question
Market structure
answer
A classification system for the key traits of a market, including the number of firms, the similarity of the products they sell, and the ease of the entry into and exit from the market
1. The number of sellers
2. The nature of the product
3. The ease of entry into or exit from the market
1. The number of sellers
2. The nature of the product
3. The ease of entry into or exit from the market
question
Perfect competition
(Also known as pure competition)
(Also known as pure competition)
answer
A market structure of
1. A large number of small firms ( of sellers and buyers in the market)
2. A homogeneous product
3. Very easy entry into or exit from the market (free entry)
4. Standardized product (free market)
(agricultural industry)
1. A large number of small firms ( of sellers and buyers in the market)
2. A homogeneous product
3. Very easy entry into or exit from the market (free entry)
4. Standardized product (free market)
(agricultural industry)
question
Monopolist competition
answer
Relatively large number of sellers
differentiated product
Product easy entry and exit
Heavy advertising (restaurants, pubs, customer service like hair dresser)
differentiated product
Product easy entry and exit
Heavy advertising (restaurants, pubs, customer service like hair dresser)
question
Oligopoly
answer
Few sellers
Standardized of different product
Each firm is affected by the decision of its rivals ( OPEC)
Standardized of different product
Each firm is affected by the decision of its rivals ( OPEC)
question
Pure monopoly
answer
One firm
Is sole seller of a product or service
Entry blocked (water and electric companies, cable, phone)
Exit when a single firm is the sole producer of a product for which there are no closed substitute
Is sole seller of a product or service
Entry blocked (water and electric companies, cable, phone)
Exit when a single firm is the sole producer of a product for which there are no closed substitute
question
Large number of small firms conclusion
answer
Conditions is met when each firm is so small relative to the total market that no single firm can influence the market price
question
Homogeneous/ conclusion for homogeneous product
answer
In a perfectly competitive market, all firms produce a standardized or homogeneous product. Means the good or service of each firm is identical.
If a product is homogeneous, buyers are indifferent which seller's product they buy
If a product is homogeneous, buyers are indifferent which seller's product they buy
question
Barrier to entry
answer
Any obstacle that makes it difficult for a new firm to enter a market.
Perfect competition requires that resources be completely mobile to freely enter or exit a market
Perfect competition requires that resources be completely mobile to freely enter or exit a market
question
Economies of scale
answer
Declining ATC with added firm size are extensive
The firm's ATC curve will decline over a wide range of output, hence its difficult to complete with
The firm's ATC curve will decline over a wide range of output, hence its difficult to complete with
question
Price taker/ price taker firm
answer
A seller that has no control over the price of the product it sells.
In a perfect competition faces a perfectly elastic demand curve. It can sell all or wishes at the market determined prices, but it will sell nothing about the given market price. This is because so many competitive firms are willing to sell the same product at the going market price.
In a perfect competition faces a perfectly elastic demand curve. It can sell all or wishes at the market determined prices, but it will sell nothing about the given market price. This is because so many competitive firms are willing to sell the same product at the going market price.
question
Normal profit
answer
Break even, no profit or loss, zero economic profit
If there is a loss, firms will leave. Demand curve shifts to the right and demand will reach ATC only normal profit exists
If there is a loss, firms will leave. Demand curve shifts to the right and demand will reach ATC only normal profit exists
question
In short run
answer
Profit or loss
question
In long run
answer
No profit or loss ( normal profit)
question
The MR = MC method conclusion
answer
In a perfect competition, the firm's marginal revenue equals the price that the firm views as a horizontal demand curve.
question
Long run perfectly competitive equilibrium
answer
Occurs when a firm earns a normal profit by producing where a firm earns a normal profit by producing where price equals minimum long run average cost equals minimum short run average total cost equals short run marginal cost.
question
Pure competition and efficiency
answer
P= minimum ATC- requires that goods be produced in the least cost way.
Allocative efficiency P=MC requires that resources be divided among firms and industries so they yield the mix of products and services that must wanted by society
In a purely competitive market there is productive and allocative efficiency
Allocative efficiency P=MC requires that resources be divided among firms and industries so they yield the mix of products and services that must wanted by society
In a purely competitive market there is productive and allocative efficiency
question
A perfectly competitive firm shut down
answer
If the price is below the minimum point on the AVC curve, each unit produced would not cover the variable cost per unit; therefore, operating would increase losses.
question
Perfectly competitive firm's short-run supply curve
answer
The firm's marginal cost curve above the minimum point on its average variable cost curve
question
Perfectly competitive industry short run supply curve
answer
The supply curve derived from horizontal summation of the marginal cost curve of all firms in the industry about the minimum point of each firms average variable cost curve
question
Short run loss minimization for perfectly competitive firm
answer
Because the perfectly competitive fire must take the price determined by market supply and demand forces market conditions can change the prevailing price. When the market price drops, the firm can do nothing but adjust it'd output to make the best of the situation. Here only the marginal approach is used to predict output decision of the firm.
question
Total revenue- total cost method
answer
Is only way a firm determines the level of output that maximizes profit. Profit reaches a maximum when the vertical difference between the total revenue and the total cost is at a maximum
question
Monopoly
answer
A market structure characterized by
1. Single seller
2. A unique product
3. Impossible entry into the market
1. Single seller
2. A unique product
3. Impossible entry into the market
question
Single seller
answer
In a perfect competition, many firms make up the industry. One firm provides the total supply of a product in a given market.
question
Unique product
answer
There are no close substitutes for the monopolist product. Monopolist faces little or no competition.
question
Impossible entry
answer
In a perfect competition, there are no constraints to prevent new firms from entering an industry.
question
3 major barriers that prevent new firms from entering a market and comparing with a monopolist
answer
1. Ownership of a vital resource- sole control of the entire supply of the strategic input is one way a monopolist can prevent a newcomer from entering an industry
2. Legal barriers- the oldest and most effective barriers protecting a firm from potential competitors are the result of government franchises and license
3. Economic of scales- a monopoly can emerge in time naturally because of the relationship between average cost and the scale of an operation.
2. Legal barriers- the oldest and most effective barriers protecting a firm from potential competitors are the result of government franchises and license
3. Economic of scales- a monopoly can emerge in time naturally because of the relationship between average cost and the scale of an operation.
question
Natural monopoly
Natural monopolist
Natural monopolist
answer
An industry in which the long run average cost of production declines throughout the entire market. As a result a single firm can supply the entire market demand at a lower cost than two or more small firms
The market demand curve cuts the long run ATC curve where ATC is still declining the single firm
The market demand curve cuts the long run ATC curve where ATC is still declining the single firm
question
Network good
answer
A good that increases in value to each user as the total number of users increases. As a result, a firm can achieve economies of scale
question
Network good conclusion
answer
The greater the number of people connected to a network good system, the more benefits of the product to each are increased
question
Price maker
answer
A firm that faces a downward sloping demand curve and therefore it can choose among price and output combination along the demand curve
question
MR, TR and price elasticity of demand conclusion
answer
The demand and marginal revenue curve of the monopolist are downward slopping, in contrast to the horizontal and demand and corresponding marginal revenue curve facing the perfectly competitive firm.
question
The monopolist always max profit by producing at a price on the elastic segment of its demand curve
answer
...
question
Monopoly in the long run
answer
If the positions of a monopolist demand and cost curve give it a profit and nothing disturbs these curves, the monopolist will earn profit in the long run
question
Price discrimination
answer
The practice of the seller charging different prices for the same product that are not justified by cost difference.
1. The demand curve must be downward sloping
2. Buyers in different markets must have different price elasticities of demand
3. Buyers must be prevented from reselling the product at a price higher than the purchase price.
1. The demand curve must be downward sloping
2. Buyers in different markets must have different price elasticities of demand
3. Buyers must be prevented from reselling the product at a price higher than the purchase price.
question
Output and price determination
answer
Monopolist charges the highest price(not true) charges the price under TR is the highest
question
Monopoly demand
answer
Declining MR indicates that TR increases but at diminishing rate
The monopolist will always want to sell in the elastic part of the demand curve where MR is positive. Do not want TR to decline additional unit sold.
The monopolist will always want to sell in the elastic part of the demand curve where MR is positive. Do not want TR to decline additional unit sold.
question
Arbitrage
answer
The activity of earning a profit by buying a good at a low price and reselling the good at a higher price
question
Monopolist as a resource misallocator
answer
A monopolist is characterized by ineffective because resources are under allocated to the production of its product
question
Perfect competition means more output for less
answer
Monopoly harms consumers on two fronts. The monopolist charges a higher price and produces a lower output than would result under a perfectly competitive market structure
question
The marginal revenue
answer
And the demand curve are downward sloping for a monopolist. The marginal revenue curve for a monopolist is below the demand curve, and the total revenue curve reaches its max where marginal revenue equals zero
question
Price elasticity of demand
answer
Corresponds to sections of the marginal revenue curve. When MR is positive, price elasticity of demand is elastic, E(d)> 1. When MR is equal to zero, price elasticity of demand is unit elastic E(d) = 1. When MR is negative, price elasticity of demand is inelastic, E(d)<1
question
Monopoly disadvantages
answer
1. A monopolist charges a higher price and produces less output than a perfectly competitive firm
2. Resources allocation is ineffective because the monopolist produces less than if competition existed
3. Monopoly produces higher long run profit than if competition existed
4. Monopoly transfers income from consumer to producers to a greater degree than under perfect competition
2. Resources allocation is ineffective because the monopolist produces less than if competition existed
3. Monopoly produces higher long run profit than if competition existed
4. Monopoly transfers income from consumer to producers to a greater degree than under perfect competition
question
Short run max monopolist
answer
The perfectly competitive firm, locates the profit maximizing price by producing the output where the MR and MC curves intersect. If this price is less than the average variable cost (AVC) curve, the monopolist shuts down to max losses.
question
Monopolistic competition
answer
1. Many small sellers
2. A differentiated product
3. Easy market entry and exit
Given these characteristics, firms in monopolistic competition have a negligible effect on the market price
2. A differentiated product
3. Easy market entry and exit
Given these characteristics, firms in monopolistic competition have a negligible effect on the market price
question
Product differentiation
answer
Is a key characteristic of monopolistic competition. It is the process of creating real or apparent differences between products.
question
Non price competition
answer
Includes advertising, packaging, product development, better quality, and better service. Under monopolistic competition and oligopoly, firms may compete using non price competition, rather than price competition
question
Short run equilibrium for a monopolistic competitor
answer
Yield economic losses, zero economic profits, or economic profits. In the long run, monopolistic competitors make zero economic profits.
question
Comparing monopolistic competition with perfect competition
answer
We find that in the long run, the monopolistically competition firm does not achieve allocative efficiency, charges a higher price, restricts output, and does not produce where average cost are at minimum.
question
Oligopoly
answer
A market structure characterized
1. Few sellers
2. Either a homogeneous or a differentiated products
3. Difficult market entry.
Oligopolies are mutually interdependent because an action by one firm may cause a reaction from other firms.
