of demand

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Ceteris paribus, the longer the time period, the

answer

More elastic the demand for the good.

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Suppose computer prices at an office supply store fall from $1,000 to $900 and as a result the quantity demanded of typewriters decreases from 40 to 20 per month. The cross-price elasticity of demand is closest to

answer

6.3. (Because a 10.5 percent decrease in computer prices caused a 66.7 percent decrease in the demand for typewriters, the cross-price elasticity of demand is equal to 6.3.)

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Suppose a university raises its tuition by 6 percent and as a result the enrollment of students decreases by 3 percent. The absolute value of the price elasticity of demand is

answer

0.5.

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Which of the following causes demand to be more elastic with respect to price?

answer

A high ratio of price to income.

question

Item 10

Suppose the quantity demanded of ski boats falls from 4.0 million to 3.0 million as a result of an average price increase from $20,000 to $25,000 per boat. The absolute value of the price elasticity of demand is closest to

Suppose the quantity demanded of ski boats falls from 4.0 million to 3.0 million as a result of an average price increase from $20,000 to $25,000 per boat. The absolute value of the price elasticity of demand is closest to

answer

1.29. The price elasticity of demand is equal to the percentage change in quantity demanded divided by the percentage change in price. Therefore the price elasticity of demand is equal to ((4-3)/((4+3)/2))/((25,000-20,000)/((25,000+20,000)/2)) or 1.29.

question

A good is normal if the sign on the income elasticity formula is

answer

Positive, The income elasticity formula is the percentage change in quantity demanded for good X, divided by the percentage change in income. For normal goods, as income rises (+), the quantity demanded for good X will rise (+). The sign on the formula then will be positive for normal goods.

question

If demand is price-elastic, then

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The elasticity number E is greater than 1, Quantity demanded will be greater than the percentage change in price, so the elasticity number E will be greater than 1 if demand is elastic.

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Higher prices will increase total revenue if

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Demand is inelastic.

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The basic formula for price elasticity is

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The percentage change in quantity demanded divided by the percentage change in price.

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When the prices of postage stamps rise, the demand for Internet service increases, ceteris paribus. Postage stamps and Internet service are therefore

answer

Substitutes.

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The formula for cross-price elasticity is

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The percentage change in the quantity demanded for one good divided by the percentage change in the price of another good.

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Assume that store-brand cereal is an inferior good. If income rises, then the price of store brand cereal will ________ and the quantity sold of store brand cereal will _______.

answer

fall; fall

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Suppose the income elasticity of demand for used jet skis is 3.5. If the level of income decreases by 1 percent, the number of used jet skis sold will, ceteris paribus,

answer

Fall by 3.5%, The income elasticity of demand is equal to the percentage change in quantity demanded divided by the percentage change in income. If income falls by 1 percent and income elasticity of demand is equal to 3.5, the demand will fall 3.5 percent.

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A price change will have no effect on total revenue if demand is

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Unitary

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Total revenue is

answer

Quantity sold times price.

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To find the average percentage change in quantity demanded,

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The change in quantity demanded is divided by the average quantity.

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To find the average percentage change in price,

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The change in price is divided by the average price.

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If a good is normal, its

answer

Income elasticity of demand is positive.

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For product XYZ, the price elasticity of demand has an absolute value of 3.5. This means that quantity demanded will increase by

answer

3.5 percent for each 1 percent decrease in price, ceteris paribus.

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Total revenue is equal to

answer

The income from sales.

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Assume apples and oranges are substitutes. Suppose apple growers launch a successful advertising campaign that convinces consumers apples are a better product. As a result the cross-price elasticity of apples and oranges will become

answer

Less positive (move closer to zero). If two goods are substitutes, the cross-price elasticity is positive, but becomes less positive due to ad.

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Ceteris paribus, as the number of substitutes for a good increases, the

answer

Price elasticity of demand should become larger.

