Fundamentals of Strategic Decision Making - Exam 1
The elasticity that shows the responsiveness of the demand for a good due to changes in the price of a related good is the
cross-price elasticity
As we move up along a linear demand curve, the price elasticity of demand becomes more
elastic
If apples have an own price elasticity of −1.2 we know the demand is
elastic
f the absolute value of the own price elasticity of demand is greater than 1, then demand is said to be
elastic
Economics
exists because of scarcity
Demand is more inelastic in the short term because consumers
have no time to find available substitutes
If the price of good X becomes lower, then the level of consumer surplus becomes
higher
If marginal benefits exceed marginal costs, it is profitable to
increase Q (quantity, output produced)
The value of the firm is the
present discounted value of all future profits
Consumer surplus is
the value consumers get from a good but do not pay for
Other things being held constant, the greater the price of a good
the lower the consumer surplus
Advertising can influence demand by altering tastes of consumers. This type of advertising is known as
persuasive advertising
Good Y is a complement to good X if an increase in the price of good Y leads to
a decrease in the demand for good X
If quantity demanded for sneakers falls by 10 percent when price increases 25 percent, we know that the absolute value of the own price elasticity of sneakers is
0.4
Which of the following is true? Accounting costs generally understate economic costs, Accounting profits generally understate economic profits, In the absence of any opportunity costs, accounting profits are less than economic profits, Accounting costs generally overstate economic costs
Accounting costs generally understate economic costs
Which of the following is an incorrect statement about the own price elasticity of demand? Demand tends to be more inelastic in the short term than in the long term, Demand tends to be more elastic as more substitutes are available, Demand tends to be more inelastic for goods that comprise a smaller share of a consumer's budget, Demand tends to be more elastic if there are few substitutes available
Demand tends to be more elastic if there are few substitutes available
Suppose the income elasticity for transportation is 1.8. Which of the following is an incorrect statement? Transportation is a normal good, Expenditures on transportation grow more rapidly than income grows, Expenditures on transportation will fall less rapidly than income falls, Whenever the income increases by 1 percent, the expenditure on transportation increases by 1.8 percent
Expenditures on transportation will fall less rapidly than income falls
Which of the following is incorrect? Accounting profits generally overstate economic profits, Accounting profits do not take opportunity cost into account, Economic costs include not only the accounting costs but also the opportunity costs of the resources used in production, Managers should only be interested in accounting profits
Managers should only be interested in accounting profits
The market for oranges is in equilibrium. Now suppose that weather in Florida increases orange production 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?
Quantity will increase, and effect on price is ambiguous
What is the effect of an increase in wages paid to workers employed in manufacturing bicycles?
Supply curve for bicycles shifts to the left
Suppose that your friend owns a coffee shop and seeks your advice on changing the price of coffee to increase total revenue. If you know that demand for coffee is unit elastic what advice will you give your friend?
