Managerial Economics: Chapter 6: Simple Pricing

Which of the following make demand more elastic?

Products with many complements have less elastic demand

Which of the following is the reason for the existence of consumer surplus?

Some consumers are willing to pay more than the price.

Suppose you're trying to compare the year-to-year performance of one of your regional salespeople over a period during which income grew by 3%. If demand for your products has an income elasticity of 2, how would you measure the salesperson's performance?

You would expect quantity to increase by 6%

Which of the following best explains why a retail store might offer free parking to its customers? a. Parking and shopping are substitutes, so offering free parking should increase the demand for the store's merchandise. b. Parking and shopping are complements, so offering free parking should decrease the demand for the store's merchandise. c. Parking and shopping are substitutes, so offering free parking should decrease the demand for the store's merchandise. d. Parking and shopping are complements, so offering free parking should increase the demand for the store's merchandise.

d. Parking and shopping are complements, so offering free parking should increase the demand for the store's merchandise.

To compute price, we need: a. MR b. MC c. to know whether MR is greater than MC, in which case, we increase prices d. a and b

d. a and b

Jim recently graduated from college. His income increased tremendously from $5,000 a year to $60,000 a year. Jim decided that instead of renting he will buy a house. This implies that

houses are normal goods for Jim.

Jim has estimated elasticity of demand for gasoline to be −0.7 in the short run and −1.8 in the long run. A decrease in taxes on gasoline would

lower tax revenue in the short run but raise tax revenue in the long run.

An economist estimated the cross-price elasticity for peanut butter and jelly to be 1.5. Based on this information, we know the goods are

substitutes

Christine has purchased five bananas and is considering the purchase of a sixth. It is likely she will purchase the sixth banana if

the marginal benefit of the sixth banana exceeds the price.

Its lunch time, you are hungry and would like to have some pizza. By the law of diminishing marginal value,

you would pay more for your first slice of pizza than your second

An end-of-aisle price promotion changes the price elasticity of a good from −2 to −3. Suppose the normal price is $12, which equates marginal revenue with marginal cost at the initial elasticity of -2. What should the promotional price be when the elasticity changes to -3? (Hint: In other words, what price will equate marginal revenue and marginal cost?)

$9.00 MC = MR = $12 x (1 - 1/2) = $6.00 $6.00/(1 - 1/2)=P P= $9

George has been selling 8,000 T-shirts per month for $9.50. When he increased the price to $10.50, he sold only 5,000 T-shirts. A. Which of the following best approximates the price elasticity of demand? Suppose George's marginal cost is $4 per shirt. B. Before the price change, George's initial price markup over marginal cost was approximately _____. George's desired markup is _____. C. Since George's initial markup, or actual margin, was _____ than his desired margin, raising the price was _____.

*A. -4.6154* NOTE: [(Q1-Q2)/(Q1+Q2)] / [(P1-P2)/(P1+P2)] [(8000-5000)/(8000+5000)] / [(9.5-10.5)/(9.5+10.5)] [(3000/13000)] / [-1/20} 60000/-13000 =-4.6154 *B. 0.5789 or 57.89%* NOTE: (9.5-4) / 9.5 = 0.5789 *0.2167 or 21.67%* NOTE: 1/4.6154 = 0.2167 *C. more;not profitable*

Suppose your firm adopts a technology that allows you to increase your output by 15%. If the elasticity of demand is −3, how should you adjust price if you want to sell all of your output?

5% lower

A bakery currently sells chocolate chip cookies at a price of $16 per dozen. The marginal cost per dozen is $8. The cookies are becoming more popular with customers, and so the bakery owner is considering raising the price to $20/dozen. What percentage of customers must be retained to ensure that the price increase is profitable?

66.6%

George has been selling 4,000 T-shirts per month for $7.50. When he increased the price to $9.50, he sold only 3,000 T-shirts. A. Which of the following best approximates the price elasticity of demand? Suppose George's marginal cost is $6 per shirt. B. Before the price change, George's initial price markup over marginal cost was approximately _____. George's desired markup is _____. C. Since George's initial markup, or actual margin, was _____ than his desired margin, raising the price was _____.

A. -1.2143 B. 0.2; 0.235 C. less/profitable

To conduct an experiment, a movie theater increased movie ticket prices from $9 to $10 and measured the change in ticket sales. The theater then gathered data over the following month to determine whether the price increase was profitable. Assume total costs to the theater are the same, whether the price of a ticket is $9 or $10. In order for the ticket price to have been profitable over the month, the elasticity of demand for movie tickets must be _____. Demand curves become _____ elastic in the long run. This means that the ticket price increase will likely be _____ profitable in the long run.

A. Inelastic B. More elastic and will be less profitable. When demand is inelastic ( |e|<1 ), an increase in price will increase revenue because the percentage decrease in quantity will be smaller than the percentage increase in price. Furthermore, if total costs are the same at both $9 per ticket and $10 per ticket, then an increase in revenue will also increase profit for the theater. Thus, for this price increase to be profitable, the demand for movie tickets must be inelastic. After the initial ticket price increase, the demand for movie tickets will become more elastic as consumers have more time to find substitutes, such as online movie streaming services. Thus, in the long run, the percentage decrease in quantity demanded (resulting from the price increase) will likely be higher, making the price increase less profitable as time goes on.

Buyers consider Marlboro cigarettes and Budweiser beer to be complements. If Marlboro just increased its prices, what would you expect to occur in the Budweiser market?

Demand would fall, and Budweiser would reduce price.

Which of the following goods has a negative income elasticity of demand?

Items from Dollar stores

To conduct an experiment, a movie theater increased movie ticket prices from $9 to $10 and measured the change in ticket sales. The theater then gathered data over the following month to determine whether the price increase was profitable. Assume total costs to the theater are the same, whether the price of a ticket is $9 or $10. In order for the ticket price to have been profitable over the month, the elasticity of demand for movie tickets must be _____ than 1 in absolute value. Demand curves become more elastic in the _____ run. This means that the ticket price increase will likely be ____ profitable in the long run.

Less; long; less