Management Economics Quiz 2
formula of income elasticity
% change in Qd / % change in income
Factors Affecting the Own Price Elasticity
1. Available Substitutes 2. Time 3. Expenditure Share
The preference ordering is assumed to satisfy four basic properties:
1. Completeness 2. More is better 3. Diminishing Marginal Rate of Substitution 4. Transitivity
Regressions that have F-statistics with significance values of _______ are generally considered significant
5 percent or less
For log linear demand, the income elasticity is...
Bm
For log linear demand, the own price elasticity is..
Bx-coefficient of ln (Px)
For log linear demand, the cross-price elasticity is...
By-coefficient of ln (Py)
A range of values that is likely to contain the true value of a population parameter. It provides an estimate of the precision or uncertainty associated with the estimated coefficients in the regression model.
CONFIDENCE INTERVALS
reveals how much its demand will rise or fall due to a change in the price of another firm's product.
CROSS-PRICE ELASTICITY
reveals the responsiveness of the demand for a good to changes in the price of a related good.
CROSS-PRICE ELASTICITY
Property of preference: For any two bundles—say, A and B—either A ≻ B, B ≻ A, or A ∼ B.
Completeness
Property of preference: we assume the consumer is capable of expressing a preference for, or indifference among, all bundles.
Completeness
Property of preference: As a consumer obtains more of good X, the amount of good Y he or she is willing to give up to obtain another unit of good X decreases.
Diminishing Marginal Rate of Substitution
Cross price elasticity formula
EC = percent change in QD of good x/ percent change in the price of related good
The elasticity between two variables, G and S, is mathematically expressed as:
EG,S = %ΔG/%ΔS
the statistical analysis of economic data.
Econometrics
A measure of the responsiveness of one variable to changes in another variable; the percentage change in one variable that arises due to a given percentage change in another variable.
Elasticity Concept
provides a measure of the total variation explained by the regression relative to the total unexplained variation.
F-Statistic
True or False: one cannot objectively determine the statistical significance of any reported F value.
False: one can objectively determine the statistical significance of any reported F value.
a measure of the responsiveness of consumer demand to changes in income.
INCOME ELASTICITY
it is the change in total revenue due to a change in output
Marginal Revenue
Property of preference: If bundle A has at least as much of every good as bundle B and more of some good, bundle A is preferred to bundle B
More Is Better
a much more precise measure of statistical significance
P-values
The Price-Elasticity Coefficient and Formula
Percentage change in quantity demanded of product X/ Percentage change in price of product X
It is computed as the ratio of the sum of squared errors from the regression (SSRegression) to the total sum of squared errors (SSTotal)
R-SQUARE
coefficient of determination
R-SQUARE
tells the fraction of the total variation in the dependent variable that is explained by the regression.
R-SQUARE
estimates the relations
REGRESSION ANALYSIS
the ratio of the value of the parameter estimate to its standard error.
T-Statistic
This test helps manage cash flows
TOTAL REVENUE TEST
When demand is unitary elastic, what happens to revenue?
Total revenue is maximized.
Property of preference: For any three bundles, A, B, and C, if A ≻ B and B ≻ C, then A ≻ C. Similarly, if A ∼ B and B ∼ C, then A ∼ C.
Transitivity
Property of preference: together with the more-is-better assumption, implies that indifference curves do not intersect one another
Transitivity
True or False: The R-square cannot decrease when additional explanatory variables are included in the regression. Thus, if we included income, advertising, and other explanatory variables in our regression, but held other things constant, we would almost surely get a higher R-square
True
are frequently used to measure the overall fit of the regression line—the R-square and the F-statistic
Two yardsticks
The greater the F-statistic, the...
better the overall fit of the regression line through the actual data.
when demand is log-linear, the elasticity with respect to a given variable is simply the
coefficient of the corresponding logarithm.
limitations or restrictions placed on a system, process, or decision-making problem
constraints
an individual who purchases goods and services from firms for the purpose of consumption.
consumer
represent the possible goods and services consumers can afford to consume.
consumer opportunities
determine which of these goods will be consumed
consumer preferences
Reduction in price leads to a ________ in marginal revenue for each additional unit sold.
decrease
When X is an inferior good, an increase in income leads to a
decrease in the consumption of X
When goods X and Y are complements, an increase in the price of Y leads to a
decrease in the demand for X
If demand is elastic, an increase in price will lead to a
decrease in total revenue
When demand is elastic: A price increase leads to a/an
decrease in total revenue.