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If the elasticity of demand for cigarettes is 0.4, a seller should

answer

Increase price to increase total revenue, the demand is very inelastic.

question

Sam owns a taco restaurant, and he conducted a consumer survey that indicates that the price elasticity of demand for his restaurant is 3.5. You would advise Sam to

answer

If the elasticity of demand is 3.5 (in absolute value), it indicates that demand is very elastic. Consumers have a lot of substitutes available. Therefore Sam should lower his price to increase total revenue because the quantity demanded will increase.

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A demand curve that is perfectly inelastic is

answer

Vertical.

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Which of the following is not a determinant of the price elasticity of demand?

answer

The amount of income the consumer has.

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MP3 players and MP3 files are complementary goods. The cross-price elasticity of demand between MP3 players and MP3 files is expected to be

answer

The cross-price elasticity of demand will be negative for complements because a decrease in the price of MP3 players will cause an increase in demand for MP3 files.

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Technically the elasticity number is negative because

answer

When price falls quantity demanded will rise, but for simplicity economists take the absolute value of the elasticity number.

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The local baseball team owner hires you to help maximize the team's profits. You are told that costs are constant because enough help is always hired for a full stadium, so assume your task is to maximize revenues from ticket sales. Your advice to the owner should be to

answer

Set the price of tickets at the unitary elasticity price.

question

What is the impact of higher prices on demand?

answer

The impact of higher prices on total revenue depends on the price elasticity of demand. Higher prices result in higher total revenue only if demand is inelastic. If demand is elastic, lower prices result in higher revenues. Therefore to maximize revenue, a firm should charge the price at the point where elasticity goes from elastic to inelastic-in other words is equal to 1.

question

The impact of higher prices on total revenue depends on the price elasticity of demand. Higher prices result in higher total revenue only if demand is inelastic. If demand is elastic, lower prices result in higher revenues. Therefore to maximize revenue, a firm should charge the price at the point where elasticity goes from elastic to inelastic-in other words is equal to 1.

answer

The percentage change in quantity demanded is greater than the percentage in price. Correct

question

If a good is inferior, its

answer

Income elasticity of demand is negative.

question

If the elasticity of demand is 3, and the price rises by 15 percent, then

answer

The basic formula for price elasticity is the price elasticity of demand number = the percentage change in quantity demanded divided by the percentage change in price. 3 = x/.15 =.45, so quantity demanded falls by 45 percent.

question

Cross-price elasticity refers to

answer

How responsive consumers of one good are to a change in the price of another good.

question

How responsive consumers of one good are to a change in the price of another good.

answer

Income elasticity of demand.

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If incomes fall by 5 percent and the quantity demanded for new cars falls by 10 percent,

answer

New cars are a normal good, and the income elasticity is +2.0.

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Price elasticity formula

answer

Price elasticity (E) = (percentage change in quantity demanded) / (percentage change in price) = 1.5% / 10% = 0.15

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Income elasticity: By how much will popcorn sales increase if average income goes up by 10 percent? (Assume the income elasticity of popcorn is 3.29.)

answer

.33 (3.29 * .10)

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If the cross-price elasticity of demand between printed textbooks and e-books is 0.3,

answer

They are substitutes

question

The average variable cost curve slopes upward with a higher rate of output in the short run because of

answer

The effect of diminishing returns.

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If the marginal cost curve is rising, which of the following must be true?

answer

Total costs must be rising.

question

Economic cost

answer

Includes both implicit and explicit costs.

question

How do you find average fixed cost (AFC?)

answer

AFC can be found at any quantity of output by taking the difference between ATC and AVC. For example, at the quantity of 120, AFC is equal to $80 ($288 - $208).

question

Which of the following is a factor of production for the Little Biscuit Bread Company?

answer

Flour.

question

How do you find total cost?

answer

TC can be found by multiplying ATC by quantity at any output level. So at an output level of 120, TC is equal to $34,560 ($288 ×120).

question

Marginal cost

answer

Is the change in total cost from producing one additional unit of output.

