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# price-elastic demand curve

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Soft Drink Bottling Data

Total Product Labor Capital
245 250 30
240 270 34
300 300 44
320 320 50
390 350 70
440 400 76
520 440 84
520 440 86
580 450 104
600 460 110
600 460 116

log(TP) log(L) log(K)
2.389166084 2.397940009 1.477121255
2.380211242 2.431363764 1.531478917
2.477121255 2.477121255 1.643452676
2.505149978 2.505149978 1.698970004
2.591064607 2.544068044 1.84509804
2.643452676 2.602059991 1.880813592
2.716003344 2.643452676 1.924279286
2.716003344 2.643452676 1.934498451
2.763427994 2.653212514 2.017033339
2.77815125 2.662757832 2.041392685
2.77815125 2.662757832 2.064457989

https://brainmass.com/economics/production-function/price-elastic-demand-curve-67990

#### Solution Preview

1. If a company faces a price-elastic demand curve, it can increase the revenue by decreasing the price. (Points: 5)
True
False
Answer: True, when the demand is in price elastic range, the decrease in price is more than compensated by the increase in demand and hence the total revenues are higher.

2. F-test measures the statistical significance of each explanatory variable. (Points: 5)
True
False
Answer: False. F test measures the statistical significance of overall regression model. The significance of each explanatory variables is checked using t-test.

3. A lawyer whose annual income used to be \$150,000 quit the job and opened a restaurant. The total cost of operating the restaurant business is \$100,000, and the annual revenue is \$250,000. What is the lawyer's economic cost of running the restaurant business? (Points: 5)
\$100,000
\$150,000
\$250,000
\$300,000
\$50,000
Economic cost = Operating cost of restaurant + The opportunity cost of the Lawyers time
=100,000+150,000
=\$250,000

4. Total revenue function is

TR = -Q(Q-10)
and total cost function is
TC = 2Q.
What is the profit-maximizing Q?
(Points: 5)
2
4
6
10
12
At price maximizing Q, MC=MR
MR=dTR/dQ= -2Q+10
MC=dTC/dQ=2
So we have
-2Q+10=2
Solving we get Q=4

5. What was NOT the effect of the "voluntary export restraint" on Japanese cars in 1981? (Points: 5)
Answer: Japan started to export high-end automobiles to U.S.
Domestic car prices jumped up.
U.S. consumers had to pay more to purchase cars.
Japanese auto manufacturers suffered a significant decrease in revenue.
US car auto manufacturers enjoyed higher profits.

6. Click demand data and using the data, estimate the following regression equation:
P = 14254 - ( ) Q
Note: Be careful. The equation shows that the independent variable is Q and the dependent variable is P.
Note: Do not round the estimate. Just write the whole number. Be careful with the sign.
(Points: 10)
See the regression output if required.

SUMMARY ...

#### Solution Summary

Examine price-elastic demand curve.

\$2.19

## ECO212 Supply and Demand and Elasticity

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.

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