Managerial Economics and Business Strategy Test Bank 8th Edtion Baye Prince

Managerial Economics And Business Strategy Test Bank 8th Edtion Baye Prince Completed download: https://testbankarea.com/download/managerial-economics-businessstrategy-8th-edition-test-bank-baye-prince/ Solutions Manual for Managerial Economics & Business Strategy, 8th edition Michael Baye, Jeff Prince Download link: https://testbankarea.com/download/managerial-economics-businessstrategy-8th-edition-solutions-manual-baye-prince/

Chapter 03 Quantitative Demand Analysis Test Bank With Answer Key

Multiple Choice Questions

3-1

1.

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:

A. decrease. B. increase. C. remain constant. D. either increase or remain constant, depending upon the size of the price increase. AACSB: Reflective Thinking Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-02 Illustrate the relationship between the elasticity of demand and total revenues. Topic: Own Price Elasticity of Demand

2.

A price elasticity of zero corresponds to a demand curve that is:

A. horizontal. B. downward sloping with a slope always equal to 1. C. vertical. D. either vertical or horizontal. AACSB: Reflective Thinking Blooms: Remember Difficulty: 2 Medium Learning Objective: 03-02 Illustrate the relationship between the elasticity of demand and total revenues. Topic: Own Price Elasticity of Demand

3-2

3.

As we move down along a linear demand curve, the price elasticity of demand becomes more:

A. elastic. B. inelastic. C. log-linear. D. variable. AACSB: Reflective Thinking Blooms: Remember Difficulty: 2 Medium Learning Objective: 03-02 Illustrate the relationship between the elasticity of demand and total revenues. Topic: Own Price Elasticity of Demand

4.

If the demand for a product is Qxd = 10 - ln Px, then product x is:

A. elastic. B. inelastic. C. unitary elastic. D. Cannot be determined without more information. AACSB: Reflective Thinking Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-05 Show how to determine elasticities from linear and log-linear demand functions. Topic: Obtaining Elasticities From Demand Functions

3-3

5.

The demand for good X has been estimated by Qxd = 12 - 3Px + 4Py. Suppose that good X sells at $2 per unit and good Y sells for $1 per unit. Calculate the own price elasticity.

A. -0.2 B. -0.3 C. -0.5 D. -0.6 AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 03-05 Show how to determine elasticities from linear and log-linear demand functions. Topic: Obtaining Elasticities From Demand Functions

6.

The own price elasticity of demand for apples is -1.2. If the price of apples falls by 5 percent, what will happen to the quantity of apples demanded?

A. It will increase 5 percent. B. It will fall 4.3 percent. C. It will increase 4.2 percent. D. It will increase 6 percent. AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-01 Apply various elasticities of demand as a quantitative tool to forecast changes in revenues; prices; and/or units sold. Topic: Own Price Elasticity of Demand

3-4

7.

If apples have an own price elasticity of -1.2 we know the demand is:

A. unitary. B. indeterminate. C. elastic. D. inelastic. AACSB: Reflective Thinking Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-01 Apply various elasticities of demand as a quantitative tool to forecast changes in revenues; prices; and/or units sold. Topic: Own Price Elasticity of Demand

8.

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:

A. 2.5. B. 0.4. C. 2.0. D. 0.27. AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-01 Apply various elasticities of demand as a quantitative tool to forecast changes in revenues; prices; and/or units sold. Topic: Own Price Elasticity of Demand

3-5

9.

The quantity consumed of a good is relatively unresponsive to changes in price whenever demand is:

A. elastic. B. unitary. C. falling. D. inelastic. AACSB: Reflective Thinking Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-01 Apply various elasticities of demand as a quantitative tool to forecast changes in revenues; prices; and/or units sold. Topic: Own Price Elasticity of Demand

10.

If the absolute value of the own price elasticity of steak is 0.4, a decrease in price will lead to:

A. a reduction in total revenue. B. an increase in total revenue. C. no change in total revenue. D. None of the statements is correct. AACSB: Reflective Thinking Blooms: Understand Difficulty: 1 Easy Learning Objective: 03-02 Illustrate the relationship between the elasticity of demand and total revenues. Topic: Own Price Elasticity of Demand

3-6

11.

If a price increase from $5 to $7 causes quantity demanded to fall from 150 to 100, what is the absolute value of the own price elasticity at a price of $7?

A. 0.57 B. 1.75 C. 0.02 D. 1.24 AACSB: Reflective Thinking Blooms: Remember Difficulty: 3 Hard Learning Objective: 03-05 Show how to determine elasticities from linear and log-linear demand functions. Topic: The Elasticity Concept

12.

Demand is perfectly elastic when the absolute value of the own price elasticity of demand is:

A. zero. B. one. C. infinite. D. unknown. AACSB: Reflective Thinking Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-02 Illustrate the relationship between the elasticity of demand and total revenues. Topic: Own Price Elasticity of Demand

3-7

13.

The demand curve for a good is horizontal when it is:

A. a perfectly inelastic good. B. a unitary elastic good. C. a perfectly elastic good. D. an inferior good. AACSB: Reflective Thinking Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-02 Illustrate the relationship between the elasticity of demand and total revenues. Topic: Own Price Elasticity of Demand

14.

Suppose Qxd = 10,000 - 2 Px + 3 Py - 4.5M, where Px = $100, Py = $50, and M = $2,000. What is the own price elasticity of demand?

A. -2.34 B. -0.78 C. -0.21 D. -1.21 AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-05 Show how to determine elasticities from linear and log-linear demand functions. Topic: Obtaining Elasticities From Demand Functions

3-8

15.

Suppose Qxd = 10,000 - 2 Px + 3 Py - 4.5M, where Px = $100, Py = $50, and M = $2,000. Then good X has a demand which is:

A. elastic. B. inelastic. C. unitary. D. neither elastic, inelastic, nor unitary elastic. AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 03-05 Show how to determine elasticities from linear and log-linear demand functions. Topic: Obtaining Elasticities From Demand Functions

16.

Suppose Qxd = 10,000 - 2 Px + 3 Py - 4.5M, where Px = $100, Py = $50, and M = $2,000. How much of good X is consumed?

A. 100 units B. 500 units C. 1,100 units D. 950 units AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 03-05 Show how to determine elasticities from linear and log-linear demand functions. Topic: Obtaining Elasticities From Demand Functions

3-9

17.

