# Knowledge Week 1

**Topics:**Supply and demand, Economics, Price elasticity of demand

**Pages:**5 (882 words)

**Published:**April 21, 2013

The material presented below is not meant to be a comprehensive list of all you need to know in the content area. Rather it is a starting point for building your knowledge and skills. Additional study materials are recommended in each area below to help you master the material. Personalized Study Guide Results:

Score: 5 / 6

Concepts| Mastery| Questions|

Elasticity| 67%| * 1 * 2 * 3|

Relationship of Pricing Strategy to Market Structure| 100%| * 4 * 6| Characteristics of Market Structures| 100%| * 5|

Concept: Elasticity

Mastery| 67%| Questions| * 1 * 2 * 3|

Materials on the concept:

* Interpretations of Ed

* Absolute Value Equations and Inequalities

* The Price-Elasticity Coefficient and Formula

* Percent Change

* Linear Models and Ratios

* Elasticity, Consumer Surplus, and Producer Surplus

* Price Elasticity of Demand

* The Total-Revenue Test

* Inelastic Demand

* Elastic Demand

* Cross Elasticity and Income Elasticity of Demand

* Consumer and Producer Surplus

* Cross Elasticity of Demand

* Substitute Goods

* Independent Goods

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Top of Form

1 . If the demand curve is QD = 100 – 10P and there is a $1 price increase, then the elasticity of demand at P = 2 is * A. -0.25

* B. -0.5

* C. -0.75

* D. -1

Bottom of Form

Correct :

At P = 2, Q = 100 – 20 = 80. At P = 3, Q = 100 – 30 = 70. So change in Q is 70 – 80 = –10, and change in P is 3 – 2 = 1. Therefore, the elasticity is (–10/1) * (2/80) = –1/4 = –0.25.

Materials

* The Price-Elasticity Coefficient and Formula

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Top of Form

2 . If the absolute value of a demand elasticity is less than 1, then * A. the demand is inelastic, and a price rise will reduce the total revenue * B. the demand is inelastic, and a price rise will increase the total revenue * C. the demand is elastic, and a price rise will reduce the total revenue * D. the demand is elastic, and a price rise will increase the total revenue Bottom of Form

Incorrect :

By definition, the demand is inelastic. Also, when demand is inelastic, the price should be increased, as the rise in price will dominate the fall in quantity, and the total revenue will increase.

Materials

* The Total-Revenue Test

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Top of Form

3 . If the cross-price elasticity is negative, then the two goods are * A. unrelated

* B. substitutes

* C. complements

* D. normal goods

Bottom of Form

Correct :

The correct answer is complements. As the price of a complement good falls, the quantity demanded for that complement good rises. If the cross-price elasticity is negative, then the quantity demanded for this good also increases. Therefore, these two goods are complements.

Materials

* Cross Elasticity of Demand

Concept: Relationship of Pricing Strategy to Market Structure Mastery| 100%| Questions| * 4 * 6|

Materials on the concept:

* Systems of Linear Equations

* Marginal Cost and Short-Run Supply

* Profit Maximization in the Short Run: Marginal-Revenue–Marginal-Cost Approach * Profit Maximization in the Short Run: Total-Revenue–Total-Cost Approach * Figure 9.6 The P = MC rule and the competitive firm’s short-run supply curve. * Pure Competition

* Neither Productive nor Allocative Efficiency

* Monopolistic Competition and Oligopoly

* Excess Capacity

* Monopolistic Competition and Efficiency

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Top of Form

4 . Under perfect competition, a firm maximizes its profit by setting * A. P = MC because P = MR

* B. P above MC where MC = MR

* C. P = FC

Bottom of Form

Correct :

All firm sets MR = MC to maximize profit. Under perfect competition, MC = P; for example, the marginal cost pricing rule remains....

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