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The period in which at least one input is fixed in quantity is the

answer

Short run

question

Which of the following is the slope of the production function with respect to an input?

answer

The marginal physical product of the input.

question

A production function shows the

answer

Maximum output that can be produced with varying combinations of factor inputs.

question

If a firm could hire all the workers it wanted at a zero wage (i.e., the workers are volunteers), the firm should hire

answer

Enough workers to produce where the MPP equals zero. Correct

question

If workers are paid $10, what is the labor cost per unit of output in Table 21.1 when output is increased from 15 to 35 units of output?

answer

$0.50 per unit. Correct

question

If an additional unit of labor costs $20 and has a MPP of 15 units of output, the marginal cost is

answer

Marginal cost is the increase in total cost associated with a one-unit increase in production and can be found by dividing the change in total cost by the MPP. If an additional unit of labor costs $20 and has a MPP of 15 units of output, the marginal cost is 20/15 or $1.33.

question

Average fixed cost (AFC)

answer

Average fixed cost is equal to fixed cost divided by quantity. Fixed cost of 40 (because total cost is $40 at 0 units of output) divided by 20 is equal to $2.00.

question

How to find AFC in chart

answer

AFC can be found at any quantity of output by taking the difference between ATC and AVC. Once you have AFC, you can multiply it by quantity to get FC. For example, at the quantity of 120, AFC is equal to $80 ($288 - $208) and FC is equal to $9,600 ($80 ×120).

question

The change in total output associated with one additional unit of input is the

answer

Marginal physical product. Correct

question

The marginal physical product is the

answer

Change in total output associated with one additional unit of the variable input. Correct

question

If the marginal physical product (MPP) is falling, then the

answer

Marginal cost of each unit of output is rising. Correct

question

The short-run production function shows how output changes when

answer

The quantity of labor changes. Correct

question

Average total cost is equal to

answer

Total cost divided by quantity produced. Correct

question

Ceteris paribus, the law of diminishing returns states that beyond some point, the

answer

Marginal physical product of a factor of production diminishes as more of that factor is used. Correct

question

Which of the following statements is not true regarding the production function and the production possibilities curve?

answer

A production function tells us the maximum amount of output attainable from the use of all resources. Correct

question

Diminishing returns occur because

answer

...

question

The perfectly competitive market structure includes all of the following except

answer

Large advertising budgets.

question

The demand curve confronting a competitive firm is

answer

Horizontal, while market demand is downward-sloping.

question

The demand curve for each perfectly competitive firm is

answer

Horizontal.

question

Short-run profits are maximized at the rate of output where

answer

Marginal revenue is equal to marginal cost.

question

For the perfectly competitive firm, the marginal revenue is always

answer

Constant

question

For perfectly competitive firms, price

answer

Is equal to marginal revenue.

question

If a perfectly competitive firm is producing a rate of output at which MC exceeds price, then the firm

answer

Can increase its profit by decreasing output.

If MC exceeds price, a firm is spending more to produce that extra unit than it is getting back, and total profits will decline. Hence a firm will want to decrease production whenever price is less than MC.

If MC exceeds price, a firm is spending more to produce that extra unit than it is getting back, and total profits will decline. Hence a firm will want to decrease production whenever price is less than MC.

question

If price is less than marginal cost, a perfectly competitive firm should decrease output because

answer

The firm is producing units that cost more to produce than the firm receives in revenue, thus reducing profits (or increasing losses).

question

If price is greater than marginal cost, a perfectly competitive firm should increase output because

answer

Additional units of output will add to the firm's profits (or reduce losses).

question

Profit per unit is equal to

answer

P - ATC.

question

Refer to Figure 22.3 for a perfectly competitive firm. At a market price of $23, profit per unit is maximized at an output of

answer

ATC minimum

question

When price equals ATC

answer

When the market price is $15, the profit-maximizing output is 31 units. At that point price is equal to ATC, and profits will be zero.

question

A catfish farmer will shut down production when

answer

Price falls below AVC.

question

The shutdown point occurs where price is below the minimum of

answer

AVC.

question

A firm experiencing economic losses will still continue to produce output in the short run as long as

answer

Price is above average variable cost.

question

A competitive firm should always continue to operate in the short run as long as

answer

MR > AVC.

question

When price exceeds average variable cost but not average total cost, the firm should, in the short run,

answer

Produce at the rate of output where MR = MC.