Which of the following factors would NOT affect the own price elasticity of a good?

A. Time B. Price of an input C. Available substitutes D. Expenditure share AACSB: Reflective Thinking Blooms: Remember Difficulty: 2 Medium Learning Objective: 03-03 Discuss three factors that influence whether the demand for a given product is relatively elastic or inelastic. Topic: Own Price Elasticity of Demand

18.

Lemonade, a good with many close substitutes, should have an own price elasticity that is:

A. unitary. B. relatively elastic. C. relatively inelastic. D. perfectly inelastic. AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-03 Discuss three factors that influence whether the demand for a given product is relatively elastic or inelastic. Topic: Own Price Elasticity of Demand

3-10

19.

We would expect the demand for jeans to be:

A. more elastic than the demand for clothing. B. less elastic than the demand for clothing. C. the same as the demand for clothing. D. neither more elastic, less elastic, nor the same elasticity as that of the demand for clothing. AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-03 Discuss three factors that influence whether the demand for a given product is relatively elastic or inelastic. Topic: Own Price Elasticity of Demand

20.

Demand is more inelastic in the short term because consumers:

A. are impatient. B. have no time to find available substitutes. C. are present-oriented. D. None of the statements is correct. AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-03 Discuss three factors that influence whether the demand for a given product is relatively elastic or inelastic. Topic: Own Price Elasticity of Demand

3-11

21.

We would expect the own price elasticity of demand for food to be:

A. less elastic than the demand for cereal. B. more elastic than the demand for cereal. C. the same as that for soap. D. perfectly inelastic. AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-03 Discuss three factors that influence whether the demand for a given product is relatively elastic or inelastic. Topic: Own Price Elasticity of Demand

22.

The elasticity which shows the responsiveness of the demand for a good due to changes in the price of a related good is the:

A. own price elasticity. B. income elasticity. C. log-linear elasticity. D. cross-price elasticity. AACSB: Reflective Thinking Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-01 Apply various elasticities of demand as a quantitative tool to forecast changes in revenues; prices; and/or units sold. Topic: Cross-Price Elasticity

3-12

23.

If the cross-price elasticity between goods A and B is negative, we know the goods are:

A. inferior goods. B. complements. C. inelastic. D. substitutes. AACSB: Reflective Thinking Blooms: Remember Difficulty: 2 Medium Learning Objective: 03-01 Apply various elasticities of demand as a quantitative tool to forecast changes in revenues; prices; and/or units sold. Topic: Cross-Price Elasticity

24.

If the cross-price elasticity between ketchup and hamburgers is -1.2, a 4 percent increase in the price of ketchup will lead to a 4.8 percent:

A. drop in quantity demanded of ketchup. B. drop in quantity demanded of hamburgers. C. increase in quantity demanded of ketchup. D. increase in quantity demanded of hamburgers. AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-01 Apply various elasticities of demand as a quantitative tool to forecast changes in revenues; prices; and/or units sold. Topic: Cross-Price Elasticity

3-13

25.

If the price of pork chops falls from $8 to $6, and this leads to an increase in demand for apple sauce from 100 to 140 jars, what is the cross-price elasticity of apple sauce and pork chops at a pork chop price of $6?

A. -1.17 B. 2.71 C. 0.42 D. -0.86 AACSB: Analytic Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-01 Apply various elasticities of demand as a quantitative tool to forecast changes in revenues; prices; and/or units sold. Topic: Cross-Price Elasticity

26.

Suppose the demand function is Qxd = 100 - 8Px + 6Py - M. If Px = $4, Py = $2, and M = $10, what is the cross-price elasticity of good x with respect to the price of good y?

A. 0.17 B. 0.38 C. 0.21 D. 0.04 AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-05 Show how to determine elasticities from linear and log-linear demand functions. Topic: Obtaining Elasticities From Demand Functions

3-14

27.

The elasticity that measures the responsiveness of consumer demand to changes in income is the:

A. income elasticity. B. own price elasticity. C. cross-price elasticity. D. neither the income elasticity, the own price elasticity, nor the cross-price elasticity. AACSB: Reflective Thinking Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-01 Apply various elasticities of demand as a quantitative tool to forecast changes in revenues; prices; and/or units sold. Topic: Income Elasticity

28.

An income elasticity less than zero tells us that the good is:

A. a normal good. B. a Giffen good. C. an inferior good. D. an inelastic good. AACSB: Reflective Thinking Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-01 Apply various elasticities of demand as a quantitative tool to forecast changes in revenues; prices; and/or units sold. Topic: Income Elasticity

3-15

29.

If the income elasticity for lobster is 0.4, a 40 percent increase in income will lead to a:

A. 10 percent drop in demand for lobster. B. 16 percent increase in demand for lobster. C. 20 percent increase in demand for lobster. D. 4 percent increase in demand for lobster. AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-01 Apply various elasticities of demand as a quantitative tool to forecast changes in revenues; prices; and/or units sold. Topic: Income Elasticity

30.

You are the manager of a supermarket, and you know that the income elasticity of peanut butter is exactly -0.7. Due to the economic recession, you expect incomes to drop by 15 percent next year. How should you adjust your purchase of peanut butter?

A. Buy 10.5 percent more peanut butter. B. Buy 2.14 percent more peanut butter. C. Buy 6.2 percent less peanut butter. D. Buy 9.8 percent less peanut butter. AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-01 Apply various elasticities of demand as a quantitative tool to forecast changes in revenues; prices; and/or units sold. Topic: Income Elasticity

3-16

31.

Suppose demand is given by Qxd = 50 - 4Px + 6Py + Ax, where Px = $4, Py = $2, and Ax = $50. What is the advertising elasticity of demand for good x?

A. 1.12 B. 0.38 C. 1.92 D. 0.52 AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-05 Show how to determine elasticities from linear and log-linear demand functions. Topic: Obtaining Elasticities From Demand Functions

32.

Suppose demand is given by Qxd = 50 - 4Px + 6Py + Ax, where Px = $4, Py = $2, and Ax = $50. What is the quantity demanded of good x?

A. 96 B. 50 C. 46 D. 72 AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 03-05 Show how to determine elasticities from linear and log-linear demand functions. Topic: Obtaining Elasticities From Demand Functions

3-17

33.