1. Few sellers
2. Either a homogeneous or a differentiated products
3. Difficult market entry.
Oligopolies are mutually interdependent because an action by one firm may cause a reaction from other firms.
question
Non price competition model
answer
A theory that might explain oligopolistic behavior. Under this theory, firms use advertising and product differentiation, rather than price reductions, to compete
question
Price leadership
answer
Another theory of pricing behavior under oligopoly. When a dominant firm in an industry raises or lowers its price, other firms follow suit.
question
A cartel
answer
A formal agreement among firms to set prices and output quotas. The goal is to max profits but firms have an incentive to cheat, which is a constant threat to s cartel.
question
Collusion
answer
Illegal, get together and agree on a price (fix price)
question
Game throry
answer
Revels
1. Oligopolies series mutually independent in their pricing policies
2. Without collusion oligopoly prices and mutual profits are lower
3. Oligopolist have a temptation on any collusive agreement
1. Oligopolies series mutually independent in their pricing policies
2. Without collusion oligopoly prices and mutual profits are lower
3. Oligopolist have a temptation on any collusive agreement
question
Comparing oligopoly with perfect competition
answer
We find they the oligopolist allocated resources inefficiently, charges a higher price, and restricts output so that price may exceed average cost
question
Mutual independent
answer
A condition in which an action by one from May cause a reaction from other firms.
question
The price elasticity of demand coefficient measures:
A. buyer responsiveness to price changes.
B. the extent to which a demand curve shifts as incomes change.
C. the slope of the demand curve.
D. how far business executives can stretch their fixed costs.
A. buyer responsiveness to price changes.
B. the extent to which a demand curve shifts as incomes change.
C. the slope of the demand curve.
D. how far business executives can stretch their fixed costs.
answer
A. buyer responsiveness to price changes.
question
The basic formula for the price elasticity of demand coefficient is:
A. absolute decline in quantity demanded/absolute increase in price.
B. percentage change in quantity demanded/percentage change in price.
C. absolute decline in price/absolute increase in quantity demanded.
D. percentage change in price/percentage change in quantity demanded.
A. absolute decline in quantity demanded/absolute increase in price.
B. percentage change in quantity demanded/percentage change in price.
C. absolute decline in price/absolute increase in quantity demanded.
D. percentage change in price/percentage change in quantity demanded.
answer
B. percentage change in quantity demanded/percentage change in price.
question
The demand for a product is inelastic with respect to price if:
A. consumers are largely unresponsive to a per unit price change.
B. the elasticity coefficient is greater than 1.
C. a drop in price is accompanied by a decrease in the quantity demanded.
D. a drop in price is accompanied by an increase in the quantity demanded.
A. consumers are largely unresponsive to a per unit price change.
B. the elasticity coefficient is greater than 1.
C. a drop in price is accompanied by a decrease in the quantity demanded.
D. a drop in price is accompanied by an increase in the quantity demanded.
answer
A. consumers are largely unresponsive to a per unit price change.
question
If the price elasticity of demand for a product is 2.5, then a price cut from $2.00 to $1.80 will:
A. increase the quantity demanded by about 2.5 percent.
B. decrease the quantity demanded by about 2.5 percent.
C. increase the quantity demanded by about 25 percent.
D. increase the quantity demanded by about 250 percent.
A. increase the quantity demanded by about 2.5 percent.
B. decrease the quantity demanded by about 2.5 percent.
C. increase the quantity demanded by about 25 percent.
D. increase the quantity demanded by about 250 percent.
answer
C. increase the quantity demanded by about 25 percent.
question
Suppose that as the price of Y falls from $2.00 to $1.90 the quantity of Y demanded increases from 110 to 118. Then the price elasticity of demand is:
A. 4.00.
B. 2.09.
C. 1.37.
D. 3.94.
A. 4.00.
B. 2.09.
C. 1.37.
D. 3.94.
answer
C. 1.37.
question
Which of the following is not characteristic of the demand for a commodity that is elastic?
A. The relative change in quantity demanded is greater than the relative change in price.
B. Buyers are relatively sensitive to price changes.
C. Total revenue declines if price is increased.
D. The elasticity coefficient is less than one.
A. The relative change in quantity demanded is greater than the relative change in price.
B. Buyers are relatively sensitive to price changes.
C. Total revenue declines if price is increased.
D. The elasticity coefficient is less than one.
answer
D. The elasticity coefficient is less than one.
question
If the demand for product X is inelastic, a 4 percent increase in the price of X will:
A. decrease the quantity of X demanded by more than 4 percent.
B. decrease the quantity of X demanded by less than 4 percent.
C. increase the quantity of X demanded by more than 4 percent.
D. increase the quantity of X demanded by less than 4 percent.
A. decrease the quantity of X demanded by more than 4 percent.
B. decrease the quantity of X demanded by less than 4 percent.
C. increase the quantity of X demanded by more than 4 percent.
D. increase the quantity of X demanded by less than 4 percent.
answer
B. decrease the quantity of X demanded by less than 4 percent.
question
If a firm can sell 3,000 units of product A at $10 per unit and 5,000 at $8, then:
A. the price elasticity of demand is 0.44.
B. A is a complementary good.
C. the price elasticity of demand is 2.25.
D. A is an inferior good.
A. the price elasticity of demand is 0.44.
B. A is a complementary good.
C. the price elasticity of demand is 2.25.
D. A is an inferior good.
answer
C. the price elasticity of demand is 2.25.
question
A perfectly inelastic demand schedule:
A. rises upward and to the right, but has a constant slope.
B. can be represented by a line parallel to the vertical axis.
C. cannot be shown on a two-dimensional graph.
D. can be represented by a line parallel to the horizontal axis.
A. rises upward and to the right, but has a constant slope.
B. can be represented by a line parallel to the vertical axis.
C. cannot be shown on a two-dimensional graph.
D. can be represented by a line parallel to the horizontal axis.
answer
B. can be represented by a line parallel to the vertical axis.
question
The larger the coefficient of price elasticity of demand for a product, the:
A. larger the resulting price change for an increase in supply.
B. more rapid the rate at which the marginal utility of that product diminishes.
C. less competitive will be the industry supplying that product.
D. smaller the resulting price change for an increase in supply.
A. larger the resulting price change for an increase in supply.
B. more rapid the rate at which the marginal utility of that product diminishes.
C. less competitive will be the industry supplying that product.
D. smaller the resulting price change for an increase in supply.
answer
D. smaller the resulting price change for an increase in supply.
question
Most demand curves are relatively elastic in the upper-left portion because the original price:
A. and quantity from which the percentage changes in price and quantity are calculated are both large.
B. and quantity from which the percentage changes in price and quantity are calculated are both small.
C. from which the percentage price change is calculated is small and the original quantity from which the percentage change in quantity is calculated is large.
D. from which the percentage price change is calculated is large and the original quantity from which the percentage change in quantity is calculated is small.
A. and quantity from which the percentage changes in price and quantity are calculated are both large.
B. and quantity from which the percentage changes in price and quantity are calculated are both small.
C. from which the percentage price change is calculated is small and the original quantity from which the percentage change in quantity is calculated is large.
D. from which the percentage price change is calculated is large and the original quantity from which the percentage change in quantity is calculated is small.
answer
D. from which the percentage price change is calculated is large and the original quantity from which the percentage change in quantity is calculated is small.
question
The price elasticity of demand for widgets is 0.80. Assuming no change in the demand curve for widgets, a 16 percent increase in sales implies a:
A. 1 percent reduction in price.
B. 12 percent reduction in price.
C. 40 percent reduction in price.
D. 20 percent reduction in price.
A. 1 percent reduction in price.
B. 12 percent reduction in price.
C. 40 percent reduction in price.
D. 20 percent reduction in price.
answer
D. 20 percent reduction in price.
question
Suppose Aiyanna's Pizzeria currently faces a linear demand curve and is charging a very high price per pizza and doing very little business. Aiyanna now decides to lower pizza prices by 5 percent per week for an indefinite period of time. We can expect that each successive week:
A. demand will become more price elastic.
B. price elasticity of demand will not change as price is lowered.
C. demand will become less price elastic.
D. the elasticity of supply will increase.
A. demand will become more price elastic.
B. price elasticity of demand will not change as price is lowered.
C. demand will become less price elastic.
D. the elasticity of supply will increase.
answer
C. demand will become less price elastic.
question
The price elasticity of demand of a straight-line demand curve is:
A. elastic in high-price ranges and inelastic in low-price ranges.
B. elastic, but does not change at various points on the curve.
C. inelastic, but does not change at various points on the curve.
D. 1 at all points on the curve.
A. elastic in high-price ranges and inelastic in low-price ranges.
B. elastic, but does not change at various points on the curve.
C. inelastic, but does not change at various points on the curve.
D. 1 at all points on the curve.
answer
A. elastic in high-price ranges and inelastic in low-price ranges.
question
A leftward shift in the supply curve of product X will increase equilibrium price to a greater extent the:
A. more elastic the supply curve.
B. larger the elasticity of demand coefficient.
C. more elastic the demand for the product.
D. more inelastic the demand for the product.
A. more elastic the supply curve.
B. larger the elasticity of demand coefficient.
C. more elastic the demand for the product.
D. more inelastic the demand for the product.
answer
D. more inelastic the demand for the product.
question
If the demand for bacon is relatively elastic, a 10 percent decline in the price of bacon will:
A. decrease the amount demanded by more than 10 percent.
B. increase the amount demanded by more than 10 percent.
C. decrease the amount demanded by less than 10 percent.
D. increase the amount demanded by less than 10 percent.
A. decrease the amount demanded by more than 10 percent.
B. increase the amount demanded by more than 10 percent.
C. decrease the amount demanded by less than 10 percent.
D. increase the amount demanded by less than 10 percent.
answer
B. increase the amount demanded by more than 10 percent.
question
The price elasticity of demand is generally:
A. negative, but the minus sign is ignored.
B. positive, but the plus sign is ignored.
C. positive for normal goods and negative for inferior goods.
D. positive because price and quantity demanded are inversely related.
A. negative, but the minus sign is ignored.
B. positive, but the plus sign is ignored.
C. positive for normal goods and negative for inferior goods.
D. positive because price and quantity demanded are inversely related.
answer
A. negative, but the minus sign is ignored.
question
For a linear demand curve:
A. elasticity is constant along the curve.
B. elasticity is unity at every point on the curve.
C. demand is elastic at low prices.
D. demand is elastic at high prices.
A. elasticity is constant along the curve.
B. elasticity is unity at every point on the curve.
C. demand is elastic at low prices.
D. demand is elastic at high prices.
answer
D. demand is elastic at high prices.
question
The price of product X is reduced from $100 to $90 and, as a result, the quantity demanded increases from 50 to 60 units. Therefore demand for X in this price range:
A. has declined.
B. is of unit elasticity.
C. is inelastic.
D. is elastic.
A. has declined.
B. is of unit elasticity.
C. is inelastic.
D. is elastic.
answer
D. is elastic.
question
If a demand for a product is elastic, the value of the price elasticity coefficient is:
A. zero.
B. greater than one.
C. equal to one.
D. less than one.
A. zero.
B. greater than one.
C. equal to one.
D. less than one.
answer
B. greater than one.
question
The concept of price elasticity of demand measures:
A. the slope of the demand curve.
B. the number of buyers in a market.
C. the extent to which the demand curve shifts as the result of a price decline.
D. the sensitivity of consumer purchases to price changes.
A. the slope of the demand curve.
B. the number of buyers in a market.
C. the extent to which the demand curve shifts as the result of a price decline.
D. the sensitivity of consumer purchases to price changes.
answer
D. the sensitivity of consumer purchases to price changes.
question
Suppose the price of local cable TV service increased from $16.20 to $19.80 and as a result the number of cable subscribers decreased from 224,000 to 176,000. Along this portion of the demand curve, price elasticity of demand is:
A. 0.8.
B. 1.2.
C. 1.6.
D. 8.0
A. 0.8.
B. 1.2.
C. 1.6.
D. 8.0
answer
B. 1.2.
question
If the price of hand calculators falls from $10 to $9 and, as a result, the quantity demanded increases from 100 to 125, then:
A. demand is elastic.
B. demand is inelastic.
C. demand is of unit elasticity.
D. not enough information is given to make a statement about elasticity.
A. demand is elastic.
B. demand is inelastic.
C. demand is of unit elasticity.
D. not enough information is given to make a statement about elasticity.
answer
A. demand is elastic.
question
A perfectly inelastic demand curve:
A. has a price elasticity coefficient greater than unity.
B. has a price elasticity coefficient of unity throughout.
C. graphs as a line parallel to the vertical axis.
D. graphs as a line parallel to the horizontal axis.
A. has a price elasticity coefficient greater than unity.
B. has a price elasticity coefficient of unity throughout.
C. graphs as a line parallel to the vertical axis.
D. graphs as a line parallel to the horizontal axis.
answer
C. graphs as a line parallel to the vertical axis.
question
If quantity demanded is completely unresponsive to price changes, demand is:
A. perfectly inelastic.
B. perfectly elastic.
C. relatively inelastic.
D. relatively elastic.
A. perfectly inelastic.
B. perfectly elastic.
C. relatively inelastic.
D. relatively elastic.
answer
A. perfectly inelastic.
question
A firm can sell as much as it wants at a constant price. Demand is thus:
A. perfectly inelastic.
B. perfectly elastic.
C. relatively inelastic.
D. relatively elastic.
A. perfectly inelastic.
B. perfectly elastic.
C. relatively inelastic.
D. relatively elastic.
answer
B. perfectly elastic.
question
A demand curve which is parallel to the horizontal axis is:
A. perfectly inelastic.
B. perfectly elastic.
C. relatively inelastic.
D. relatively elastic.
A. perfectly inelastic.
B. perfectly elastic.
C. relatively inelastic.
D. relatively elastic.
answer
B. perfectly elastic.
question
When the percentage change in price is greater than the resulting percentage change in quantity demanded:
A. a decrease in price will increase total revenue.
B. demand may be either elastic or inelastic.
C. an increase in price will increase total revenue.
D. demand is elastic.
A. a decrease in price will increase total revenue.
B. demand may be either elastic or inelastic.
C. an increase in price will increase total revenue.
D. demand is elastic.
answer
C. an increase in price will increase total revenue.
question
Suppose the price elasticity coefficients of demand are 1.43, 0.67, 1.11, and 0.29 for products W, X, Y, and Z respectively. A 1 percent decrease in price will increase total revenue in the case(s) of:
A. W and Y.
B. Y and Z.
C. X and Z.
D. Z and W.
A. W and Y.
B. Y and Z.
C. X and Z.
D. Z and W.
answer
A. W and Y.
question
Which of the following statements is not correct?
A. If the relative change in price is greater than the relative change in the quantity demanded associated with it, demand is inelastic.
B. In the range of prices in which demand is elastic, total revenue will diminish as price decreases.
C. Total revenue will not change if price varies within a range where the elasticity coefficient is unity.
D. Demand tends to be elastic at high prices and inelastic at low prices.
A. If the relative change in price is greater than the relative change in the quantity demanded associated with it, demand is inelastic.
B. In the range of prices in which demand is elastic, total revenue will diminish as price decreases.
C. Total revenue will not change if price varies within a range where the elasticity coefficient is unity.
D. Demand tends to be elastic at high prices and inelastic at low prices.
answer
B. In the range of prices in which demand is elastic, total revenue will diminish as price decreases.
question
In which of the following instances will total revenue decline?
A. price rises and supply is elastic
B. price falls and demand is elastic
C. price rises and demand is inelastic
D. price rises and demand is elastic
A. price rises and supply is elastic
B. price falls and demand is elastic
C. price rises and demand is inelastic
D. price rises and demand is elastic
answer
D. price rises and demand is elastic
question
If a firm's demand for labor is elastic, a union-negotiated wage increase will:
A. necessarily be inflationary.
B. cause the firm's total payroll to increase.
C. cause the firm's total payroll to decline.
D. cause a shortage of labor.
A. necessarily be inflationary.
B. cause the firm's total payroll to increase.
C. cause the firm's total payroll to decline.
D. cause a shortage of labor.
answer
C. cause the firm's total payroll to decline.
question
The Illinois Central Railroad once asked the Illinois Commerce Commission for permission to increase its commuter rates by 20 percent. The railroad argued that declining revenues made this rate increase essential. Opponents of the rate increase contended that the railroad's revenues would fall because of the rate hike. It can be concluded that:
A. both groups felt that the demand was elastic but for different reasons.
B. both groups felt that the demand was inelastic but for different reasons.
C. the railroad felt that the demand for passenger service was inelastic and opponents of the rate increase felt it was elastic.
D. the railroad felt that the demand for passenger service was elastic and opponents of the rate increase felt it was inelastic.
A. both groups felt that the demand was elastic but for different reasons.
B. both groups felt that the demand was inelastic but for different reasons.
C. the railroad felt that the demand for passenger service was inelastic and opponents of the rate increase felt it was elastic.
D. the railroad felt that the demand for passenger service was elastic and opponents of the rate increase felt it was inelastic.
answer
C. the railroad felt that the demand for passenger service was inelastic and opponents of the rate increase felt it was elastic.
question
If a firm finds that it can sell $13,000 worth of a product when its price is $5 per unit and $11,000 worth of it when its price is $6, then:
A. the demand for the product is elastic in the $6-$5 price range.
B. the demand for the product must have increased.
C. elasticity of demand is 0.74.
D. the demand for the product is inelastic in the $6-$5 price range.
A. the demand for the product is elastic in the $6-$5 price range.
B. the demand for the product must have increased.
C. elasticity of demand is 0.74.
D. the demand for the product is inelastic in the $6-$5 price range.
answer
A. the demand for the product is elastic in the $6-$5 price range.
question
Suppose the price elasticity of demand for bread is 0.20. If the price of bread falls by 10 percent, the quantity demanded will increase by:
A. 2 percent and total expenditures on bread will rise.
B. 2 percent and total expenditures on bread will fall.
C. 20 percent and total expenditures on bread will fall.
D. 20 percent and total expenditures on bread will rise.
A. 2 percent and total expenditures on bread will rise.
B. 2 percent and total expenditures on bread will fall.
C. 20 percent and total expenditures on bread will fall.
D. 20 percent and total expenditures on bread will rise.
answer
B. 2 percent and total expenditures on bread will fall.
question
Gigantic State University raises tuition for the purpose of increasing its revenue so that more faculty can be hired. GSU is assuming that the demand for education at GSU is:
A. decreasing.
B. relatively elastic.
C. perfectly elastic.
D. relatively inelastic.
A. decreasing.
B. relatively elastic.
C. perfectly elastic.
D. relatively inelastic.
answer
D. relatively inelastic.
question
If the demand for farm products is price inelastic, a good harvest will cause farm revenues to:
A. increase.
B. decrease.
C. be unchanged.
D. either increase or decrease, depending on what happens to supply.
A. increase.
B. decrease.
C. be unchanged.
D. either increase or decrease, depending on what happens to supply.
answer
B. decrease.
question
Other things the same, if a price change causes total revenue to change in the opposite direction, demand is:
A. perfectly inelastic.
B. relatively elastic.
C. relatively inelastic.
D. of unit elasticity.
A. perfectly inelastic.
B. relatively elastic.
C. relatively inelastic.
D. of unit elasticity.
answer
B. relatively elastic.
question
If the price elasticity of demand for a product is unity, a decrease in price will:
A. have no effect upon the amount purchased.
B. increase the quantity demanded and increase total revenue.
C. increase the quantity demanded, but decrease total revenue.
D. increase the quantity demanded, but total revenue will be unchanged.
A. have no effect upon the amount purchased.
B. increase the quantity demanded and increase total revenue.
C. increase the quantity demanded, but decrease total revenue.
D. increase the quantity demanded, but total revenue will be unchanged.
answer
D. increase the quantity demanded, but total revenue will be unchanged.
question
In which of the following cases will total revenue increase?
