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# Economics questions: Supply curve, elasticity, etc

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1. If a 20% decrease in the price of long distance phone calls leads to a 35% increase in the quantity of calls demanded, we can conclude that the demand for phone calls is:
a. elastic.
b. inelastic.
c. unit elastic.
d. stretchy elastic.

2. Which of the following pairs are examples of substitutes?
a. Popcorn & Pepsi
b. Automobiles & Bicycles
c. Boats & Fishing Tackle
d. Wine & Cheese

3. When we say that a price in a competitive market is "too high to clear the market" we usually mean that (given upward-sloping supply curves).
a. no producer can cover the costs of production at that price
b. quantity supplied exceeds quantity demanded at that price
c. producers are leaving the industry
d. consumers are willing to buy all the units produced at that price

4. Which of the following statements is incorrect? Assume upward-sloping supply curves.
a. If the supply curve shifts left and the demand remains constant, equilibrium price will rise.
b. If the demand curve shifts left and the supply increase, equilibrium price will rise.
c. If the supply curve shifts right and the demand curve shifts left, equilibrium price will fall.
d. If the demand curve shifts right and the supply curve shifts left, price will rise.

Section Two: Short Answer (250 words or less)
1.Define "Elasticity of Demand". Give an example.

2.Define the "Law of diminishing Marginal utility". Give an example.

3.Demonstrate, using supply and demand analysis, the impact on the equilibrium price and quantity of new Hybrid automobiles when the following occurs. Using graphs as we did in the notes we worked with in Week 1, describe the change in the equilibrium price and quantity, and explain your answer. Is the equilibrium price higher, lower, or is the change indeterminate? Is the equilibrium quantity higher, lower, or is the change indeterminate?

a.Incomes increase
b.Interest rates decrease
c.The price of batteries used in the production of these vehicles decreases.
d.The price of gasoline decreases

4.Determine if the demand for the following products is price elastic or price inelastic, and explain your answer.

a.Box of cereal sold in a grocery store
b.Gasoline as a commodity
c.Gasoline sold at a local gasoline station
d.Fast food sold at a restaurant
e.Hotel rooms for people planning a vacation
f.Hotel rooms for people on business to meet an important client
g.Clothes sold in a discount retailer

5.Name three types of market systems and give an example of each.

6.Define the "Law of Demand" and the "Law of Supply". Give an example for each.

#### Solution Summary

The questions deal with fundamental issues in Economics: supply, elasticity etc.

\$2.19

## Managerial Economics

MANAGERIAL ECONOMICS

1. Construct a Supply/Demand (S/D) graph, identify the initial equilibrium, then identify the new equilibrium when Supply decreases and Demand increases.

2. In the graph for question number 1, what would happen to the initial equilibrium when consumer incomes increase, assuming the good in question is an inferior good? Explain your answer using an S/D graph

3. Given the following equation: Q=20 - 2p + 35I - 13S, where Q is quantity, P is price, I is income, and S is the price of a related good, what is the own price elasticity of demand when Q=20 and P=5? What is the cross price elasticity assuming S=15 and Q=20? Is the good a substitute or a complement?

4. Draw one graph showing a Demand curve, and the corresponding Marginal Revenue curve; also, show the price elasticity ranges along the Demand Curve.

5. Write a short essay explaining why a profit-maximizing manager should never set price in the Inelastic portion of the demand curve.

6. Assume the following equation where quantity is a function of price: Q = a + b P. Identify the Y-intercept and the slope that this equation would generate for a normal Demand Curve. (By normal I mean the way a Demand Curve is drawn in the undergraduate classes where Price is on the vertical axis and Quantity is on the horizontal axis, or where price is a function of quantity.)

7. Briefly identify four determinants of own-price elasticity.

8. Explain why a firm that uses all fixed cost and zero variable cost will always price in the unit elastic range of the demand curve.

1. Construct a Supply/Demand (S/D) graph, identify the initial equilibrium, then identify the new equilibrium when Supply decreases and Demand increases.

2. In the graph for question number 1, what would happen to the initial equilibrium when consumer incomes increase, assuming the good in question is an inferior good? Explain your answer using an S/D graph

3. Given the following equation: Q=20 - 2p + 35I - 13S, where Q is quantity, P is price, I is income, and S is the price of a related good, what is the own price elasticity of demand when Q=20 and P=5? Is it elastic or inelastic? What is the cross price elasticity assuming S=15 and Q=20? Is the good a substitute or a complement?

4. Draw one graph showing a Demand curve, and the corresponding Marginal Revenue curve; also, show the price elasticity ranges along the Demand Curve.

5. Write a short essay explaining why a profit-maximizing manager should never price in the Inelastic portion of the demand curve.

6. Assume the following equation where quantity is a function of price: Q = a + b P. Identify the Y-intercept and the slope that this equation would generate for a normal Demand Curve. (By normal I mean the way a Demand Curve is drawn in the undergraduate classes where Price is on the vertical axis and Quantity is on the horizontal axis, or where price is a function of quantity.)

7. Briefly identify four determinants of own-price elasticity.

8. Explain, using words and graphs, why a firm that uses all fixed cost and zero variable cost will always price in the unit elastic range of the demand curve. In your answer, identify the profit maximization rule.

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