Chapter 2: Optimal Decisions using Marginal Analysis

Sources of increase are threefold...

1) increased sales to the firm's customers 2) sales gained form rival firms 3) sales to new buyers

When the own price elasticity of good X is -3.5 then total revenue can be increased by

decreasing the price.

If demand is perfectly inelastic, then:

demand curve is vertical

Cost Function

shows how total costs depend on quantity

For a good that has a price elasticity of demand of -1.5 and a marginal cost of $50 per unit, the profit-maximizing price should be approximately _____.

$150

If price is $25 when the price elasticity of demand is -0.5, then marginal revenue must be:

-$25

If quantity demanded for sneakers falls by 10% when price increases 25% we know that the absolute value of the own-price elasticity of sneakers is:

0.4.

A Simple Model (Decision Setting)

1) firm produces a single good/service to maximize profit 2) task to determine the quantity of goods to produce and sell to set a sales price 3) firm can predict the revenue and cost consequences of its price and decisions with certainty

A product's point price elasticity has been estimated at -1.5. At the initial price of $20, the quantity demanded was 10 units. If the firm cuts the price to $17.50, quantity demanded and sold is expected to increase by _____.

18.75%

You are the manager of a popular shoe company. You know that the advertising elasticity of demand for your product is 0.15. How much will you have to increase advertising in order to increase demand by 10%?

66.7%.

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

Buy 10.5% more peanut butter.

An increase in the demand for motorcycles has led to an increase in the demand for motorcycle helmets. Based on this information, which of the following is likely to be true?

In the demand equation for helmets, the coefficient associated with the price of motorcycles will be negative.

Which of the following correctly defines marginal revenue?

Marginal revenue is the additional revenue from a unit increase in output and sales.

A firm negotiates a new labor contract with a higher average hourly wage. What is the most likely effect of the higher wage on the firm's price and output?

Price will increase and output will decrease.

When the price of sugar was "low", consumers in the U.S. spent a total of $3 billion annually on sugar consumption. When the price doubled, consumer expenditures increased to $5 billion annually. This data indicates that:

The demand for sugar is inelastic.

If the absolute value of the own-price elasticity of steak is 0.4, a decrease in price will lead to:

a reduction in total revenue.

Marginal Cost

additional cost of producing an extra unit of output

Marginal Revenue

amount of additional revenue that comes with a unit increase in output and sales

Deterministic

at any given price, quantity sold can be predicted with certainty

The price elasticity of market demand primarily depends on the:

availability of substitutes

Enumeration

calculating profits associated with a range of outputs and identifying the one with the greatest profit.

Suppose the demand for good x is Qdx = 21Px^-0.8Py^-1.6M^6.2Ax^0.4, Then we know goods x and y are:

complements

Assume that the price and income elasticities of demand for luxury cars are Ep = -0.52 and Ey = 3.2 respectively. In the coming year, car prices are expected to rise by 2 percent and income by 8 percent. Based on this information, sales of cars are expected to _____.

increase by 24.56%

Assume that demand for a service depends upon price and income, where the price elasticity of demand is Ep = -0.6 and income elasticity is Ey = 1.2. If price falls by 4% and income rises by 2%, the quantity demanded of the service will _____.

increase by 4.8%

The demand for a product is more elastic the:

longer the time period covered

Marginal Analysis

looks at change in profit that results from making a small change in a decision variable

Information on the quantities that would be purchased at different prices, holding all other factors constant , in a given time period from a group of firms is shown in a:

market demand curve

The demand for women's clothing is, in general,

more elastic than the demand for clothing.

A firm's demand curve is usually:

more elastic than the market demand curve

The formula for the arc price elasticity can be written (where D Q denotes the change in Q) as:

n = [TRIQ/(Q1+Q2)] / [TRIP/(P1+P2)]

The formula for the income elasticity of demand can be written as:

n1 = (TRIQ / TRII) (I/Q)

When the price of sugar was "low", consumers in the United States spent a total of $3 billion annually on its consumption. When the price doubled, consumer expenditures actually increased to $4 billion annually. This indicates that:

none of the statements associated with this question are correct.

A market demand curve is likely to shift to the right when:

population increases

Marginal Profit

the difference between the marginal revenue and the marginal cost

Demand Curve

the graph depicting the relationship between the price of a good (y-axis) and the quantity of the good that is demanded at the price (x-axis).

Cost

to produce, firms require a plant, equipment, and labor.

The demand for video recorders has been estimated to be Qv = 134 - 1.07P f + 46P m -2.1P v - 5I, where Qv is the quantity of video recorders, Pf denotes the price of video recorder film, Pm is the price of attending a movie, Pv is the price of video recorders, and I is income. Based on the estimated demand equation we can conclude:

video recorders are inferior goods.

The demand for video recorders has been estimated to linear and given by the demand relation Qv = 145 - 3.2P v + 7M - 0.95P f - 39P m, where Qv is the quantity of video recorders, Pf denotes the price of video recorder film, P m is the price of attending a movie, Pv is the price of video recorders, and M is income. Based on the estimated demand equation we can conclude:

video recorders are normal goods and video recorder film is a complement for video recorders.