STUDY FOR MIDTERM

The market for oranges is in equilibrium. Now suppose that a cold snap hits Florida, and at the same time a new research shows that eating oranges reduces risk of heart disease. What will be the effect of these changes on the equilibrium price and quantity in orange market?

Price will increase, and effect on quantity is ambiguous.

Law of Supply:

Quantity supplied of a good rises when the price of the good rises.

Suppose that you own a clothing store. You expect food prices to increase 20 percent due to the COVID-19 pandemic. If the cross-price elasticity of demand between food and clothing is -0.18, what will be the resulting impact on sales from your clothing store?

Sales will decrease by 3.6 percent

If the price of gasoline rises, when is the price elasticity of demand likely to be the highest?

One year after the price increase.

If steak is a normal good, what do you suppose would happen to price and quantity during an economic recession?

Price and quantity would both decrease.

In which of the following situations will total revenue increase?

Price elasticity of demand is 1.2, and the price of the good decreases. b.Price elasticity of demand is 0.5, and the price of the good increases. c.Price elasticity of demand is 3.0, and the price of the good decreases.

The price ceiling is binding

causes a shortage

Changing factors other than price leads to

changes in demand.

Changing only price leads to

changes in quantity demanded.

Suppose an airline determines that its customers traveling for business have inelastic demand and its customers traveling for vacations have an elastic demand. If the airline's objective is to increase total revenue, it should

decrease the price charged to vacationers and increase the price charged to business travelers

When demand is elastic, total revenue

falls when price rises

Suppose the demand for good X is given by Qdx = 10 + axPx + ayPy + aMM. If ay is positive, then ____. [Py indicates the price of a related good].

goods y and x are substitutes

Price of elasticity of demand depends on:

if good is necessity or a luxury

Incentive plans imply

if managers put forth little effort, they receive little pay; if they put forth much effort and hence generate many sales and more profit, they receive a lot of pay.

(Supply) # of sellers

increase in # of sellers, increase quantity supplied at each price

(Demand) Price of related goods: 2 goods are complements if an

increase in price of one causes a fall in demand for the other

(Demand) Price of related goods: 2 goods are substitutes if an

increase in price of one causes an increase in demand for the other

If Kindle e-readers and Nook e-readers are substitutes, a higher price for Nooks would result in a(n)

increase in the demand for Kindles

Elastic demand: lower price

increases total revenue

Inelastic demand: higher price

increases total revenue

If demand decreases when income increases (negative relationship), this indicates that the good

inferior

implicit cost

input costs that DO NOT require an outlay of money by the firm (opportunity cost of the owners time)

explicit costs

input costs that REQUIRE an outlay of money by the firm

Demand for a normal good is

is positively related to income

Price ceiling:

legal MAXIMUM on the price of a good or service

Price floor:

legal MINIMUM on the price at which a good can be sold

Suppose the demand for good X is given by Qdx = 10 + axPx + ayPy + aMM. From the law of demand, we know that ax will be

less than zero

Demand for an inferior good is

negatively related to income. An increase in income shifts D curves for inferior goods to the left.

In order to maximize net benefits, the managerial control variable should be used up to the point where

net marginal benefits equal zero.

If demand rises when income increases (positive relationship), this indicates that the good is

normal

Suppose that when income rises, the demand curve for doctor's visits shifts to the right. In this case, we know doctor's visits are

normal goods

Midpoint method:

number halfway between the start and end values

Supply is unit elastic:

price elasticity of supply = 1

Supply is elastic

price elasticity of supply > 1 (price is greater than 1)

Supply is inelastic

price of elasticity < 1 (Price is less than 1)

demand Inelastic:

price of elasticity of demand < 1 (Price is less than 1)

demand Elastic:

price of elasticity of demand > 1 (price is greater than 1)

Law of Demand:

quantity of a good increases (decreases) as the price falls (rises).

Lemonade, a good with many close substitutes, should have an own price elasticity that is

relatively elastic

If demand is inelastic, total revenue

rises when the price increases.

For a steel factory, a decrease in the cost of electricity to the plant will cause the supply curve to ____, all else equal.

shift to the right

Ford Motor Company announces that next month it will offer $3,000 rebates on new Mustangs. As a result of this information, today's demand curve for Mustangs

shifts to the left

"Our marginal revenue is greater than our marginal cost at the current production level." This statement indicates that the firm

should increase the quantity produced to increase profits

Steeper the curve =

smaller elasticity

Workers at a bicycle assembly plant currently earn the mandatory minimum wage. If the federal government increases the minimum wage by $1.00 per hour, then it is likely that the

supply of bicycles will shift to the left

If marginal costs of producing an additional unit for a firm exceed marginal benefits, then

the firm should decrease its production level.

An excise tax of $1.00 per gallon of gasoline placed on the suppliers of gasoline would shift the supply curve

up by $1.00

Input price examples

wages and prices of raw materials

When demand is elastic:

•A price increase (decrease) leads to a decrease (increase) in total revenue.

When demand is inelastic:

•A price increase (decrease) leads to an increase (decrease) in total revenue.

Increase in supply only

•Decrease equilibrium price. •Increase equilibrium quantity.

Decrease in supply only

•Increase equilibrium price. •Decrease equilibrium quantity.

When demand is unitary elastic:

•Total revenue is maximized.

(Demand) # of Buyers

-Increase in # of buyers -Increases quantity demanded at each price -shifts D curve to the right

Which of the following leads to a decrease in demand for mechanical pencils (a normal good)?

A decrease in price of lead pencils

You are the manager of a supermarket, and you know that the income elasticity of peanut butter is exactly -0.7. Due to the economic recession, you expect incomes to drop by 15 percent next year. How should you adjust your purchase of peanut butter?

Buy 10.5 percent more peanut butter.

(Supply) technology

Cost-saving technological improvement has the same effect as a fall in input prices, shifts S curve to the right

(Supply) input prices

Fall of an input price makes production more profitable at each output price so the firms supply a larger quantity at each price and the S curve shifts to the right.

Which of the following is an implicit cost to a firm that produces a good or service?

Foregone interest of using money that could have been kept in a bank.

(Demand) Income

Increase in income causes Increase in quantity demanded at each price, shifts D curve to the right

A tax on any good or service causes

a fall in its quantity, and that the market for this good or service shrinks.

example of implicit

alternative job salary and forgone interest

When a tax is placed on the sellers of cell phones, the size of the cell phone market

and the effective price received by sellers both decrease

Flatter the curve =

bigger elasticity

Suppose buyers of computers and printers regard the two goods as complements. Then an increase in the price of computers will cause a(n)

decrease in the demand for printers and a decrease in the quantity supplied of printers