When demand is inelastic: - A price decrease leads to an
decrease in total revenue.
if demand is inelastic, a decrease in price will lead to an
decrease in total revenue.
when prices rise, Qx
decreases
Ed > 1 demand is
elastic
for a linear demand function, demand is _____ at high prices
elastic
the coefficient of any other logarithm on the right-hand side of the log-linear demand relation tells us the
elasticity of demand with respect to that demand shifter.
true or false: The closer the R-square is to 1, the "worse" the overall fit of the estimated regression equation to the actual data.
false: it is better
true or false: The more time consumers have to react to a price change, the more inelastic the demand for the good.
false: it is more elastic
the demand for broadly defined commodities tends to be more elastic than the demand for specific commodities.
false: it tends to be more inelastic
True or False: In log-linear demand, since all of these coefficients are constants, the elasticities may depend on the value of variables like prices, income, or advertising
false: none of the elasticities depend on the value of variables like prices, income, or advertising
true or false: Goods with a smaller share of consumer budgets are usually more elastic than goods with a larger share of consumer incomes.
false: smaller share of consumer budgets are usually more inelastic
true or false: the lower the P-value for an estimated coefficient, the less confident you are in the estimate.
false: you are more confident in the estimate.
The job of the econometrician is to
find a smooth curve or line that does a "good" job of approximating the points
When good X is a normal good, an increase in income leads to an
increase in the consumption of X
whenever goods X and Y are substitutes, an increase in the price of Y leads to an
increase in the demand for X.
when price rises, the absolute value of the elasticity
increases
Ed < 1 demand is
inelastic
When there are few close substitutes for a good, demand tends to be relatively
inelastic
for a linear demand function, demand is ____ at lower prices
inelastic
for prices near zero, demand is
inelastic
the _______ are unbiased estimators of the true demand parameters.
least squares estimates
it seeks to find the best-fitting linear relationship between the independent variable(s) and the dependent variable and is the corresponding line
least squares regression
the relationship between the quantity demanded of a product and its price, where both the quantity and price are transformed using logarithmic functions.
log-linear demand function
the rate at which a consumer is willing to substitute one good for the other and still maintain the same level of satisfaction.
marginal rate of substitution
the absolute value of the slope of an indifference curve
marginal rate of substitution (MRS)
when −1 < E < 0, demand is inelastic, and marginal revenue is...
negative
These values of a and b in a regression line are called
parameter estimates
Ed = ∞ demand is
perfectly elastic
Ed = 0 demand is
perfectly inelastic
when −∞ < E < −1, demand is elastic, and the Marginal revenue is...
positive
represents the expected relationship between the variables being analyzed.
regression line
the line that minimizes the squared deviations between the line (the expected relation) and the actual data points.
regression line
The _________ of each estimated coefficient is a measure of how much each estimated coefficient would vary in regressions based on the same underlying true demand relation, but with different observations
standard error
Cross-price elasticity function
state
Own price elasticity function:
state
income elasticity function
state
he point where marginal revenue is zero corresponds to
the output at which total revenue is maximized
In non linear function, it determines whether X is a normal or an inferior good.
the sign of the coefficient of ln M
In non linear function, it determines whether goods X and Y are substitutes or complements,
the sign of the coefficient of ln Py
allows the consumer to seek out available substitutes
time
true or false: Advertising also indicated elasticities
true
true or false: Demand tends to be more inelastic in the short term than in the long term.
true
true or false: Sometimes, the R-square is very close to 1 merely because the number of observations is small relative to the number of estimated parameters.
true
true or false: The parameter estimates â and bˆ represent the values of a and b that result in the smallest sum of squared errors between a line and the actual data.
true
true or false: The smaller the standard error of an estimated coefficient, the smaller the variation in the estimate given data from different outlets (different samples of data).
true
true or false: When the t-statistic for a parameter estimate is large in absolute value, then you can be confident that the true parameter is not zero.
true
true or false: as a firm increases its quantity of output, it typically has to lower the price in order to sell more units.
true
true or false: demand for a good will depend not only on the good's price, but also on demand shifters.
true
true or false: if the absolute value of a t-statistic is greater than or equal to 2, then the corresponding parameter estimate is statistically different from zero.
true
true or false: the more substitutes available for the good, the more elastic the demand for it
true
true or false: the value of an elasticity depends on the particular price and quantity at which it is calculated.
true
Ed = 1 demand is
unit elastic
total revenue is maximized at the point where demand is
unitary elastic
When E = −1, demand is unitary elastic, marginal revenue is...
zero