To keep the price unchanged
Which of the following leads to a decrease in demand for mechanical pencils (a normal good)? an increase in incomes, a decrease in price of mechanical pencils, an increase in price of mechanical pencils, a decrease in price of lead pencils, which is a substitute for mechanical pencils
a decrease in price of lead pencils, which is a substitute for mechanical pencils
If good A is an inferior good, an increase in income leads to
a decrease in the demand for good A
Assume that hot dog and hot dog buns are complementary goods. If the price of hot dogs rises, all else constant, then this will cause
a decrease in the demand for hot dog buns
A change in income will not lead to
a movement along the demand curve
The maximum legal price that can be charged in a market is
a price ceiling
The minimum legal price that can be charged in a market is
a price floor
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
Good X is a normal good if an increase in income leads to
an increase in the demand for good X
Good X is an inferior good if a decrease in income leads to
an increase in the demand for good X
Suppose that good X is a substitute for good Y. Then an increase in the price of good Y leads to
an increase in the demand of good X
Which of the following can explain an increase in the demand for housing (a normal good)? a drop in housing prices, an increase in the population, a decrease in income, an improvement in technology
an increase in the population
An income elasticity less than zero tells us that the good is
an inferior good
Suppose good X is a normal good. Then a decrease in income would lead to
an inward shift of the demand curve
Which of the following are least likely to be substitutes? chicken and beef, cars and trucks, automobile and housing, automobile and gasoline
automobile and gasoline
The demand for which of the following commodities is likely to be most inelastic? soft drinks, beverages, cola drinks, Pepsi Cola
beverages
Generally when calculating profits as total revenue minus total costs, accounting profits are larger than economic profits because economists take into account
both explicit and implicit costs
If chocolate bars have a price elasticity of 0.1, then we can infer the chocolate bar
buyers have short time at hand and sellers should raise price to increase revenue
Which of the following are least likely to be complements? peanut butter and jelly, bread and butter, sports coats and dress slacks, cars and trucks
cars and trucks
If the cross-price elasticity between goods A and B is negative, we know the goods are
complements
Assume that the price elasticity of demand is −2 for a certain firm's product. If the firm raises price, the firm's managers can expect total revenue to
decrease
The price elasticity of demand is −2.0 for a certain firm's product. If the firm raises price, the firm manager can expect total revenue to
decrease
When the own price elasticity of good X is −3.5, total revenue can be increased by
decreasing the price
Which of the following would not shift the demand for good A? drop in price of good A, drop in price of good B, consumer income, change in the level of advertising of good A
drop in price of good A
The demand for which of the following commodities is likely to be most price inelastic? food, hamburgers, Big Macs, sandwiches
food
Which of the following is an implicit cost to a firm that produces a good or service? labor costs, costs of operating production machinery, foregone profits of producing a different good or service, costs of renting or buying land for a production site
foregone profits of producing a different good or service
Which of the following is an implicit cost to a firm that produces a good or service? labor costs, costs of operating production machinery, foregone salary of working in the other job, costs of renting or buying land for a production site
foregone salary of working in the other job
Which of the following is an implicit cost of going to college? tuition, cost of books and supplies, room and board, foregone wages
foregone wages
Which of the following pairs of goods are probably complements? televisions and roller skates, frozen yogurt and ice cream, steak and chicken, hamburgers and hamburger buns
hamburgers and hamburger buns
Marginal benefits are the
incremental benefits of a decision
As we move down along a linear demand curve, the price elasticity of demand becomes more
inelastic
The quantity consumed of a good is relatively unresponsive to changes in price whenever demand is
inelastic
The demand for food (a broad group) is more
inelastic than the demand for beef (specific commodity)
Advertising provides consumers with information about the underlying existence or quality of a product. These types of advertising messages are called
informative advertising
Managerial economics has little to say about day-to-day decisions, is valuable to the coordinator of a shelter for the homeless, is not relevant for managers of not-for-profit groups, is the study of how to get rich in the stock market.
is valuable to the coordinator of a shelter for the homeless
If A and B are complements, an increase in the price of good A would
lead to a decrease in demand for B
If A and B are substitute goods, a decrease in the price of good A would
lead to a decrease in demand for B
If A and B are complementary goods, a decrease in the price of good A would
lead to an increase in demand for B
If A and B are substitute goods, an increase in the price of good A would
lead to an increase in demand for B
We would expect the own price elasticity of demand for food to be
less elastic than the demand for cereal
The additional benefits that arise by using an additional unit of the managerial control variable is defined as the
marginal benefit
The optimal amount of studying is determined by comparing
marginal benefit and the marginal cost of studying
In order to maximize net benefits, firms should produce where
marginal benefits equal marginal costs
The additional cost incurred by using an additional unit of the managerial control variable is defined as the
marginal cost
The change in net benefits that arises from a one-unit change in quantity is the
marginal net benefits
The difference between marginal benefits and marginal costs is the
marginal net benefits
To an economist, maximizing profit is
maximizing the value of the firm
The demand for Cinnamon Toast Crunch brand cereal is
more elastic than the demand for cereal in general
The demand for women's clothing is, in general,
more elastic than the demand for clothing
We would expect the demand for jeans to be
more elastic than the demand for clothing
Demand tends to be
more inelastic in the short term than in the long term
All else being held constant, as additional firms enter an industry,
more output is available at each given price
In order to maximize net benefits, the managerial control variable should be used up to the point where
net marginal benefits equal zero
Suppose the firm achieves total revenue of $1,000 by selling 150 units, while facing total costs of $900. If the firm produces and sells 151 units, their total revenue is $1,005 and their total costs is $950. Should the firm produce and sell the extra unit?