You are the manager of a popular shoe company. You know that the advertising elasticity of demand for your product is 0.15. How much will you have to increase advertising in order to increase demand by 10 percent?

A. 0.02 percent B. 38.6 percent C. 66.7 percent D. 4.3 percent AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-01 Apply various elasticities of demand as a quantitative tool to forecast changes in revenues; prices; and/or units sold. Topic: Other Elasticities

34.

Suppose the demand for good x is ln Qxd = 21 - 0.8 ln Px - 1.6 ln Py + 6.2 ln M + 0.4 ln Ax. Then we know goods x and y are:

A. substitutes. B. complements. C. normal goods. D. inferior goods. AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 03-05 Show how to determine elasticities from linear and log-linear demand functions. Topic: Obtaining Elasticities From Demand Functions

3-18

35.

Suppose the demand for good x is ln Qxd = 21 - 0.8 ln Px - 1.6 ln Py + 6.2 ln M + 0.4 ln Ax. Then we know good x is:

A. an inferior good. B. an elastic good. C. a normal good. D. a Giffen good. AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 03-05 Show how to determine elasticities from linear and log-linear demand functions. Topic: Obtaining Elasticities From Demand Functions

36.

Suppose the demand for good x is ln Qxd = 21 - 0.8 ln Px - 1.6 ln Py + 6.2 ln M + 0.4 ln Ax. Then we know that the own price elasticity for good x is:

A. unitary. B. elastic. C. inelastic. D. It cannot be calculated from the existing information. AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 03-05 Show how to determine elasticities from linear and log-linear demand functions. Topic: Obtaining Elasticities From Demand Functions

3-19

37.

Suppose the demand function is given by Qxd = 8Px0.5 Py0.25 M0.12 H. Then the cross-price elasticity between goods x and y is:

A. 4.00. B. 0.25. C. 0.50. D. 8.33. AACSB: Analytic Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-05 Show how to determine elasticities from linear and log-linear demand functions. Topic: Obtaining Elasticities From Demand Functions

38.

Suppose the demand function is given by Qxd = 8Px0.5 Py0.25 M0.12 H. Then good x is:

A. a normal good. B. an inferior good. C. a complement for good y. D. perfectly inelastic. AACSB: Analytic Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-05 Show how to determine elasticities from linear and log-linear demand functions. Topic: Obtaining Elasticities From Demand Functions

3-20

39.

Suppose the demand function is given by Qxd = 8Px0.5 Py0.25 M0.12 H. Then the demand for good x is:

A. inelastic. B. unitary. C. elastic. D. perfectly elastic. AACSB: Analytic Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-05 Show how to determine elasticities from linear and log-linear demand functions. Topic: Obtaining Elasticities From Demand Functions

40.

The statistical analysis of economic phenomena is defined as:

A. econometrics. B. variance. C. confidence intervals. D. standard deviation. AACSB: Reflective Thinking Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-06 Explain how regression analysis may be used to estimate demand functions; and how to interpret and use the output of a regression. Topic: Regression Analysis

3-21

41.

The demand for video recorders has been estimated to be Qv = 134 - 1.07Pf + 46Pm - 2.1Pv 5I, where Qv is the quantity of video recorders, Pf denotes the price of video recorder film, Pm is the price of attending a movie, Pv is the price of video recorders, and I is income. Based on the estimated demand equation we can conclude:

A. video recorders are inferior goods. B. video recorder film is a substitute for video recorders. C. the demand for video recorders is inelastic. D. the demand for video recorders is neither inferior nor inelastic, and video recorder film is not a substitute for video recorders. AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-05 Show how to determine elasticities from linear and log-linear demand functions. Topic: Obtaining Elasticities From Demand Functions

42.

Which of the following is used to determine the statistical significance of a regression coefficient?

A. t-statistic B. F-statistic C. R-square D. Adjusted R-square AACSB: Reflective Thinking Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-06 Explain how regression analysis may be used to estimate demand functions; and how to interpret and use the output of a regression. Topic: Regression Analysis

3-22

43.

Which of the following provides a measure of the overall fit of a regression?

A. t-statistic B. F-statistic C. R-square D. The F-statistic and R-square AACSB: Reflective Thinking Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-06 Explain how regression analysis may be used to estimate demand functions; and how to interpret and use the output of a regression. Topic: Regression Analysis

44.

Which of the following can be used to quantify the overall statistical significance of a regression?

A. t-statistic B. F-statistic C. R-square D. The F-statistic and R-square AACSB: Reflective Thinking Blooms: Remember Difficulty: 2 Medium Learning Objective: 03-06 Explain how regression analysis may be used to estimate demand functions; and how to interpret and use the output of a regression. Topic: Regression Analysis

3-23

45.

Which of the following measures of fit penalizes a researcher for estimating many coefficients with relatively little data?

A. t-statistic B. R-square C. Adjusted R-square D. Neither the t-statistic, the R-square, nor the adjusted R-square AACSB: Reflective Thinking Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-06 Explain how regression analysis may be used to estimate demand functions; and how to interpret and use the output of a regression. Topic: Regression Analysis

46.

As a rule of thumb, a parameter estimate is statistically different from zero when the absolute value of the t-statistic is:

A. zero. B. less than one. C. greater than or equal to 1. D. greater than or equal to 2. AACSB: Reflective Thinking Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-06 Explain how regression analysis may be used to estimate demand functions; and how to interpret and use the output of a regression. Topic: Regression Analysis

3-24

47.

A study has estimated the effect of changes in interest rates and consumer confidence on the demand for money to be: ln M = 14.666 + .021 ln C - 0.036 ln r, where M denotes real money balances, C is an index of consumer confidence, and r is the interest rate paid on bank deposits. Based on this study we know that the interest elasticity is:

A. unitary. B. zero. C. very elastic. D. very inelastic. AACSB: Reflective Thinking Blooms: Understand Difficulty: 3 Hard Learning Objective: 03-06 Explain how regression analysis may be used to estimate demand functions; and how to interpret and use the output of a regression. Topic: Regression Analysis

48.