A. price falls and demand is inelastic
B. price falls and supply is elastic
C. price rises and demand is inelastic
D. price rises and demand is elastic
A. price falls and demand is inelastic
B. price falls and supply is elastic
C. price rises and demand is inelastic
D. price rises and demand is elastic
answer
C. price rises and demand is inelastic
question
A manufacturer of frozen pizzas found that total revenue decreased when price was lowered from $5 to $4. It was also found that total revenue decreased when price was raised from $5 to $6. Thus,
A. the demand for pizza is elastic above $5 and inelastic below $5.
B. the demand for pizza is elastic both above and below $5.
C. the demand for pizza is inelastic above $5 and elastic below $5.
D. $5 is not the equilibrium price of pizza.
A. the demand for pizza is elastic above $5 and inelastic below $5.
B. the demand for pizza is elastic both above and below $5.
C. the demand for pizza is inelastic above $5 and elastic below $5.
D. $5 is not the equilibrium price of pizza.
answer
A. the demand for pizza is elastic above $5 and inelastic below $5.
question
The total-revenue test for elasticity:
A. is equally applicable to both demand and supply.
B. does not apply to demand because price and quantity are inversely related.
C. does not apply to supply because price and quantity are directly related.
D. applies to the short-run supply curve, but not to the long-run supply curve.
A. is equally applicable to both demand and supply.
B. does not apply to demand because price and quantity are inversely related.
C. does not apply to supply because price and quantity are directly related.
D. applies to the short-run supply curve, but not to the long-run supply curve.
answer
C. does not apply to supply because price and quantity are directly related.
question
If the University Chamber Music Society decides to raise ticket prices to provide more funds to finance concerts, the Society is assuming that the demand for tickets is:
A. parallel to the horizontal axis.
B. shifting to the left.
C. inelastic.
D. elastic.
A. parallel to the horizontal axis.
B. shifting to the left.
C. inelastic.
D. elastic.
answer
C. inelastic.
question
The state legislature has cut Gigantic State University's appropriations. GSU's Board of Regents decides to increase tuition fees to compensate for the loss of revenue. The board is assuming that the:
A. demand for education at GSU is elastic.
B. demand for education at GSU is inelastic.
C. coefficient of price elasticity of demand for education at GSU is unity.
D. coefficient of price elasticity of demand for education at GSU is greater than unity.
A. demand for education at GSU is elastic.
B. demand for education at GSU is inelastic.
C. coefficient of price elasticity of demand for education at GSU is unity.
D. coefficient of price elasticity of demand for education at GSU is greater than unity.
answer
B. demand for education at GSU is inelastic.
question
Which of the following is correct?
A. If demand is elastic, an increase in price will increase total revenue.
B. If demand is elastic, a decrease in price will decrease total revenue.
C. If demand is elastic, a decrease in price will increase total revenue.
D. If demand is inelastic, an increase in price will decrease total revenue.
A. If demand is elastic, an increase in price will increase total revenue.
B. If demand is elastic, a decrease in price will decrease total revenue.
C. If demand is elastic, a decrease in price will increase total revenue.
D. If demand is inelastic, an increase in price will decrease total revenue.
answer
C. If demand is elastic, a decrease in price will increase total revenue.
question
Suppose that the price of peanuts falls from $3 to $2 per bushel and that, as a result, the total revenue received by peanut farmers changes from $16 to $14 billion. Thus:
A. the demand for peanuts is elastic.
B. the demand for peanuts is inelastic.
C. the demand curve for peanuts has shifted to the right.
D. no inference can be made as to the elasticity of demand for peanuts.
A. the demand for peanuts is elastic.
B. the demand for peanuts is inelastic.
C. the demand curve for peanuts has shifted to the right.
D. no inference can be made as to the elasticity of demand for peanuts.
answer
B. the demand for peanuts is inelastic.
question
Which of the following is correct?
A. If the demand for a product is inelastic, a change in price will cause total revenue to change in the opposite direction.
B. If the demand for a product is inelastic, a change in price will cause total revenue to change in the same direction.
C. If the demand for a product is inelastic, a change in price may cause total revenue to change in either the opposite or the same direction.
D. The price elasticity coefficient applies to demand, but not to supply.
A. If the demand for a product is inelastic, a change in price will cause total revenue to change in the opposite direction.
B. If the demand for a product is inelastic, a change in price will cause total revenue to change in the same direction.
C. If the demand for a product is inelastic, a change in price may cause total revenue to change in either the opposite or the same direction.
D. The price elasticity coefficient applies to demand, but not to supply.
answer
B. If the demand for a product is inelastic, a change in price will cause total revenue to change in the same direction.
question
The demand schedules for such products as eggs, bread, and electricity tend to be:
A. perfectly price elastic.
B. of unit price elasticity.
C. relatively price inelastic.
D. relatively price elastic.
A. perfectly price elastic.
B. of unit price elasticity.
C. relatively price inelastic.
D. relatively price elastic.
answer
C. relatively price inelastic.
question
The elasticity of demand for a product is likely to be greater:
A. if the product is a necessity, rather than a luxury good.
B. the greater the amount of time over which buyers adjust to a price change.
C. the smaller the proportion of one's income spent on the product.
D. the smaller the number of substitute products available.
A. if the product is a necessity, rather than a luxury good.
B. the greater the amount of time over which buyers adjust to a price change.
C. the smaller the proportion of one's income spent on the product.
D. the smaller the number of substitute products available.
answer
B. the greater the amount of time over which buyers adjust to a price change.
question
We would expect:
A. the demand for Coca-Cola to be less price elastic than the demand for soft drinks in general.
B. the demand for Coca-Cola to be more price elastic than the demand for soft drinks in general.
C. no relationship between the price elasticity of demand for Coca-Cola and the price elasticity of demand for soft drinks in general.
A. the demand for Coca-Cola to be less price elastic than the demand for soft drinks in general.
B. the demand for Coca-Cola to be more price elastic than the demand for soft drinks in general.
C. no relationship between the price elasticity of demand for Coca-Cola and the price elasticity of demand for soft drinks in general.
answer
B. the demand for Coca-Cola to be more price elastic than the demand for soft drinks in general.
question
The narrower the definition of a product:
A. the larger the number of substitutes and the greater the price elasticity of demand.
B. the smaller the number of substitutes and the greater the price elasticity of demand.
C. the larger the number of substitutes and the smaller the price elasticity of demand.
D. the smaller the number of substitutes and the smaller the price elasticity of demand.
A. the larger the number of substitutes and the greater the price elasticity of demand.
B. the smaller the number of substitutes and the greater the price elasticity of demand.
C. the larger the number of substitutes and the smaller the price elasticity of demand.
D. the smaller the number of substitutes and the smaller the price elasticity of demand.
answer
A. the larger the number of substitutes and the greater the price elasticity of demand.
question
The more time consumers have to adjust to a change in price:
A. the smaller will be the price elasticity of demand.
B. the greater will be the price elasticity of demand.
C. the more likely the product is a normal good.
D. the more likely the product is an inferior good.
A. the smaller will be the price elasticity of demand.
B. the greater will be the price elasticity of demand.
C. the more likely the product is a normal good.
D. the more likely the product is an inferior good.
answer
B. the greater will be the price elasticity of demand.
question
The demand for autos is likely to be:
A. less price elastic than the demand for Honda Accords.
B. more price elastic than the demand for Honda Accords.
C. of the same price elasticity as the demand for Honda Accords.
D. perfectly inelastic.
A. less price elastic than the demand for Honda Accords.
B. more price elastic than the demand for Honda Accords.
C. of the same price elasticity as the demand for Honda Accords.
D. perfectly inelastic.
answer
A. less price elastic than the demand for Honda Accords.
question
Price elasticity of demand is generally:
A. greater in the long run than in the short run.
B. greater in the short run than in the long run.
C. the same in both the short run and the long run.
D. greater for "necessities" than it is for "luxuries."
A. greater in the long run than in the short run.
B. greater in the short run than in the long run.
C. the same in both the short run and the long run.
D. greater for "necessities" than it is for "luxuries."
answer
A. greater in the long run than in the short run.
question
Which of the following generalizations is not correct?
A. The larger an item is in one's budget, the greater the price elasticity of demand.
B. The price elasticity of demand is greater for necessities than it is for luxuries.
C. The larger the number of close substitutes available, the greater will be the price elasticity of demand for a particular product.
D. The price elasticity of demand is greater the longer the time period under consideration.
A. The larger an item is in one's budget, the greater the price elasticity of demand.
B. The price elasticity of demand is greater for necessities than it is for luxuries.
C. The larger the number of close substitutes available, the greater will be the price elasticity of demand for a particular product.
D. The price elasticity of demand is greater the longer the time period under consideration.
answer
B. The price elasticity of demand is greater for necessities than it is for luxuries.
question
If price and total revenue vary in opposite directions, demand is:
A. perfectly inelastic.
B. perfectly elastic.
C. relatively inelastic.
D. relatively elastic.
A. perfectly inelastic.
B. perfectly elastic.
C. relatively inelastic.
D. relatively elastic.
answer
D. relatively elastic.
question
The demand for a luxury good whose purchase would exhaust a big portion of one's income is:
A. perfectly price inelastic.
B. perfectly price elastic.
C. relatively price inelastic.
D. relatively price elastic.
A. perfectly price inelastic.
B. perfectly price elastic.
C. relatively price inelastic.
D. relatively price elastic.
answer
D. relatively price elastic.
question
The demand for a necessity whose cost is a small portion of one's total income is:
A. perfectly price inelastic.
B. perfectly price elastic.
C. relatively price inelastic.
D. relatively price elastic.
A. perfectly price inelastic.
B. perfectly price elastic.
C. relatively price inelastic.
D. relatively price elastic.
answer
C. relatively price inelastic.
question
The price elasticity of supply measures how:
A. easily labor and capital can be substituted for one another in the production process.
B. responsive the quantity supplied of X is to changes in the price of X.
C. responsive the quantity supplied of Y is to changes in the price of X.
D. responsive quantity supplied is to a change in incomes.
A. easily labor and capital can be substituted for one another in the production process.
B. responsive the quantity supplied of X is to changes in the price of X.
C. responsive the quantity supplied of Y is to changes in the price of X.
D. responsive quantity supplied is to a change in incomes.
answer
B. responsive the quantity supplied of X is to changes in the price of X.
question
The main determinant of elasticity of supply is the:
A. number of close substitutes for the product available to consumers.
B. amount of time the producer has to adjust inputs in response to a price change.
C. urgency of consumer wants for the product.
D. number of uses for the product.
A. number of close substitutes for the product available to consumers.
B. amount of time the producer has to adjust inputs in response to a price change.
C. urgency of consumer wants for the product.
D. number of uses for the product.
answer
B. amount of time the producer has to adjust inputs in response to a price change.
question
Suppose the supply of product X is perfectly inelastic. If there is an increase in the demand for this product, equilibrium price:
A. will decrease but equilibrium quantity will increase.
B. and quantity will both decrease.
C. will increase but equilibrium quantity will decline.
D. will increase but equilibrium quantity will be unchanged.
A. will decrease but equilibrium quantity will increase.
B. and quantity will both decrease.
C. will increase but equilibrium quantity will decline.
D. will increase but equilibrium quantity will be unchanged.
answer
D. will increase but equilibrium quantity will be unchanged.
question
The supply of product X is elastic if the price of X rises by:
A. 5 percent and quantity supplied rises by 7 percent.
B. 8 percent and quantity supplied rises by 8 percent.
C. 10 percent and quantity supplied remains the same.
D. 7 percent and quantity supplied rises by 5 percent.
A. 5 percent and quantity supplied rises by 7 percent.
B. 8 percent and quantity supplied rises by 8 percent.
C. 10 percent and quantity supplied remains the same.
D. 7 percent and quantity supplied rises by 5 percent.
answer
A. 5 percent and quantity supplied rises by 7 percent.
question
The supply of product X is inelastic (but not perfectly inelastic) if the price of X rises by:
A. 5 percent and quantity supplied rises by 7 percent.
B. 8 percent and quantity supplied rises by 8 percent.
C. 10 percent and quantity supplied remains the same.
D. 7 percent and quantity supplied rises by 5 percent.
A. 5 percent and quantity supplied rises by 7 percent.
B. 8 percent and quantity supplied rises by 8 percent.
C. 10 percent and quantity supplied remains the same.
D. 7 percent and quantity supplied rises by 5 percent.
answer
D. 7 percent and quantity supplied rises by 5 percent.
question
The elasticity of supply of product X is unitary if the price of X rises by:
A. 5 percent and quantity supplied rises by 7 percent.
B. 8 percent and quantity supplied rises by 8 percent.
C. 10 percent and quantity supplied stays the same.
D. 7 percent and quantity supplied rises by 5 percent.
A. 5 percent and quantity supplied rises by 7 percent.
B. 8 percent and quantity supplied rises by 8 percent.
C. 10 percent and quantity supplied stays the same.
D. 7 percent and quantity supplied rises by 5 percent.
answer
B. 8 percent and quantity supplied rises by 8 percent.
question
The supply of product X is perfectly inelastic if the price of X rises by:
A. 5 percent and quantity supplied rises by 7 percent.
B. 8 percent and quantity supplied rises by 8 percent.
C. 10 percent and quantity supplied stays the same.
D. 7 percent and quantity supplied rises by 5 percent.
A. 5 percent and quantity supplied rises by 7 percent.
B. 8 percent and quantity supplied rises by 8 percent.
C. 10 percent and quantity supplied stays the same.
D. 7 percent and quantity supplied rises by 5 percent.
answer
C. 10 percent and quantity supplied stays the same.
question
It takes a considerable amount of time to increase the production of pork. This implies that:
A. a change in the demand for pork will not affect its price in the short run.
B. the short-run supply curve for pork is less elastic than the long-run supply curve for pork.
C. an increase in the demand for pork will elicit a larger supply response in the short run than in the long run.
D. the long-run supply curve for pork is less elastic than the short-run supply curve for pork.
A. a change in the demand for pork will not affect its price in the short run.
B. the short-run supply curve for pork is less elastic than the long-run supply curve for pork.
C. an increase in the demand for pork will elicit a larger supply response in the short run than in the long run.
D. the long-run supply curve for pork is less elastic than the short-run supply curve for pork.
answer
B. the short-run supply curve for pork is less elastic than the long-run supply curve for pork.
question
Suppose that the price of product X rises by 20 percent and the quantity supplied of X increases by 15 percent. The coefficient of price elasticity of supply for good X is:
A. negative and therefore X is an inferior good.
B. positive and therefore X is a normal good.
C. less than 1 and therefore supply is inelastic.
D. more than 1 and therefore supply is elastic.
A. negative and therefore X is an inferior good.
B. positive and therefore X is a normal good.
C. less than 1 and therefore supply is inelastic.
D. more than 1 and therefore supply is elastic.
answer
C. less than 1 and therefore supply is inelastic.
question
If the supply of product X is perfectly elastic, an increase in the demand for it will increase:
A. equilibrium quantity but reduce equilibrium price.
B. equilibrium quantity but equilibrium price will be unchanged.
C. equilibrium price but reduce equilibrium quantity.
D. equilibrium price but equilibrium quantity will be unchanged.
A. equilibrium quantity but reduce equilibrium price.
B. equilibrium quantity but equilibrium price will be unchanged.
C. equilibrium price but reduce equilibrium quantity.
D. equilibrium price but equilibrium quantity will be unchanged.
answer
B. equilibrium quantity but equilibrium price will be unchanged.
question
Suppose the price of a product rises and the total revenue of sellers increases.
A. It can be concluded that the demand for the product is elastic.
B. It can be concluded that the supply of the product is elastic.
C. It can be concluded that the supply of the product is inelastic.
D. No conclusion can be reached with respect to the elasticity of supply.
A. It can be concluded that the demand for the product is elastic.
B. It can be concluded that the supply of the product is elastic.
C. It can be concluded that the supply of the product is inelastic.
D. No conclusion can be reached with respect to the elasticity of supply.
answer
D. No conclusion can be reached with respect to the elasticity of supply.
question
Supply curves tend to be:
A. perfectly elastic in the long run because consumer demand will have sufficient time to adjust fully to changes in supply.
B. more elastic in the long run because there is time for firms to enter or leave the industry.
C. perfectly inelastic in the long run because the law of scarcity imposes absolute limits on production.
D. less elastic in the long run because there is time for firms to enter or leave an industry.
A. perfectly elastic in the long run because consumer demand will have sufficient time to adjust fully to changes in supply.
B. more elastic in the long run because there is time for firms to enter or leave the industry.
C. perfectly inelastic in the long run because the law of scarcity imposes absolute limits on production.
D. less elastic in the long run because there is time for firms to enter or leave an industry.
answer
B. more elastic in the long run because there is time for firms to enter or leave the industry.
question
For an increase in demand the price effect is smallest and the quantity effect is largest:
A. when supply is least elastic.
B. in the long run.
C. in the short run.
D. in the immediate market period.
A. when supply is least elastic.
B. in the long run.
C. in the short run.
D. in the immediate market period.
answer
B. in the long run.
question
A supply curve that is a vertical straight line indicates that:
A. production costs for this product cannot be calculated.
B. the relationship between price and quantity supplied is inverse.
C. a change in price will have no effect on the quantity supplied.
D. an unlimited amount of the product will be supplied at a constant price.
A. production costs for this product cannot be calculated.
B. the relationship between price and quantity supplied is inverse.
C. a change in price will have no effect on the quantity supplied.
D. an unlimited amount of the product will be supplied at a constant price.
answer
C. a change in price will have no effect on the quantity supplied.
question
A supply curve that is parallel to the horizontal axis suggests that:
A. the industry is organized monopolistically.
B. the relationship between price and quantity supplied is inverse.
C. a change in demand will change price in the same direction.
D. a change in demand will change the equilibrium quantity but not price.
A. the industry is organized monopolistically.
B. the relationship between price and quantity supplied is inverse.
C. a change in demand will change price in the same direction.
D. a change in demand will change the equilibrium quantity but not price.
answer
D. a change in demand will change the equilibrium quantity but not price.
question
An increase in demand will increase equilibrium price to a greater extent:
A. if the product is a normal good.
B. if the product is an inferior good.
C. the less elastic the supply curve.
D. the more elastic the supply curve.
A. if the product is a normal good.
B. if the product is an inferior good.
C. the less elastic the supply curve.
D. the more elastic the supply curve.
answer
C. the less elastic the supply curve.
question
The supply of known Monet paintings is:
A. perfectly elastic.
B. perfectly inelastic.
C. relatively elastic.
D. relatively inelastic.
A. perfectly elastic.
B. perfectly inelastic.
C. relatively elastic.
D. relatively inelastic.
answer
B. perfectly inelastic.
question
An antidrug policy which reduces the supply of heroin might:
A. increase street crime because the addict's demand for heroin is highly inelastic.
B. reduce street crime because the addict's demand for heroin is highly elastic.
C. reduce street crime because the addict's demand for heroin is highly inelastic.
D. increase street crime because the addict's demand for heroin is highly elastic.
A. increase street crime because the addict's demand for heroin is highly inelastic.
B. reduce street crime because the addict's demand for heroin is highly elastic.
C. reduce street crime because the addict's demand for heroin is highly inelastic.
D. increase street crime because the addict's demand for heroin is highly elastic.
answer
A. increase street crime because the addict's demand for heroin is highly inelastic.
question
Studies of the minimum wage suggest that the price elasticity of demand for teenage workers is relatively inelastic. This means that:
A. an increase in the minimum wage would increase the total incomes of teenage workers as a group.
B. an increase in the minimum wage would decrease the total incomes of teenage workers as a group.
C. the unemployment effect of an increase in the minimum wage would be relatively large.
D. the cross elasticity of demand between teenage and adult workers is positive and very large.
A. an increase in the minimum wage would increase the total incomes of teenage workers as a group.
B. an increase in the minimum wage would decrease the total incomes of teenage workers as a group.
C. the unemployment effect of an increase in the minimum wage would be relatively large.
D. the cross elasticity of demand between teenage and adult workers is positive and very large.
answer
A. an increase in the minimum wage would increase the total incomes of teenage workers as a group.
question
Studies show that the demand for gasoline is:
A. price inelastic in the short run, but elastic in the long run.
B. price inelastic in both the short and long run.
C. price elastic in the short run, but inelastic in the long run.
D. price elastic in both the short and long run.
A. price inelastic in the short run, but elastic in the long run.
B. price inelastic in both the short and long run.
C. price elastic in the short run, but inelastic in the long run.
D. price elastic in both the short and long run.
answer
B. price inelastic in both the short and long run.
question
Farmers often find that large bumper crops are associated with declines in their gross incomes. This suggests that:
A. farm products are normal goods.
B. farm products are inferior goods.
C. the price elasticity of demand for farm products is less than 1.
D. the price elasticity of demand for farm products is greater than 1.
A. farm products are normal goods.
B. farm products are inferior goods.
C. the price elasticity of demand for farm products is less than 1.
D. the price elasticity of demand for farm products is greater than 1.
answer
C. the price elasticity of demand for farm products is less than 1.
question
The supply curve of a one-of-a-kind original painting is:
A. relatively elastic.
B. relatively inelastic.
C. perfectly inelastic.
D. perfectly elastic.
A. relatively elastic.
B. relatively inelastic.
C. perfectly inelastic.
D. perfectly elastic.
answer
C. perfectly inelastic.
question
The price of old baseball cards rises rapidly with increases in demand because:
A. the supply of old baseball cards is price inelastic.
B. the supply of old baseball cards is price elastic.
C. the demand for old baseball cards is price inelastic.
D. the demand for old baseball cards is price elastic.
A. the supply of old baseball cards is price inelastic.
B. the supply of old baseball cards is price elastic.
C. the demand for old baseball cards is price inelastic.
D. the demand for old baseball cards is price elastic.
answer
A. the supply of old baseball cards is price inelastic.
question
The supply curve of antique reproductions is:
A. relatively elastic.
B. relatively inelastic.
C. perfectly inelastic.
D. unit elastic.
A. relatively elastic.
B. relatively inelastic.
C. perfectly inelastic.
D. unit elastic.
answer
A. relatively elastic.
question
Suppose the income elasticity of demand for toys is +2.00. This means that:
A. a 10 percent increase in income will increase the purchase of toys by 20 percent.
B. a 10 percent increase in income will increase the purchase of toys by 2 percent.
C. a 10 percent increase in income will decrease the purchase of toys by 2 percent.
D. toys are an inferior good.
A. a 10 percent increase in income will increase the purchase of toys by 20 percent.
B. a 10 percent increase in income will increase the purchase of toys by 2 percent.
C. a 10 percent increase in income will decrease the purchase of toys by 2 percent.
D. toys are an inferior good.
answer
A. a 10 percent increase in income will increase the purchase of toys by 20 percent.
question
If the income elasticity of demand for lard is -3.00, this means that:
A. lard is a substitute for butter.
B. lard is a normal good.
C. lard is an inferior good.
D. more lard will be purchased when its price falls.
A. lard is a substitute for butter.
B. lard is a normal good.
C. lard is an inferior good.
D. more lard will be purchased when its price falls.
answer
C. lard is an inferior good.
question
The formula for cross elasticity of demand is percentage change in:
A. quantity demanded of X/percentage change in price of X.
B. quantity demanded of X/percentage change in income.
C. quantity demanded of X/percentage change in price of Y.
D. price of X/percentage change in quantity demanded of Y.
A. quantity demanded of X/percentage change in price of X.
B. quantity demanded of X/percentage change in income.
C. quantity demanded of X/percentage change in price of Y.
D. price of X/percentage change in quantity demanded of Y.
answer
C. quantity demanded of X/percentage change in price of Y.
question
Cross elasticity of demand measures how sensitive purchases of a specific product are to changes in:
A. the price of some other product.
B. the price of that same product.
C. income.
D. the general price level.
A. the price of some other product.
B. the price of that same product.
C. income.
D. the general price level.
answer
A. the price of some other product.
question
The larger the positive cross elasticity coefficient of demand between products X and Y, the:
A. stronger their complementariness.
B. greater their substitutability.
C. smaller the price elasticity of demand for both products.
D. the less sensitive purchases of each are to increases in income
A. stronger their complementariness.
B. greater their substitutability.
C. smaller the price elasticity of demand for both products.
D. the less sensitive purchases of each are to increases in income
answer
B. greater their substitutability.
question
We would expect the cross elasticity of demand between Pepsi and Coke to be:
A. positive, indicating normal goods.
B. positive, indicating inferior goods.
C. positive, indicating substitute goods.
D. negative, indicating substitute goods.
A. positive, indicating normal goods.
B. positive, indicating inferior goods.
C. positive, indicating substitute goods.
D. negative, indicating substitute goods.
answer
C. positive, indicating substitute goods.
question
We would expect the cross elasticity of demand between dress shirts and ties to be:
A. positive, indicating normal goods.
B. positive, indicating complementary goods.
C. negative, indicating substitute goods.
D. negative, indicating complementary goods.
A. positive, indicating normal goods.
B. positive, indicating complementary goods.
C. negative, indicating substitute goods.
D. negative, indicating complementary goods.
answer
D. negative, indicating complementary goods.
question
Compared to coffee, we would expect the cross elasticity of demand for:
A. tea to be negative, but positive for cream.
B. tea to be positive, but negative for cream.
C. both tea and cream to be negative.
D. both tea and cream to be positive.
A. tea to be negative, but positive for cream.
B. tea to be positive, but negative for cream.
C. both tea and cream to be negative.
D. both tea and cream to be positive.
answer
B. tea to be positive, but negative for cream.
question
We would expect the cross elasticity of demand for Pepsi to be greater in relation to other soft drinks than that for soft drinks in general because:
A. soft drinks are normal goods.
B. the income effect always exceeds the substitution effect.
C. there are fewer good substitutes for soft drinks as a whole than for Pepsi specifically.
D. there are more good substitutes for soft drinks as a whole than for Pepsi specifically.
A. soft drinks are normal goods.
B. the income effect always exceeds the substitution effect.
C. there are fewer good substitutes for soft drinks as a whole than for Pepsi specifically.
D. there are more good substitutes for soft drinks as a whole than for Pepsi specifically.
answer
C. there are fewer good substitutes for soft drinks as a whole than for Pepsi specifically.
question
Suppose that a 10 percent increase in the price of normal good Y causes a 20 percent increase in the quantity demanded of normal good X. The coefficient of cross elasticity of demand is:
A. negative and therefore these goods are substitutes.
B. negative and therefore these goods are complements.
C. positive and therefore these goods are substitutes.
D. positive and therefore these goods are complements.
A. negative and therefore these goods are substitutes.
B. negative and therefore these goods are complements.
C. positive and therefore these goods are substitutes.
D. positive and therefore these goods are complements.
answer
C. positive and therefore these goods are substitutes.
question
Suppose that a 20 percent increase in the price of normal good Y causes a 10 percent decline in the quantity demanded of normal good X. The coefficient of cross elasticity of demand is:
A. negative and therefore these goods are substitutes.
B. negative and therefore these goods are complements.
C. positive and therefore these goods are substitutes.
D. positive and therefore these goods are complements.
A. negative and therefore these goods are substitutes.
B. negative and therefore these goods are complements.
C. positive and therefore these goods are substitutes.
D. positive and therefore these goods are complements.
answer
B. negative and therefore these goods are complements.
question
Assume that a 4 percent increase in income across the economy produces an 8 percent increase in the quantity demanded of good X. The coefficient of income elasticity of demand is:
A. negative and therefore X is an inferior good.
B. negative and therefore X is a normal good.
C. positive and therefore X is an inferior good.
D. positive and therefore X is a normal good.
A. negative and therefore X is an inferior good.
B. negative and therefore X is a normal good.
C. positive and therefore X is an inferior good.
D. positive and therefore X is a normal good.
answer
D. positive and therefore X is a normal good.
question
Assume that a 6 percent increase in income in the economy produces a 3 percent increase in the quantity demanded of good X. The coefficient of income elasticity of demand is:
A. negative and therefore X is an inferior good.
B. positive but less than one; therefore X is an inferior good.
C. positive and therefore X is an inferior good.
D. positive and therefore X is a normal good.
A. negative and therefore X is an inferior good.
B. positive but less than one; therefore X is an inferior good.
C. positive and therefore X is an inferior good.
D. positive and therefore X is a normal good.
answer
D. positive and therefore X is a normal good.
question
Assume that a 3 percent increase in income across the economy produces a 1 percent decline in the quantity demanded of good X. The coefficient of income elasticity of demand for good X is:
A. negative and therefore X is an inferior good.
B. negative and therefore X is a normal good.
C. positive and therefore X is an inferior good.
D. positive and therefore X is a normal good.
A. negative and therefore X is an inferior good.
B. negative and therefore X is a normal good.
C. positive and therefore X is an inferior good.
D. positive and therefore X is a normal good.
answer
A. negative and therefore X is an inferior good.
question
Which type of goods is most adversely affected by recessions?
A. Goods for which the income elasticity coefficient is relatively low or negative.
B. Goods for which the income elasticity coefficient is relatively high and positive.
C. Goods for which the cross elasticity coefficient is positive.
D. Goods for which the cross elasticity coefficient is negative.
A. Goods for which the income elasticity coefficient is relatively low or negative.
B. Goods for which the income elasticity coefficient is relatively high and positive.
C. Goods for which the cross elasticity coefficient is positive.
D. Goods for which the cross elasticity coefficient is negative.
answer
B. Goods for which the income elasticity coefficient is relatively high and positive.
question
Which of the following goods (with their respective income elasticity coefficients in parentheses) will most likely suffer a decline in demand during a recession?
A. Dinner at a nice restaurant (+1.8)
B. Chicken purchased at the grocery store for preparation at home (+0.25)
C. Facial tissue (+0.6)
D. Plasma screen and LCD TVs (+4.2)
A. Dinner at a nice restaurant (+1.8)
B. Chicken purchased at the grocery store for preparation at home (+0.25)
C. Facial tissue (+0.6)
D. Plasma screen and LCD TVs (+4.2)
answer
D. Plasma screen and LCD TVs (+4.2)
question
Which of the following goods will least likely suffer a decline in demand during a recession?