no, since marginal profits are declining
Since most consumers spend very little on salt, a small increase in the price of salt will
not reduce quantity demanded by very much
Demand shifters do not include the
price of the good
If a shortage exists in a market, the natural tendency is for
price to increase
The law of supply states that, holding all else constant, as the price of a good falls,
quantity supplied falls
Non-fed ground beef is an inferior good. In economic booms, grocery managers should
reduce their orders of non-fed ground beef
Lemonade, a good with many close substitutes, should have an own price elasticity that is
relatively elastic
Graphically, a decrease in advertising will cause the demand curve to
shift leftward
For a wood furniture manufacturer, an increase in the cost of lumber will cause the supply curve to
shift to the left
Firms advertise in order to cause the demand for their products to
shift to the right
For a steel factory, a decrease in the cost of electricity to the plant will cause the supply curve to
shift to the right
Technological advances will cause the supply curve to
shift to the right
If consumers expect future prices to be higher,
stockpiling will happen when the products are durable in nature
If the cross-price elasticity between goods X and Y is positive, we know the goods are
substitutes
An inferior good is a good
that consumers purchase less of when their incomes are higher
Marginal benefit refers to
the additional benefits that arise by using an additional unit of the managerial control variables
If firms expect prices to be higher in the future and the product is not perishable, then
the current supply curve shifts to the left
All else being held constant, when number of buyers of soda drinks increase,
the demand curve shifts to the right and more output is demanded at each given price
When the price of corn was "low," consumers in the United States spent a total of $8 billion annually on its consumption. When the price halved, consumer expenditures actually decreased to $6 billion annually. This indicates that
the demand for corn is inelastic
When the price of sugar was "low," U.S. consumers 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
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 purchases actually decreased to $2 billion annually. This indicates that
the demand for sugar is relatively inelastic
If marginal costs exceed marginal benefits, then
the firm should decrease its production level
The opportunity cost of receiving $10 in the future as opposed to getting that $10 today is
the foregone interest that could be earned if you had the money today
Other things being held constant, the lower the price of a good,
the greater the consumer surplus, the lower the producer surplus
Other things being held constant, the higher the price of a good,
the greater the producer surplus, the lower the consumer surplus
The elasticity that measures the responsiveness of consumer demand to changes in income is
the income elasticity
Changes in the price of good A lead to a change in
the quantity demanded of good A
The higher the interest rate
the smaller the present value of a future amount
Consider the market for bicycles (a normal good). All else being constant, when price of an input needed to make bicycles decreases,
the supply curve shifts to the right and more bicycles are available at each given price
Which of the following is the main goal of a continuing company? to maximize the value of the firm, to minimize costs, to improve product quality, to enhance service to its customers
to maximize the value of the firm
What is the main role of economic profits?
to signal where resources are most highly valued
Accounting profits are
total revenue minus total cost
Economic profits are
total revenue minus total opportunity cost
Each week Bill buys exactly 10 hot dogs regardless of their price. Bill's own price elasticity of demand for hot dogs in absolute value is
zero
Each week Bill buys exactly 7 bottles of cola regardless of its price. Bill's own price elasticity of demand for cola in absolute value is
zero