A study has estimated the effect of changes in interest rates and consumer confidence on the demand for money to be: ln M = 14.666 + .021 ln C - 0.036 ln r, where M denotes real money balances, C is an index of consumer confidence, and r is the interest rate paid on bank deposits. Based on this study, a 5 percent increase in interest rates will cause the demand for money to:

A. drop by 1.8 percent. B. increase by 1.8 percent. C. drop by 0.18 percent. D. increase by 0.18 percent. AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-05 Show how to determine elasticities from linear and log-linear demand functions. Topic: Obtaining Elasticities From Demand Functions

3-25

49.

The elasticity of variable G with respect to variable S is defined as:

A. the percentage change in variable G that results from a given percentage change in variable S. B. the percentage change in variable G that results from a given change in variable S. C. the change in variable G that results from a given percentage change in variable S. D. the change in variable G that results from a given change in variable S. AACSB: Reflective Thinking Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-01 Apply various elasticities of demand as a quantitative tool to forecast changes in revenues; prices; and/or units sold. Topic: The Elasticity Concept

50.

If the absolute value of the own price elasticity of demand is greater than 1, then demand is said to be:

A. elastic. B. inelastic. C. unitary elastic. D. neither elastic, inelastic, nor unitary elastic. AACSB: Reflective Thinking Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-01 Apply various elasticities of demand as a quantitative tool to forecast changes in revenues; prices; and/or units sold. Topic: Own Price Elasticity of Demand

3-26

51.

Suppose the own price elasticity of demand for good X is -0.5, and the price of good X increases by 10 percent. We would expect the quantity demanded of good X to:

A. increase by 5 percent. B. increase by 20 percent. C. decrease by 5 percent. D. decrease by 20 percent. AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-01 Apply various elasticities of demand as a quantitative tool to forecast changes in revenues; prices; and/or units sold. Topic: Own Price Elasticity of Demand

52.

Suppose the own price elasticity of demand for good X is -0.5, and the price of good X increases by 10 percent. What would you expect to happen to the total expenditures on good X?

A. Increase B. Decrease C. Remain unchanged D. Neither increase, decrease, nor remain unchanged AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-01 Apply various elasticities of demand as a quantitative tool to forecast changes in revenues; prices; and/or units sold. Topic: Own Price Elasticity of Demand

3-27

53.

If the own price elasticity of demand is infinite in absolute value, then:

A. demand is perfectly inelastic. B. the demand curve is horizontal. C. consumers do not respond at all to changes in price. D. demand is neither perfectly inelastic nor is the demand curve horizontal. AACSB: Reflective Thinking Blooms: Remember Difficulty: 2 Medium Learning Objective: 03-01 Apply various elasticities of demand as a quantitative tool to forecast changes in revenues; prices; and/or units sold. Topic: Own Price Elasticity of Demand

54.

If demand is perfectly inelastic, then:

A. the own price elasticity of demand is infinite in absolute value. B. a small increase in price will lead to a situation where none of the good is purchased. C. the demand curve is vertical. D. None of the statements is correct. AACSB: Reflective Thinking Blooms: Remember Difficulty: 2 Medium Learning Objective: 03-01 Apply various elasticities of demand as a quantitative tool to forecast changes in revenues; prices; and/or units sold. Topic: Own Price Elasticity of Demand

3-28

55.

The demand for good X is estimated to be Qxd = 10,000 - 4PX + 5PY + 2M + AX where PX is the price of X, PY is the price of good Y, M is income, and AX is the amount of advertising on X. Suppose the present price of good X is $50, PY = $100, M = $25,000, and AX = 1,000 units. What is the demand curve for good X?

A. 61,500 B. 61,300 C. 61,300 - 4PX D. 61,500 - 4PX AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-05 Show how to determine elasticities from linear and log-linear demand functions. Topic: Own Price Elasticity of Demand

56.

The demand for good X is estimated to be Qxd = 10,000 - 4PX + 5PY + 2M + AX where PX is the price of X, PY is the price of good Y, M is income, and AX is the amount of advertising on X. Suppose the present price of good X is $50, PY = $100, M = $25,000, and AX = 1,000 units. What is the quantity demanded of good X?

A. 61,500 B. 61,300 C. 61,300 - 4PX D. 61,500 - 4PX AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 03-05 Show how to determine elasticities from linear and log-linear demand functions. Topic: Own Price Elasticity of Demand

3-29

57.

The demand for good X is estimated to be Qxd = 10,000 - 4PX + 5PY + 2M + AX, where PX is the price of X, PY is the price of good Y, M is income, and AX is the amount of advertising on X. Suppose the present price of good X is $50, PY = $100, M = $25,000, and AX = 1,000 units. What is the own price elasticity of demand for good X?

A. -0.003 B. -0.03 C. -0.3 D. -3 AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-05 Show how to determine elasticities from linear and log-linear demand functions. Topic: Obtaining Elasticities From Demand Functions

58.

The demand for good X is estimated to be Qxd = 10, 000 - 4PX + 5PY + 2M + AX, where PX is the price of X, PY is the price of good Y, M is income, and AX is the amount of advertising on X. Suppose the present price of good X is $50, PY = $100, M = $25,000, and AX = 1,000 units. Based on this information, we know that the demand for good X is:

A. elastic. B. inelastic. C. unitary elastic. D. neither elastic, inelastic, nor unitary elastic. AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-05 Show how to determine elasticities from linear and log-linear demand functions. Topic: Obtaining Elasticities From Demand Functions

3-30

59.

The demand for good X is estimated to be Qxd = 10, 000 - 4PX + 5PY + 2M + AX, where PX is the price of X, PY is the price of good Y, M is income, and AX is the amount of advertising on X. Suppose the present price of good X is $50, PY = $100, M = $25,000, and AX = 1,000 units. Based on this information, the cross-price elasticity between goods X and Y is:

A. 0.008. B. -0.08. C. -0.8. D. -8. AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-05 Show how to determine elasticities from linear and log-linear demand functions. Topic: Obtaining Elasticities From Demand Functions

60.

The demand for good X is estimated to be Qxd = 10,000 - 4PX + 5PY + 2M + AX, where PX is the price of X, PY is the price of good Y, M is income, and AX is the amount of advertising on X. Suppose the present price of good X is $50, PY = $100, M = $25,000, and AX = 1,000 units. Based on this information, goods X and Y are:

A. substitutes. B. complements. C. normal goods. D. inferior goods. AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-05 Show how to determine elasticities from linear and log-linear demand functions. Topic: Cross-Price Elasticity

3-31

61.

