micro final review 4-6

chapter 4

question 2, 8, 9, 10, 11, 12, 13

chapter 6

question 4, 5,

chapter 5

question 5, 6, 7, 8, 9, 10, 11, 12

One football season Domino's Pizza, a corporate sponsor of the Washington Redskins (a football team), offered to reduce the price of its $8 medium-size pizza by $1 for every touchdown scored by the Redskins during the previous week. Until that year, the Redskins weren't scoring many touchdowns. Much to the surprise of Domino's, in one week in 1999, the Redskins scored six touchdowns. (Maybe they like pizza.) Domino's pizzas were selling for $2 a pie! The quantity of pizzas demanded soared the following week from 1 pie an hour to 100 pies an hour. What was price elasticity of demand for Domino's pizza? Price elasticity of demand:

1.68

When tolls on the Dulles Airport Greenway were reduced from $1.75 to $1.00, traffic increased from 10,000 to 26,000 trips a day. Assuming all changes in quantity were due to the change in price, what is the price elasticity of demand for the Dulles Airport Greenway? Price elasticity of demand:

1.68

Identify four shift factors of demand with the correct explanation of how each affects demand.

-Change in taxes paid by consumers. As taxes rise, demand falls. -Change in consumer tastes. As the taste for a product rises, demand increases. -Change in income. As income rises, demand for a normal good increases. -The price of a related consumer good changes. As the price of a complement falls, demand increases.

Identify four shift factors of supply with the correct explanation of how each affects supply.

-Producers expect prices of their products to change in the future. As the price that producers expect to sell their products for increases, supply decreases. -Change in taxes paid by producers. As the amount of taxes that producers pay increases, supply decreases. -When new production technologies are introduced the cost of production falls and supply increases. -The price of inputs changes. As the price of inputs rises, supply decreases.

Mary has just stated that normally, as price rises, supply will increase. Her teacher grimaces. Why?

As price rises, quantity supplied will increase.

Why is price inversely related to quantity demanded?

Because as price rises, consumers substitute other goods whose price has not risen.

How is elasticity related to the revenue from a sales tax?

If demand is inelastic, then raising tax rates will increase tax revenue paid by consumers. This principle works similarly with supply. With elastic supply and demand, increasing taxes will decrease quantity supplied and quantity demanded enough to cause a decrease in tax revenue.

State the law of demand.

Quantity demanded rises as price falls, other things constant. Quantity demanded falls as price rises, other things constant.

Once a book has been written, would an author facing an inelastic demand curve for the book prefer to raise or lower the book's price? Why?

The author would prefer to raise the book's price. Raising prices when demand is inelastic increases revenue. Because the author's cost is a sunk cost, profit also rises

A newspaper recently lowered its price from 50 cents to 30 cents. As it did, the number of newspapers sold increased from 240,000 to 280,000. a. What was the newspaper's elasticity of demand? Price elasticity of demand: b. Given that elasticity, did it make sense for the newspaper to lower its price? c. What would your answer be if much of the firm's revenue came from advertising and the higher the circulation, the more it could charge for advertising?

a. 0.36 b. Since demand is inelastic, it doesn't make sense to lower the price because it reduces total revenue. c. It would make sense to lower the price in order to increase the circulation for more advertising revenue.

Determine the price elasticity of demand if, in response to an increase in price of 10 percent, quantity demanded decreases by 20 percent. a. Price elasticity of demand: b. Is demand elastic or inelastic? Demand is:

a. 2.0 b. elastic

Which of the pairs of goods would you expect to have a greater price elasticity of demand?

a. Cars b. Leisure travel c. Rubber during the entire 20th century

Economists have estimated the following transportation elasticities. For each pair, explain possible reasons why the elasticities differ. a. Elasticity of demand for buses is 0.23 during peak hours and 0.42 during off-peak hours. b. Elasticity of demand for buses is 0.7 in the short run and 1.5 in the long run. c. Elasticity of demand for toll roads is 4.7 for low-income commuters and 0.63 for high-income commuters.

a. Peak-hour travelers are likely to be commuters who have little choice but to go to work and therefore have lower demand elasticity than those riding buses during off-peak hours who are more likely using buses for errands or other more discretionary activities. b.Demand tends to be less elastic in the short run because there are fewer substitutes. If fares rose enough, in the long run, people could find alternative modes of transportation c.Tolls are likely a much smaller portion of a high-income commuter's total income, contributing to a less elastic demand.

Say that equilibrium price fell and quantity remained constant. What would you say was the most likely cause? There was _________ in demand and ________ in supply.

a. an decrease b. an increase

Say that the equilibrium price and quantity both rose. What would you say was the most likely cause? There was __________ in demand and ________ in supply.

a. an increase b. no change

A change in the price of a good causes a _________ the demand curve. A ________ the demand curve means that the quantities will be different at all prices.

a. movement along b. shift of

Suppose average movie ticket prices are $8.50 and attendance is 1.2 billion. The price of tickets rises to $9.50 and attendance rises to 1.4 billion. a. What happened to total revenue? Total revenue ________ from _________ billion to ________ billion. b. If you were to estimate elasticity from these figures, what would your estimate be? c. What provisos would you offer about your estimate of elasticity?

a. rises, $10.3, $13.4 b. 1.42 c. It assumes other things, such as income, have remained constant. Income has likely changed.

a. Define the fallacy of composition. The fallacy of composition is the false assumption that: b. How does it affect the supply/demand model?

a. what is true for a part will also be true for the whole. b. It draws our attention to the possibility that supply and demand are interdependent and that feedback effects must be taken into account to make the analysis complete.