Quantitative Demand Analysis
Cross-price elasticity is given by which of the following expressions?
%change Qx^d / % change Py (Qx^d/Py) x (Py/Qx)
Which of the following is the formula of price elasticity of demand for a good, X?
%changeQd / % change Px
Suppose a firm produces two products, X and Y. The firm earns revenues from X equal to $50,000 and revenues from Y equal to $30,000. The own price elasticity of demand for X is -2 and the cross-price elasticity of demand between X and Y is -0.6. If the firm lowers the price of product X by 1%, the change in total revenues will be $. (Do not add any negative sign before your answer.)
Blank 1: 680
Suppose a firm produces two products, X and Y. The firm earns revenues from X equal to $70,000 and revenues from Y equal to $60,000. The own price elasticity of demand for X is -1.5 and the cross-price elasticity of demand between X and Y is -0.80. If the firm decreases the price of product X by 1%, the change in total revenues will be $.
Blank 1: 830
If demand is elastic, a(n) in price will lead to an increase in total revenue.
Blank 1: decrease, reduction, lowering, fall, drop, decline, or cut
If demand is inelastic, a(n) in price will lead to an increase in total revenue.
Blank 1: increase or rise
If income elasticity of good X is negative, (EQx, M < 0), then good X is considered a(n) good.
Blank 1: inferior
If income elasticity of good X is positive, (EQx, M > 0), then good X is considered a(n) good.
Blank 1: normal
Total revenue is maximized when marginal revenue equals which is when the own price elasticity of demand is equal to .
Blank 1: zero or 0 Blank 2: -1, negative one, unit elastic, or unitary elastic
Total revenue is maximized when marginal revenue equals which is when the own price elasticity of demand is equal to . (Enter a number in both blanks.)
Blank 1: zero or 0 Blank 2: -1, negative one, unit elastic, or unitary elastic
What is true of demand for a good that has many available substitutes?
Demand is relatively elastic.
What is true of demand for a good that has few close substitutes?
Demand is relatively inelastic.
Consider the following relationship between marginal revenue and elasticity of demand: MR = P × {1+EE}1+EE. If demand is inelastic:
Marginal revenue is negative.
Consider the following relationship between marginal revenue and elasticity of demand: MR = P × {1+EE}1+EE. If demand is elastic:
Marginal revenue is positive.
What can be said about goods X and Y if the cross-price elasticity between X and Y is negative?
They are complements.
True or false: A new car is likely to have a more elastic demand than paper clips.
True
If elasticity is given by, EX,Y = %ΔX%ΔY%ΔX%ΔY, then elasticity is negative when:
a decrease in Y produces an increase in X. an increase in Y produces a decrease in X.
If elasticity is given by, EX,Y = %ΔX%ΔY%ΔX%ΔY, then elasticity is positive when:
an increase in Y leads to an increase in X. a decrease in Y leads to a decrease in X.
Advertising elasticity measures
changes in consumption due to changes in advertising
Cross advertising elasticity measures
changes in consumption of one good due to changes in advertising on another good.
Suppose as a result of a 5% increase in the price of pizza, the demand for soft drinks decreases by 1.1%. In this example, soft drinks and pizza are ____________.
complements
Responsiveness of demand for a good due to changes in the price of a related good is measured using
cross-price elasticity.
If ||EQ,Px||EQ,Px > 1, an increase in the price of a good will _______ total revenue.
decrease
If ||EQ,Px||EQ,Px=∞, then demand is said to be perfectly _____.
elastic
If ||EQ,P||EQ,P> 1, then demand is said to be ________.
elastic
The primary analytic tool used to evaluate the responsiveness of one variable to change in another variable is called ______.
elasticity
Suppose elasticity is given by, EX,Y = %ΔX%ΔY%ΔX%ΔY. The absolute value of elasticity will be ________ 1 when the change in X is large relative to the change in Y.
greater than
If ||EQ,Px||EQ,Px= 0, then demand is said to be perfectly _________.
inelastic
If ||EQ,P||EQ,P< 1, then demand is said to be ________.
inelastic
Suppose elasticity is given by, EX,Y = %ΔX%ΔY%ΔX%ΔY. The absolute value of elasticity will be ________ 1 when the change in X is small relative to the change in Y.
less than
Demand tends to be ___________ elastic for goods that require a relatively small portion of consumers' budgets and ____________ elastic for goods that require a relatively large portion of consumers' budgets.
less; more
If ||EQ,Px||EQ,Px= 1, total revenue is _____.
maximized
Demand tends to be ___________ elastic when consumers have more time to react to price changes.
more
Income elasticity tells us whether goods are
normal or inferior
Elasticity measures the responsiveness of
one variable to changes in another.
When consumers have more time to react to a price change of a good,
the consumers are able to locate more substitutes. the demand for the good becomes relatively more elastic.
If ||EQ,P||EQ,P= 1, then demand is said to be ________ elastic.
unitary
Total revenue is maximized at a point where demand is
unitary elastic.
Consider the following relationship between marginal revenue and elasticity of demand: MR = P × {1+EE}1+EE. If elasticity is unitary, marginal revenue is ___________ and total revenue is ____________.
zero; maximized
Suppose that demand is linear and given by: Qxd = αo - αxPx + αyPy + αMM + αHH Income elasticity is given by:
αM × MQx
Suppose that demand is linear and given by: Qxd = αo - αxPx + αyPy + αMM + αHH Own price elasticity is given by:
αx × PxQx
Suppose that demand is linear and given by: Qxd = α0 - αxPx + αyPy + αMM + αHH Cross-price elasticity is given by:
αy × PyQx
Suppose the demand for good X is log-linear and given by lnQxd = β0 + βxlnPx + βylnPy + βMlnM + βHlnH Income elasticity is
βM
Suppose the demand for good X is log-linear and given by lnQxd = β0 + βxlnPx + βylnPy + βMlnM + βHlnH Own price elasticity is
βx
Suppose the demand for good X is log-linear and given by lnQxd = β0 + βxlnPx + βylnPy + βMlnM + βHlnH Cross-price elasticity is
βy