The demand for good X is estimated to be Qxd = 10, 000 - 4PX + 5PY + 2M + AX, where PX is the price of X, PY is the price of good Y, M is income, and AX is the amount of advertising on X. Suppose the present price of good X is $50, PY = $100, M = $25,000, and AX = 1,000 units. Based on this information, the income elasticity of good X is:

A. 0.008. B. 0.082. C. 0.82. D. 8.2. AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-05 Show how to determine elasticities from linear and log-linear demand functions. Topic: Obtaining Elasticities From Demand Functions

62.

The demand for good X is estimated to be Qxd = 10, 000 - 4PX + 5PY + 2M + AX, where PX is the price of X, PY is the price of good Y, M is income, and AX is the amount of advertising on X. Suppose the present price of good X is $50, PY = $100, M = $25,000, and AX = 1,000 units. Based on this information, good X is:

A. an inferior good. B. a normal good. C. a Giffen good. D. a regular good. AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 03-05 Show how to determine elasticities from linear and log-linear demand functions. Topic: Income Elasticity

3-32

63.

When a demand curve is linear,

A. the elasticity is the same as the slope of the demand curve. B. demand is elastic at high prices. C. demand is unitary elastic at low prices. D. the elasticity is constant at all prices. AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-01 Apply various elasticities of demand as a quantitative tool to forecast changes in revenues; prices; and/or units sold. Topic: Own Price Elasticity of Demand

64.

Which of the following is NOT an important factor that affects the magnitude of the own price elasticity of a good?

A. Available substitutes B. Supply of the good C. Time D. Expenditure share AACSB: Reflective Thinking Blooms: Remember Difficulty: 2 Medium Learning Objective: 03-03 Discuss three factors that influence whether the demand for a given product is relatively elastic or inelastic. Topic: Own Price Elasticity of Demand

3-33

65.

If there are few close substitutes for a good, demand tends to be relatively:

A. elastic. B. inelastic. C. unitary elastic. D. neither elastic, inelastic, nor unitary elastic. AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-03 Discuss three factors that influence whether the demand for a given product is relatively elastic or inelastic. Topic: Own Price Elasticity of Demand

66.

The demand for food (a broad group) is more:

A. elastic than the demand for beef (specific commodity). B. inelastic than the demand for beef (specific commodity). C. sensitive to price changes than the demand for beef. D. responsive to price changes than the demand for beef. AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-03 Discuss three factors that influence whether the demand for a given product is relatively elastic or inelastic. Topic: Own Price Elasticity of Demand

3-34

67.

The demand for women's clothing is, in general:

A. more elastic than the demand for clothing. B. less elastic than the demand for clothing. C. equally elastic to the demand for clothing. D. neither more elastic, less elastic, nor equally elastic to the demand for clothing. AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-03 Discuss three factors that influence whether the demand for a given product is relatively elastic or inelastic. Topic: Own Price Elasticity of Demand

68.

Demand tends to be:

A. more elastic in the short term than in the long term. B. more inelastic in the short term than in the long term. C. equally elastic in the short term and in the long term. D. None of the statements is correct. AACSB: Reflective Thinking Blooms: Remember Difficulty: 2 Medium Learning Objective: 03-03 Discuss three factors that influence whether the demand for a given product is relatively elastic or inelastic. Topic: Own Price Elasticity of Demand

3-35

69.

If the short-term own price elasticity for transportation is estimated to be -0.6, then long-term own price elasticity is expected to be:

A. -0.6. B. greater than -0.6. C. less than -0.6. D. neither greater than, less than, nor equal to -0.6. AACSB: Reflective Thinking Blooms: Understand Difficulty: 3 Hard Learning Objective: 03-03 Discuss three factors that influence whether the demand for a given product is relatively elastic or inelastic. Topic: Own Price Elasticity of Demand

70.

Since most consumers spend very little on salt, a small increase in the price of salt will:

A. reduce quantity demanded by a large amount. B. not reduce quantity demanded by very much. C. not change quantity demanded. D. increase quantity demanded by a small amount. AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-03 Discuss three factors that influence whether the demand for a given product is relatively elastic or inelastic. Topic: Own Price Elasticity of Demand

3-36

71.

Suppose the income elasticity for transportation is 1.8. Which of the following is an INCORRECT statement?

A. Transportation is a normal good. B. Expenditures on transportation grow more rapidly than income grows. C. Expenditures on transportation will fall less rapidly than income falls. D. Whenever the income increases by 1 percent, the expenditure on transportation increases by 1.8 percent. AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-01 Apply various elasticities of demand as a quantitative tool to forecast changes in revenues; prices; and/or units sold. Topic: Income Elasticity

72.

Non-fed ground beef is an inferior good. In economic booms, grocery managers should:

A. increase their orders of non-fed ground beef. B. reduce their orders of non-fed ground beef. C. not change their orders of non-fed ground beef. D. neither increase, reduce, nor maintain their current orders for non-fed ground beef. AACSB: Reflective Thinking Blooms: Understand Difficulty: 1 Easy Learning Objective: 03-01 Apply various elasticities of demand as a quantitative tool to forecast changes in revenues; prices; and/or units sold. Topic: Income Elasticity

3-37

73.

The demand for good X has been estimated to be ln Q xd = 100 - 2.5 ln PX + 4 ln PY + ln M. The own price elasticity of good X is:

A. -2.5. B. 4.0. C. -2.5 percent. D. 4.0 percent. AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-05 Show how to determine elasticities from linear and log-linear demand functions. Topic: Obtaining Elasticities From Demand Functions

74.

The demand for good X has been estimated to be ln Q xd = 100 - 2.5 ln PX + 4 ln PY + ln M. The cross-price elasticity of demand between goods X and Y is:

A. -2.5. B. 4.0. C. -2.5 percent. D. 4.0 percent. AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-05 Show how to determine elasticities from linear and log-linear demand functions. Topic: Obtaining Elasticities From Demand Functions

3-38

75.

