MGE Chapter 4

If the demand for movie tickets is elastic, then

Ed > 1.

At the midpoint of a linear demand curve, the elasticity of demand is

one

Assume D1 represents the current demand curve for skis. Which of the following would most likely cause D1 to shift to D2?

An increase in the price of snowboards

Which of the following is true of the demand curves shown below?

Curves (2) and (3) have constant price elasticity.

Assume that Pyrotex Inc. estimates the demand for its fireworks to be linear. If the current price charged by Pyrotex is such that the elasticity of demand is equal to 2.5, which of the following statements is true?

Not enough information is provided to determine whether Pyrotex is currently maximizing its profits.

Edt = - 5. This means that if

Pt increases by 1 percent, Qdt will decrease by 5 percent.

Assume Pyrotex Inc. estimates the demand for its fireworks to be linear. If the current price charged by Pyrotex is such that the elasticity of demand is equal to 2.5, which of the following statements is true?

Pyrotex will increase its revenues by decreasing the price of fireworks.

Assume SeatComfy Inc. estimates the demand for its table chairs to be Q = 5,000 -25P + 4I +10PA-15 PT, where P = the price of SeatComfy's chairs; PA = average price of competitors' chairs; PT = price of tables; and I = average income of SeatComfy's customers. Which of the following is true?

SeatComfy's chairs are normal goods; SeatComfy's chairs and tables are complements, while SeatComfy's and competitors' chairs are substitutes. SeatComfy's sales decrease by 25 units as price increases by $1.

FarAwayDrive Inc. has recently increased the price from $4 to $6. In response to this increase in price, sales decreased from 2,200 to 1,800 units. If no other information concerning the demand is available, which of the following is true about the sensitivity of demand (using the ARC or midpoints formula) for FarAwayDrive's golf balls?

The ARC-elasticity (midpoints formula) of demand is ½ or .50.

Which of the following describes the difference between the demand faced by a firm and the demand faced by an industry?

The demand facing individual firms tend to be more price-elastic than those for the entire industry.

Which of the following is a limitation of demand estimation through price experimentation?

There is no uniform result as the demand will differ, depending on whether customers anticipate that a price change is permanent or temporary.

Let Edt= -2. This implies that the demand for movie tickets is

elastic, because a 1 percent change in Pt changes Qdt by 2 percent.

The omitted-variable problem in statistical analysis occurs when

excluded variables are correlated with explanatory variables that are included in the analysis.

BaseBall Inc. is a leader in the industry for baseball bats. If new firms enter the industry and BaseBall Inc. experiences a fall in market share, we can say that the product of the company is in the ______ phase.

growth

The long-run price elasticity of demand for a product is generally ______ the short-run elasticity for the same product.

higher than

The shape of a perfectly elastic demand curve is

horizontal, Ed = infinity.

If the demand for product A displays high and positive cross-price elasticity with respect to the price of product B, then

products A and B are substitutes.

Assume the demand function for skin care products is given by Q = 1,000 - 20 P + 5I. If P=$25 and I=$1,000 currently, then

skin care products are normal goods.

Sales of shampoo by CleanHair, Inc., have recently decreased from 1,300 to 1,100 units in response to a price decrease from $7 to $5 by its main competitor. Assuming that everything else is being held constant, we can infer that

the cross-price ARC-elasticity (midpoints formula) between the two products is ½.

Price elasticity is defined as the change in quantity demanded relative to a change in

the price of the product

Fast food is believed to be an inferior good. This means that

the quantity of fast food consumed decreases as income increases.

The shape of a perfectly inelastic demand curve is

vertical, Ed = 0.