Supply and Demand and Price

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Chapter 04
Demand

10. The long-run price elasticity of demand for a product is generally _________ the short-run elasticity for the same product.  A. lower than
B. equal to
C. higher than
D. not comparable to

11. Assume the demand function for skin care products is given by Q = 1,000 – 20 P + 5I. If P=$25 and I=$1,000 currently, then:  A. skin care products are a normal good.
B. the elasticity of demand is equal to 11.
C. skin care products are inferior.
D. The price is too high

12. If the demand for product A displays high and positive cross-price elasticity with respect to the price of product B, then:  A. the demand for product A is likely to have a low price elasticity. B. products A and B are substitutes.

C. products A and B are complements
D. the demand for product B is likely to have a low price elasticity.

13. Assume Pyrotex Inc. estimates the demand for its fireworks to be linear. If the current price charged by Pyrotex is such that the elasticity of demand is equal to 2.5, which of the following statements is true?  A. Pyrotex will surely increase its profits by decreasing the price of fireworks. B. Pyrotex will surely increase its profits by increasing the price of fireworks. C. Pyrotex cannot increase its profits by changing the price of fireworks. D. Not enough information is provided to determine whether Pyrotex is currently maximizing its profits.

14. Sales of shampoo by CleanHair, Inc. have recently decreased from 1,300 to 1,100 units in response to a price decrease from $7 to $5 by its main competitor. Assuming that everything else is being held constant, we can infer that:  A. the cross-price ARC-elasticity (midpoints formula) between the two products is -2. B. the cross-price ARC-elasticity (midpoints formula) between the two products is -½. C. the cross-price ARC-elasticity (midpoints formula) between the two products is ½. D. the cross-price ARC-elasticity (midpoints formula) between the two products is 2.

 15. Fast food is believed to be an inferior good. This means that:  A. the quantity of fast food consumed decreases as income increases. B. the income elasticity of demand for fast food is positive. C. the quantity of fast food consumed will always be high

D. fast food is really not quality food

16. BrightLight Ltd. estimates the demand curve for its table lamps to be Q = 1,000 – 4 P. That is, P = 250- .25Q. Which of the following is NOT true?  A. The maximum total revenue BrightlLight can obtain is $62,500. B. The Marginal Revenue curve for BrightLight's table lamps is given by MR = 250 – ½ Q. C. The elasticity of demand for BrightLight's table lamps is equal to 7.5 when their price is $125. D. BrightLight maximizes its total revenues when selling 500 lamps.  

17. Let EdGIrefer to the income elasticity for gasoline. Suppose EdGI= 2, then this means that  A. if income increases by 2%, then QdGwill increase by 1%
B. if income decreases by 1%, then QdGwill decrease by 2%
C. if income increases by $1, then QdGwill decrease by 2%
D. if income decreases by 2%, then QdGwill decrease by 1%

18. Assume that several firms compete in the market for cellular phones, and that the price elasticity for this industry is equal to 0.75. Based on this information, would you advise a firm in this industry to increase its price? If so, what is the percentage loss in total sales this firm should expect to experience?  A. Definitely yes. Total revenues would increase, since < 1. Sales would decrease by only .75% for each 1% increase in price. B. Not enough information is provided to make a sound decision. For the same reason it is not possible to predict what the loss in sales for one firm would be. C. Definitely no. Each 1% increase in price would result in 7.5% reduction in total sales, negatively affecting total revenues. D. Definitely no. Each 1% increase in price would result in 7.5% reduction in total sales, affecting total revenues positively.

19. Assume the demand curve...
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