The demand for good X has been estimated to be ln Q xd = 100 - 2.5 ln PX + 4 ln PY + ln M. The income elasticity of good X is:

A. 4.0. B. 1.0. C. 2.0. D. -2.5. AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-05 Show how to determine elasticities from linear and log-linear demand functions. Topic: Obtaining Elasticities From Demand Functions

76.

The demand for good X has been estimated to be ln Q xd = 100 - 2.5 ln PX + 4 ln PY + ln M. The advertising elasticity of good X is:

A. 4.0. B. 1.0. C. 0.0. D. -2.5. AACSB: Analytic Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-05 Show how to determine elasticities from linear and log-linear demand functions. Topic: Obtaining Elasticities From Demand Functions

3-39

77.

The greater the standard error of an estimated coefficient:

A. the greater the t-value of the estimated coefficient. B. the lower the t-value of the estimated coefficient. C. the greater the R-square. D. the greater the adjusted R-square. AACSB: Reflective Thinking Blooms: Understand Difficulty: 1 Easy Learning Objective: 03-06 Explain how regression analysis may be used to estimate demand functions; and how to interpret and use the output of a regression. Topic: Regression Analysis

78.

For a given set of data and a regression equation, the greater the R-square:

A. the greater the t-value. B. the lower the t-value. C. the greater the adjusted R-square. D. the lower the adjusted R-square. AACSB: Reflective Thinking Blooms: Understand Difficulty: 3 Hard Learning Objective: 03-06 Explain how regression analysis may be used to estimate demand functions; and how to interpret and use the output of a regression. Topic: Regression Analysis

3-40

79.

The lower the standard error:

A. the less confident the manager can be that the parameter estimates reflect the true values. B. the more confident the manager can be that the parameter estimates reflect the true values. C. the more precisely the parameter estimates the true values. D. the less precisely the parameter estimates the true values. AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-06 Explain how regression analysis may be used to estimate demand functions; and how to interpret and use the output of a regression. Topic: Regression Analysis

80.

The manager can be 95 percent confident that the true value of the underlying parameters in a regression is not zero if the absolute value of the t-statistic is:

A. less than 1. B. less than 2. C. greater than 1. D. greater than 2. AACSB: Reflective Thinking Blooms: Remember Difficulty: 2 Medium Learning Objective: 03-06 Explain how regression analysis may be used to estimate demand functions; and how to interpret and use the output of a regression. Topic: Regression Analysis

3-41

81.

When the own price elasticity of good X is -3.5, then total revenue can be increased by:

A. increasing the price. B. decreasing the quantity supplied. C. decreasing the price. D. neither increasing the price, decreasing the price, nor decreasing the quantity supplied. AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-02 Illustrate the relationship between the elasticity of demand and total revenues. Topic: Own Price Elasticity of Demand

82.

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:

A. the demand for sugar is inelastic. B. the demand curve for sugar is upward sloping. C. the quantity demanded of sugar increased. D. the demand curve for sugar is upward sloping and the quantity demanded of sugar increased. AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-02 Illustrate the relationship between the elasticity of demand and total revenues. Topic: Own Price Elasticity of Demand

3-42

83.

Which of the following statements is INCORRECT?

A. If a firm decreases the price of its product, its total revenue must decrease. B. The own price elasticity of demand is constant at all points along a linear demand curve. C. As the price of X falls and we move down an individual's demand curve for X, the money income of the individual also changes. D. None of the statements is correct. AACSB: Reflective Thinking Blooms: Understand Difficulty: 1 Easy Learning Objective: 03-02 Illustrate the relationship between the elasticity of demand and total revenues. Topic: Own Price Elasticity of Demand

84.

The demand for which of the following commodities is likely to be most inelastic?

A. Soft drinks B. Beverages C. Cola drinks D. Pepsi Cola AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-03 Discuss three factors that influence whether the demand for a given product is relatively elastic or inelastic. Topic: Own Price Elasticity of Demand

3-43

85.

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:

A. greater than 1. B. less than 1. C. 1. D. zero. AACSB: Reflective Thinking Blooms: Understand Difficulty: 3 Hard Learning Objective: 03-01 Apply various elasticities of demand as a quantitative tool to forecast changes in revenues; prices; and/or units sold. Topic: Own Price Elasticity of Demand

86.

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:

A. decrease. B. increase. C. remain constant. D. either increase or remain constant, depending upon the size of the price increase. AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-01 Apply various elasticities of demand as a quantitative tool to forecast changes in revenues; prices; and/or units sold. Topic: Own Price Elasticity of Demand

3-44

87.

The management of Local Cinema has estimated the monthly demand for tickets to be ln Q = 22,328 - 0.41 ln P + 0.5 ln M - 0.33 ln A + 100 ln PDVD, where Q = quantity of tickets demanded, P = price per ticket, M = income, A = advertising outlay, and PDVD = price of a DVD rental. It is known that P = $5.50, M = $9,000, A = $900, and PDVD = $3.00. Determine the own price elasticity of demand for movie tickets.

A. -0.29 B. -0.32 C. -0.39 D. -0.41 AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-05 Show how to determine elasticities from linear and log-linear demand functions. Topic: Obtaining Elasticities From Demand Functions

88.

The management of Local Cinema has estimated the monthly demand for tickets to be ln Q = 22,328 - 0.41 ln P + 0.5 ln M - 0.33 ln A + 100 ln PDVD, where Q = quantity of tickets demanded, P = price per ticket, M = income, A = advertising outlay, and PDVD = price of a DVD rental. It is known that P = $5.50, M = $9,000, A = $900, and Pvcr = $3.00. Based on the information given, which of the following statements is false?

A. Advertising decreases the demand for movie tickets. B. Movies are normal goods. C. Movies are complements for DVD rentals. D. The advertising elasticity of demand for movie tickets is -0.33. AACSB: Analytic Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-05 Show how to determine elasticities from linear and log-linear demand functions. Topic: Obtaining Elasticities From Demand Functions

3-45

89.

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 remained at $3 billion annually. This data indicates that:

A. the demand for sugar is inelastic. B. the demand curve for sugar is upward sloping. C. the quantity demanded of sugar increased. D. None of the statements is correct. AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-02 Illustrate the relationship between the elasticity of demand and total revenues. Topic: Own Price Elasticity of Demand

90.