A. Dinner at a nice restaurant
B. iPods
C. Toothpaste
D. Plasma screen and LCD TVs
A. Dinner at a nice restaurant
B. iPods
C. Toothpaste
D. Plasma screen and LCD TVs
answer
C. Toothpaste
question
Q1 The Law Of Demand states that:
answer
Both 1 and 2
1. The lower the price, ceteris paribus, the more units a consumer will demand.
2. The higher the price, ceteris paribus, the less the consumer will demand.
1. The lower the price, ceteris paribus, the more units a consumer will demand.
2. The higher the price, ceteris paribus, the less the consumer will demand.
question
Q2 When the price of chicken rises, people will tend to eat more beef. This is an example of:
answer
The Substitution Effect
question
Q3 Why does quantity demanded tend to fall as price rises?
answer
Both 1 and 2
1. The Substitution Effect
2. The Income Effect
1. The Substitution Effect
2. The Income Effect
question
Q4 The assumption of ceteris paribus is useful because it allows economists to draw their graphs in:
answer
Two dimensions
question
Q5 Common shift factors used in the analysis of demand include:
answer
Both 1 and 2
1. Income and tastes
2. The price of other products
1. Income and tastes
2. The price of other products
question
Q6 Suppose the price of chicken rises. Which way do you think the beef demand curve will shift?
answer
Outward and rightward
question
Q7 Which statement is true?
answer
Both
1. A shift in the demand curve represents a change in demand
2. A movement along the demand curve represents a change in the quantity demanded
1. A shift in the demand curve represents a change in demand
2. A movement along the demand curve represents a change in the quantity demanded
question
Q8 The Law Of Supply states that:
answer
The lower the price, ceteris paribus, the less units firms will produce.
question
Q9 Which of these is NOT an important shift factor for the supply curve:
answer
Tastes
question
Q10 A set of regulations imposed upon a manufacturer to clean up air and water pollution is likely to:
answer
Shift the supply curve inward and leftward and increase prices
question
Q11 To say something is in equilibrium in economics is to say that:
answer
Both 1 and 2
1. The dynamic forces pushing on it cancel each other out.
2. The upward pressure on price is exactly offset by the downward pressure on price.
1. The dynamic forces pushing on it cancel each other out.
2. The upward pressure on price is exactly offset by the downward pressure on price.
question
Q12 Suppose you go to the store and see that the price of bread has doubled. Has the demand for bread risen or has bread become more expensive to produce?
answer
Need more information to determine why the price doubled
question
Q13 In the 1930s, United States President Franklin Delano Roosevelt's New Deal began a program of price supports for many of America's agricultural products. This program led to:
answer
Surpluses
question
Q14 During the Arab Oil Embargo of 1974, the OPEC cartel put an embargo on oil sales to the United States. The U.S. government responded with a price ceiling. This led to:
answer
Gas lines as a form of rationing
question
Q15 Suppose a drought in Brazil significantly reduces the coffee crop in Brazil? What is likely to happen to the price of coffee and Starbucks and what is likely to happen to the profits for the Starbucks company?
answer
Prices rise because of an increase in costs and profits fall because of a decrease in the quantity demanded.
question
What does elasticity measure?
answer
the percent change in the value of a dependent variable given a percent change in the value of an explanatory variable.
question
Equation 3.2 Qx = 127-50Px
What does the slope coefficient -50 indicate?
What does the slope coefficient -50 indicate?
answer
The quantity demanded for good x increases by 50 thousand units for every $1 decrease in its price.
Or good x decreases 50 thousand units for every increase of $1 in price.
Or good x decreases 50 thousand units for every increase of $1 in price.
question
Bx (slope) is calculated by...
answer
Change in Q/Change in P
Q2-Q1/P2-P1
Q2-Q1/P2-P1
question
Why is slope not an ideal way to measure consumer responsiveness to price change?
answer
1. Change in unit sales resulting from change in price.
It depends on the affect the price change has. If it is $10 off $100, consumers may think that is a good deal, if it is $10 off $1000, they may think it is a marketing ploy.
2. Its numerical value depends on how we measure unit sales.
It depends on the affect the price change has. If it is $10 off $100, consumers may think that is a good deal, if it is $10 off $1000, they may think it is a marketing ploy.
2. Its numerical value depends on how we measure unit sales.
question
What does price elasticity of demand measure? How does it differ from slope?
answer
It measures the PERCENT change in the quantity demanded of a good/service given a PERCENT change in its price.
The slope coefficient simply deals with price and quantity, while the price elasticity of demand deals with percents.
The slope coefficient simply deals with price and quantity, while the price elasticity of demand deals with percents.
question
Why is elasticity a preferred measure instead of slope?
answer
...
question
How is a "percentage change" calculated (in general, not specifically for elasticity)?
answer
subtract starting value by ending value then divide by ending value
question
9. Review equations 3.6 and 3.7, how do the equations differ?
3.6 %changePx = P2-P1/P1*100 less than zero
3.7 %changePx = P2-P1/P2*100 greater than zero
3.6 %changePx = P2-P1/P1*100 less than zero
3.7 %changePx = P2-P1/P2*100 greater than zero
answer
3.6 shows a percent increase, 3.7 shows a percent decrease
question
How does the midpoint formula calculate the percentage change in quantity and the percentage change in price to measure elasticity?
answer
It takes the two equations
{Q2-Q1/P2-P1}*{P1+P2/Q1+Q2}
{Q2-Q1/P2-P1}*{P1+P2/Q1+Q2}
question
Midpoint formula
Is the calculation dependent on which point is considered the starting point and which is the ending point?
Is the calculation dependent on which point is considered the starting point and which is the ending point?
answer
No, it only needs to know which the values of P1, P2 and Q1, Q2.
question
What are weakness of the midpoint (or arc) elasticity approach?
answer
1. It assumes the demand curve is linear.
2. It produces a value that depends on price-quantity combinations selected for its calculation.
2. It produces a value that depends on price-quantity combinations selected for its calculation.
question
How does point elasticity calculation (equation 3.12) differ from the arc price elasticity of demand (which is the midpoint formula used in the previous section)?
answer
It calculates the price elasticity of demand of a single point on the curve times the slope of the demand curve
question
How does point price elasticity depend on whether the initial price for a price change is from A to B or if the price changes from B to A.
answer
...
question
Given the law of demand, should the elasticity coefficient be positive or negative when calculated?
answer
...
question
What are the factors that determine price elasticity of demand?
answer
1. number of close substitutes
2. proportion of the consumer's income spent on the product.
3. amount of time that a consumer has to adjust the price change.
2. proportion of the consumer's income spent on the product.
3. amount of time that a consumer has to adjust the price change.
question
How does the number of substitutes available affect elasticity?
answer
the greater the number of close substitutes, the more price elastic is the demand for a product.
the fewer number of close substitutes, the less price elastic since substitutes are difficult to locate.
the fewer number of close substitutes, the less price elastic since substitutes are difficult to locate.
question
How does the proportion of income spent on the good affect price elasticity of demand?
answer
If there is an increase in the price of a big ticket item, there is a larger effect on purchasing than if there is an increase in the price of a small ticket item.
question
How does the adjustment period affect price elasticity of demand?
answer
Consumers tend to be less price sensitive in the short run than in the long run.
Gas prices increase:
short run - change route, combine activities
long run - trade in car for more fuel efficient one
Gas prices increase:
short run - change route, combine activities
long run - trade in car for more fuel efficient one
question
INELASTIC:
How does the relative change in quantity for a given percentage change in price affect whether revenue increases or decreases (i.e., how is elasticity related to whether revenues increase or decrease when price changes)?
How does the relative change in quantity for a given percentage change in price affect whether revenue increases or decreases (i.e., how is elasticity related to whether revenues increase or decrease when price changes)?
answer
If a price is INELASTIC, an increase will push up revenues but decrease sales.
The net effect is the difference between increase in revenue minus decrease in sales.
The net effect is the difference between increase in revenue minus decrease in sales.
question
ELASTIC:
How does the relative change in quantity for a given percentage change in price affect whether revenue increases or decreases (i.e., how is elasticity related to whether revenues increase or decrease when price changes)?
How does the relative change in quantity for a given percentage change in price affect whether revenue increases or decreases (i.e., how is elasticity related to whether revenues increase or decrease when price changes)?
answer
Revenues will increase, but the sales will decrease by twice as much.
The net effect will be a decline in total revenues when revenue minus sales is calculated.
The net effect will be a decline in total revenues when revenue minus sales is calculated.
question
Unit ELASTIC:
How does the relative change in quantity for a given percentage change in price affect whether revenue increases or decreases (i.e., how is elasticity related to whether revenues increase or decrease when price changes)?
How does the relative change in quantity for a given percentage change in price affect whether revenue increases or decreases (i.e., how is elasticity related to whether revenues increase or decrease when price changes)?
answer
Price and sales will increase at the same rate, the net effect is no change in total revenue.
question
What does income elasticity of demand measure?
answer
It is a measure of consumer sensitivity to changes in money income.
question
30. What does cross price elasticity of demand measure?
answer
It measures the sensitivity of consumer purchases of a product with respect to a change in the price of a related good. (complements or substitutes)
question
If cross price elasticity is positive, are the goods substitutes are complements?
answer
complements
question
If cross price elasticity is negative, are the good substitute or complement?
answer
substitutes
question
Monopolistic Competition Graph
answer
(Break even -Profit max)
question
Monopolistic Graph and important important points
answer
Fixed cost
-only shift ATC
-only shift ATC
question
Excess capacity (Break even -Profit max)
answer
Demand increases and becomes more inelastic
Marginal rev increase and becomes more inelastic
Marginal rev increase and becomes more inelastic
question
What type of cost is advertising
answer
Demand decreases and becomes more elastic
Marginal rev decreases ease and becomes more elastic
Marginal rev decreases ease and becomes more elastic
question
What happens to curves when advertising has a positive effect
answer
Demand increases and becomes more elastic
Marginal rev increase and becomes more elastic
-causes it that other sellers exit the market
Marginal rev increase and becomes more elastic
-causes it that other sellers exit the market
question
What happens to curves when advertising has a negative effect
answer
Demand decreases and becomes more inelastic
Marginal rev decreases and becomes more in elastic
-causes could be more sellers enter the market
Marginal rev decreases and becomes more in elastic
-causes could be more sellers enter the market
question
What happens when just the demand increases naturally
answer
No long run profits
question
What happens when just the demand decreases naturally
answer
-only alters the ATC curve
-Production quantity and price does not charge
-profits increase
-market is inefficient
-Market Remains inequitable
-Production quantity and price does not charge
-profits increase
-market is inefficient
-Market Remains inequitable
question
No long run profits
answer
-alters the ATC curve and MC curve by decreasing cost shifts to the right
-Output increases
-Price decrease
-Profits increase
-market is inefficient
-Market Remains inequitable
-Output increases
-Price decrease
-Profits increase
-market is inefficient
-Market Remains inequitable
question
Lump Sum subsidy payments
answer
1. Allocatively Efficient
2. Socially Optimal
3. Point of Equilibrium
2. Socially Optimal
3. Point of Equilibrium
question
Per unit Subsidy Paymets
answer
when the outcome (profit) of each firm depends on the actions of other firms in the market
question
Where demand intersects supply can be called
answer
an oligopoly consisting of only two firms
question
Interdependence
answer
when sellers cooperate to raise their joint profits
question
Duopoly
answer
a group of producers that agree to restrict output in order to increase prices and their joint profits
question
Collusion
answer
actions by firms that ignore the effects of those actions on the profits of other firms
question
Cartel
answer
the study of behavior in situations of interdependence
question
Non-cooperative behavior
answer
the reward received by a player in a game, such as the profit earned by an oligopolist
question
Game theory
answer
shows how the payoff to each of the participants in a two-player game depends on the actions of both
question
Payoff
answer
a particular/specific "game" between two people that illustrates why cooperation is difficult to maintain even when it is mutually beneficial
question
Payoff matrix
answer
a player's best action regardless of the action taken by the other player
question
Prisoners' dilemma
answer
the result when each player in a game chooses the action that maximizes his or her payoff, given the actions of other players
question
Dominant strategy
answer
involves efforts by the government to prevent oligopolistic industries from becoming or behaving like monopolies
question
Nash equilibrium
answer
when a firm attempts to influence the future behavior of other firms
question
Antitrust policy
answer
A strategy involves playing cooperatively at first, then doing whatever the other player did in the previous period
question
Strategic behavior
answer
when firms limit production and raise prices in a way that raises each others' profits, even though they have not made any formal agreement
question
Tit for tat
answer
when collusion breaks down and aggressive price competition causes prices to collapse
question
Tacit collusion
answer
a positioning strategy that some firms use to distinguish their products from those of competitors (similar to non price discrimination)
question
Price war
answer
one firm sets its price first, and other firms then follow
question
Product differentiation
answer
a marketing strategy to attract customers through style, service, or location, but not a lower price (similar to product differentiation)
question
Price leadership
answer
a name owned by a particular firm that distinguishes its products from those of other firms
question
Non-price competition
answer
Complete control of a product or business by one person or group. Price makers with very high barriers to enter.