The demand for good X is given by ln Qxd = 120 - 0.9 ln Px + 1.5 ln Py - 0.7 ln M. Which of the following statements is correct?

A. X has constant income elasticity. B. An economic downturn will decrease demand for X. C. A 15 percent increase in income would increase demand for X by 10.5 percent. D. X has a constant income elasticity, and an economic downturn will decrease the demand for X. AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-05 Show how to determine elasticities from linear and log-linear demand functions. Topic: Obtaining Elasticities From Demand Functions

3-46

91.

The cross-price elasticity of demand between goods X and Y is -3.5. If the price of X decreases by 7 percent, the quantity demanded of Y will:

A. decrease by 24.5 percent. B. decrease by 2.45 percent. C. increase by 24.5 percent. D. increase by 2.45 percent. AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-01 Apply various elasticities of demand as a quantitative tool to forecast changes in revenues; prices; and/or units sold. Topic: Cross-Price Elasticity

92.

The short-run response of quantity demanded to a change in price is usually:

A. the same as the long-run response. B. less than the long-run response. C. greater than the long-run response. D. None of the statements is correct. AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-03 Discuss three factors that influence whether the demand for a given product is relatively elastic or inelastic. Topic: Own Price Elasticity of Demand

3-47

93.

The cross-price elasticity of demand for books and magazines is -2.0. If the price of magazines decreases by 10 percent, the quantity demanded of books will:

A. fall by 2.0 percent. B. rise by 2.0 percent. C. fall by 20 percent. D. rise by 20 percent. AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-01 Apply various elasticities of demand as a quantitative tool to forecast changes in revenues; prices; and/or units sold. Topic: Cross-Price Elasticity

94.

If the demand function for a particular good is Q = 25 - 10P, then the price elasticity of demand (in absolute value) at a price of $1 is:

A. 8. B. 2. C. 2/3. D. 1/8. AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 03-05 Show how to determine elasticities from linear and log-linear demand functions. Topic: Obtaining Elasticities From Demand Functions

3-48

95.

The demand for video recorders has been estimated to be linear and given by the demand relation Qv = 145 - 3.2Pv + 7M - 0.95Pf - 39Pm, where Qv is the quantity of video recorders, Pf denotes the price of video recorder film, Pm is the price of attending a movie, Pv is the price of video recorders, and M is income. Based on the estimated demand equation we can conclude:

A. video recorders are normal goods. B. the demand for video recorders is inelastic. C. video recorders are normal goods and the demand for video recorders is inelastic. D. video recorders are normal goods and video recorder film is a complement for video recorders. AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-05 Show how to determine elasticities from linear and log-linear demand functions. Topic: Obtaining Elasticities From Demand Functions

96.

The elasticity of demand for gasoline has been estimated to be 2.0, and the standard error is 1.0. The upper and lower bounds on the 95 percent confidence interval for the elasticity of demand for gasoline are:

A. 3 and 2. B. 2 and 1. C. 3 and 1. D. None of the statements is correct. AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-06 Explain how regression analysis may be used to estimate demand functions; and how to interpret and use the output of a regression. Topic: Regression Analysis

3-49

97.

The cross-price elasticity of demand for textbooks and copies of old exams is -3.5. If the price of copies of old exams increases by 10 percent, the quantity demanded of textbooks will:

A. fall by 3.5 percent. B. rise by 3.5 percent. C. fall by 35 percent. D. rise by 35 percent. AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-01 Apply various elasticities of demand as a quantitative tool to forecast changes in revenues; prices; and/or units sold. Topic: Cross-Price Elasticity

98.

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 expenditures actually INCREASED to $4 billion annually. This indicates that:

A. the demand for sugar is elastic. B. the demand curve for sugar is upward sloping. C. sugar is a Giffen good. D. None of the statements is correct. AACSB: Reflective Thinking Blooms: Understand Difficulty: 3 Hard Learning Objective: 03-02 Illustrate the relationship between the elasticity of demand and total revenues. Topic: Own Price Elasticity of Demand

3-50

99.

The demand for which of the following commodities is likely to be most price inelastic?

A. Food B. Hamburgers C. Big Macs D. Sandwiches AACSB: Reflective Thinking Blooms: Understand Difficulty: 1 Easy Learning Objective: 03-03 Discuss three factors that influence whether the demand for a given product is relatively elastic or inelastic. Topic: Own Price Elasticity of Demand

100.

If the demand function for a particular good is Q = 20 - 8P, then the price elasticity of demand (in absolute value) at a price of $1 is:

A. 8. B. 2. C. 2/3. D. 1/8. AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-05 Show how to determine elasticities from linear and log-linear demand functions. Topic: Obtaining Elasticities From Demand Functions

3-51

101.

Assume that the price elasticity of demand is -0.75 for a certain firm's product. If the firm lowers price, the firm's managers can expect total revenue to:

A. decrease. B. increase. C. remain constant. D. either increase or remain constant, depending upon the size of the price decrease. AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-02 Illustrate the relationship between the elasticity of demand and total revenues. Topic: Own Price Elasticity of Demand

102.

Suppose the demand for a product is Qxd = 12 - 3 ln Px. Then demand for product x is:

A. inelastic. B. unitary elastic. C. elastic. D. It cannot be determined without more information. AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 03-05 Show how to determine elasticities from linear and log-linear demand functions. Topic: Obtaining Elasticities From Demand Functions

3-52

103.

The demand for good X has been estimated by Qxd = 6 - 2Px + 5Py. Suppose that good X sells at $3 per unit and good Y sells for $2 per unit. Calculate the own price elasticity.

A. -0.3 B. -0.4 C. -0.5 D. -0.6 AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-05 Show how to determine elasticities from linear and log-linear demand functions. Topic: Obtaining Elasticities From Demand Functions

104.

The own price elasticity of demand for apples is -1.5. If the price of apples falls by 6 percent, what will happen to the quantity of apples demanded?

A. It will increase 4 percent. B. It will increase 9 percent. C. It will fall 4 percent. D. It will fall 6 percent. AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-01 Apply various elasticities of demand as a quantitative tool to forecast changes in revenues; prices; and/or units sold. Topic: Own Price Elasticity of Demand

3-53

105.