question
Brand names
answer
a market structure in which many companies sell products that are similar but not identical
question
Unprofitable firm
answer
A market structure in which a few large firms dominate a market
question
Profitable firm in the short run
answer
1. a key resource or patent, that is required for production, is owned by a single firm.
2. the government gives a single firm the exclusive right to produce some good.
3. cost of production make a single producer more efficient than a large number of producers (economies of scale give rise to a natural monopoly)
2. the government gives a single firm the exclusive right to produce some good.
3. cost of production make a single producer more efficient than a large number of producers (economies of scale give rise to a natural monopoly)
question
Monopoly
answer
the business practice of selling the same good at different prices to different customers. It reduces consumer surplus, but increases output.
question
monopolistic competition
answer
This is what happened when other firms entered the market (see graph)
question
Oligopoly
answer
studies behavior of individual economic agents. Apply microeconomic & industrial organization theory to business problems
question
Barriers to enter
answer
households, firms, government
question
price discrimination
answer
the study of how firms' decisions about prices and quantities depend on the market conditions they face
question
Demand curve shifted down and the firm earns a normal economic profit
answer
some choices depend on market conditions: prices, wages, competition.
other choices can affect or alter conditions: innovation or invention that increases market share or power
other choices can affect or alter conditions: innovation or invention that increases market share or power
question
managerial economics
answer
whatever must be given up to obtain some item. Value of forgone alternative.
Cost of any decision: monetary + nonmonetary costs.
Cost of any decision: monetary + nonmonetary costs.
question
Economic agents
answer
= total revenue - total economic cost
= total revenue - explicit costs - implicit costs
= total revenue - explicit costs - implicit costs
question
industrial organization
answer
total revenue - explicit costs
question
Choices of firms
answer
longevity requires pursuit and maximization of total profit.
This goal usually conflicts with pursuing: 1) maximizing total revenue (while neglecting costs). 2) minimizing total costs (while neglecting revenue) 3) maximizing market share 4) maximizing profit margin (instead of total profit) 5) cost-plus pricing (adding fixed $ or % markup)
This goal usually conflicts with pursuing: 1) maximizing total revenue (while neglecting costs). 2) minimizing total costs (while neglecting revenue) 3) maximizing market share 4) maximizing profit margin (instead of total profit) 5) cost-plus pricing (adding fixed $ or % markup)
question
opportunity cost
answer
the ability to escape price competition and to justify higher prices and margins without losing market share
question
economic profit
answer
firm has no real control over its price.
price is determined by market demand & supply
price is determined by market demand & supply
question
accounting profit
answer
A firm that can raise its price without losing all of its sales
question
inferior goals of a company
answer
any place that facilitates buyers & sellers trading goods & services. This reduces transaction costs.
question
pricing power
answer
the costs in time and other resources that parties incur in the process of agreeing to and carrying out an exchange of goods or services
question
price-taking firm
answer
The nature and degree of competition among firms operating in the same industry.
Degree of competitiveness within an industry: 1) Number & size of firms in market 2) Degree of product differentiation 3) Likelihood of new firms entering market
Degree of competitiveness within an industry: 1) Number & size of firms in market 2) Degree of product differentiation 3) Likelihood of new firms entering market
question
price-setting firm / price-making firm
answer
-very large number of very small firms
-homogeneous (undifferentiated or identical) product
-no barriers to entry
-homogeneous (undifferentiated or identical) product
-no barriers to entry
question
Market
answer
-Single firm
-Product has no substitutes
-Barrier(s) to entry keeps out competitors
-Product has no substitutes
-Barrier(s) to entry keeps out competitors
question
transaction costs
answer
-large number of relatively small firms
-differentiated products
-no barriers to entry
-differentiated products
-no barriers to entry
question
Market Structure
answer
A few large firms produce all or most market output.
Decisions/strategies/profits are interdependent. One firm's choice affects profits of the other firms.
Decisions/strategies/profits are interdependent. One firm's choice affects profits of the other firms.
question
perfect competition
answer
Economic integration of markets located in nations around the world.
-Provides opportunity to sell more goods & services to foreign buyers
-Presents threat of increased competition from foreign producers
-Provides opportunity to sell more goods & services to foreign buyers
-Presents threat of increased competition from foreign producers
question
Monopoly
answer
the amount of a good or service that a consumer is willing and able to purchase during a given period of time
question
monopolistic competition
answer
Variables that increase/decrease Qd at the same price:
-own price (P)
-incomes of consumers(M)
-number of consumers in market (N)
-prices of related goods & services (R, substitutes & compliments)
-tastes & preferences (T)
-future expectations (E)
-own price (P)
-incomes of consumers(M)
-number of consumers in market (N)
-prices of related goods & services (R, substitutes & compliments)
-tastes & preferences (T)
-future expectations (E)
question
Oligopoly
answer
Qd = f(P, M, N, R, T, E)
question
Globalization of Markets
answer
Qd = a + bP + cM + dN + eR + fT + gE
- b, c, d, e, f & g are coefficients
- coefficient shows effect on Qd of one-unit change in independent variable while holding the other variables constant
- a is vertical intercept
Sign of coefficient shows direction of relationship to Qd
- positive sign indicates direct relationship
- negative sign indicates inverse relationship
- b, c, d, e, f & g are coefficients
- coefficient shows effect on Qd of one-unit change in independent variable while holding the other variables constant
- a is vertical intercept
Sign of coefficient shows direction of relationship to Qd
- positive sign indicates direct relationship
- negative sign indicates inverse relationship
question
Quantity Demanded (Qd)
answer
Relation to Qd: inverse
Expected sign: b is negative
Expected sign: b is negative
question
What affects demand?
answer
Relation to Qd: direct for normal good, inverse for inferior good
Expected sign: c is positive for normal, negative for inferior
Expected sign: c is positive for normal, negative for inferior
question
General Demand Function
answer
Relation to Qd: direct
Expected sign: d is positive
Expected sign: d is positive
question
Estimated Demand Function
answer
Relation to Qd: direct for substitutes, inverse for compliments
Expected sign: e positive for substitutes, negative for compliments
Expected sign: e positive for substitutes, negative for compliments
question
Variable P
answer
Relation to Qd: depends on change
Expected sign: f depends on change
Expected sign: f depends on change
question
Variable M
answer
Relation to Qd: depends on change
Expected sign: g depends on change
Expected sign: g depends on change
question
Variable N
answer
Inverse relationship betwen Qd and P, all else equal (M, N, R, T, E)
- Qd increases when P falls, all else equal
- Qd decreases when P rises, all else equal
- b coefficient should always be negative
- Qd increases when P falls, all else equal
- Qd decreases when P rises, all else equal
- b coefficient should always be negative
question
Variable R
answer
are determined by the intersection of demand & supply curves.
The price where Qd = Qs
Consumers can purchase all they want and producers can sell all they want, at the "market bearing" or "equilibrium" price.
The most that consumers want to buy at P is Q, and the most that producers want to sell at P is Q.
The price where Qd = Qs
Consumers can purchase all they want and producers can sell all they want, at the "market bearing" or "equilibrium" price.
The most that consumers want to buy at P is Q, and the most that producers want to sell at P is Q.
question
Variable T
answer
Excess demand (shortage)
-exists when quantity demanded exceeds quantity supplied (Qd > Qs)
-at any P < P*
Excess supply (surplus)
-exists wen quantity supplied exceeds quantity demanded (Qd < Qs)
-at any P > P*
-exists when quantity demanded exceeds quantity supplied (Qd > Qs)
-at any P < P*
Excess supply (surplus)
-exists wen quantity supplied exceeds quantity demanded (Qd < Qs)
-at any P > P*
question
Variable E
answer
1. A low level of unemployment
2. Stable price level
3. Healthy rate of economic growth
4. A fair distribution of income
2. Stable price level
3. Healthy rate of economic growth
4. A fair distribution of income
question
Law of Demand
answer
The market economy solves the consumer goods/capital goods production dilemma by automatically adjusting to the need for more or fewer capital goods by providing market-based incentives for businesses and consumers to change their spending practices (instead of waiting for a committee). The command system attempts to solve this problem by letting a powerful individual or committee answer the three economic questions.
question
market equilibrium
answer
(1) Nations distribute wealth solely to those who successfully satisfy the needs of others.
Those who cannot or will not work are not entitled to some amount of the profit. They should not receive a portion of the nation's wealth just because they exist in that nation.
(2)each person has a right to part of a nations wealth because part of the nation. Less extreme egalitarians believe society has to maintain a safety net which is a basis of social programs
Those who cannot or will not work are not entitled to some amount of the profit. They should not receive a portion of the nation's wealth just because they exist in that nation.
(2)each person has a right to part of a nations wealth because part of the nation. Less extreme egalitarians believe society has to maintain a safety net which is a basis of social programs
question
market disequilibrium
answer
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question
List the four economic goals of most societies.
answer
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question
How does the market economy solve the consumer goods/capital goods production dilemma? How does the command system attempt to solve it?
answer
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question
How does the market system decide who should receive what the nation produces? How does the command system address the problem?
answer
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