If quantity demanded for sneakers falls by 6 percent when price increases 20 percent, we know that the absolute value of the own price elasticity of sneakers is:

A. 0.3. B. 0.7. C. 2.3. D. 3.3. AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 03-01 Apply various elasticities of demand as a quantitative tool to forecast changes in revenues; prices; and/or units sold. Topic: Own Price Elasticity of Demand

106.

If the cross-price elasticity between ketchup and hamburgers is -2.5, a 2 percent increase in the price of ketchup will lead to a:

A. 5 percent drop in quantity demanded of ketchup. B. 5 percent drop in quantity demanded of hamburgers. C. 5 percent increase in quantity demanded of ketchup. D. 5 percent increase in quantity demanded of hamburgers. AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-01 Apply various elasticities of demand as a quantitative tool to forecast changes in revenues; prices; and/or units sold. Topic: Cross-Price Elasticity

3-54

107.

If the income elasticity for lobster is 0.6, a 25 percent increase in income will lead to a:

A. 6 percent drop in demand for lobster. B. 2.4 percent increase in demand for lobster. C. 15 percent increase in demand for lobster. D. 42 percent increase in demand for lobster. AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-01 Apply various elasticities of demand as a quantitative tool to forecast changes in revenues; prices; and/or units sold. Topic: Income Elasticity

108.

You are the manager of a popular hat company. You know that the advertising elasticity of demand for your product is 0.25. How much will you have to increase advertising in order to increase demand by 5 percent?

A. 0.05 percent B. 20 percent C. 25 percent D. 1.25 percent AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-01 Apply various elasticities of demand as a quantitative tool to forecast changes in revenues; prices; and/or units sold. Topic: Other Elasticities

3-55

109.

The statistical analysis of economic phenomena is defined as:

A. standard error. B. confidence intervals. C. the t-statistic. D. econometrics. AACSB: Reflective Thinking Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-06 Explain how regression analysis may be used to estimate demand functions; and how to interpret and use the output of a regression. Topic: Regression Analysis

110.

Which of the following provides a measure of the overall fit of a regression?

A. t-statistic B. F-statistic C. P-value D. The t-statistic and the P-value AACSB: Reflective Thinking Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-06 Explain how regression analysis may be used to estimate demand functions; and how to interpret and use the output of a regression. Topic: Regression Analysis

3-56

111.

As a general rule of thumb, a manager can be 95 percent confident that the true value of the underlying parameter in the regression is not zero, when the absolute value of the t-statistic is:

A. greater than zero. B. greater than or equal to 1. C. greater than or equal to 2. D. None of the statements is correct. AACSB: Reflective Thinking Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-06 Explain how regression analysis may be used to estimate demand functions; and how to interpret and use the output of a regression. Topic: Regression Analysis

112.

If the own price elasticity of demand is infinite in absolute value, then:

A. demand is perfectly elastic. B. the demand curve is vertical. C. consumers do not respond at all to changes in price. D. the demand curve is vertical and consumers do not respond at all to changes in price. AACSB: Reflective Thinking Blooms: Understand Difficulty: 1 Easy Learning Objective: 03-01 Apply various elasticities of demand as a quantitative tool to forecast changes in revenues; prices; and/or units sold. Topic: Own Price Elasticity of Demand

3-57

113.

When a demand curve is linear:

A. demand is elastic at low prices. B. demand is inelastic at low prices. C. demand is unitary elastic at low prices. D. the elasticity is constant at all prices. AACSB: Reflective Thinking Blooms: Understand Difficulty: 3 Hard Learning Objective: 03-01 Apply various elasticities of demand as a quantitative tool to forecast changes in revenues; prices; and/or units sold. Topic: Own Price Elasticity of Demand

114.

The demand for Cinnamon Toast Crunch brand cereal is:

A. equally elastic to the demand for cereal in general. B. less elastic than the demand for cereal in general. C. more elastic than the demand for cereal in general. D. None of the statements is correct. AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-03 Discuss three factors that influence whether the demand for a given product is relatively elastic or inelastic. Topic: Own Price Elasticity of Demand

3-58

115.

Which of the following is a correct statement about the own price elasticity of demand?

A. Demand tends to be more inelastic in the short term than in the long term. B. Demand tends to be more elastic as more substitutes are available. C. Demand tends to be more inelastic for goods that comprise a smaller share of a consumer's budget. D. All of the statements are correct. AACSB: Reflective Thinking Blooms: Understand Difficulty: 1 Easy Learning Objective: 03-03 Discuss three factors that influence whether the demand for a given product is relatively elastic or inelastic. Topic: Own Price Elasticity of Demand

116.

When marginal revenue is zero, demand will be:

A. elastic. B. inelastic. C. unit elastic. D. There is not sufficient information to classify the elasticity of demand. AACSB: Reflective Thinking Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-04 Explain the relationship between marginal revenue and the own price elasticity of demand. Topic: Own Price Elasticity of Demand

3-59

117.

When marginal revenue is zero, total revenue:

A. will increase when price increases. B. is maximized. C. will decrease when price decreases. D. will decrease as quantity decreases. AACSB: Reflective Thinking Blooms: Remember Difficulty: 2 Medium Learning Objective: 03-04 Explain the relationship between marginal revenue and the own price elasticity of demand. Topic: Own Price Elasticity of Demand

118.

When marginal revenue is positive, demand is:

A. elastic. B. inelastic. C. unit elastic. D. There is not sufficient information to classify the elasticity of demand. AACSB: Reflective Thinking Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-04 Explain the relationship between marginal revenue and the own price elasticity of demand. Topic: Own Price Elasticity of Demand

3-60

119.

When marginal revenue is negative, demand is:

A. elastic. B. inelastic. C. unit elastic. D. There is not sufficient information to classify the elasticity of demand. AACSB: Reflective Thinking Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-04 Explain the relationship between marginal revenue and the own price elasticity of demand. Topic: Own Price Elasticity of Demand

120.

Suppose the equilibrium price in the market is $10 and the price elasticity of demand for the linear demand function at the market equilibrium is -1.25. Then we know that:

A. demand is inelastic. B. marginal revenue is $2. C. marginal revenue is $50. D. demand is unit elastic. AACSB: Analytic Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-04 Explain the relationship between marginal revenue and the own price elasticity of demand. Topic: Own Price Elasticity of Demand

3-61

121.

Suppose that at the equilibrium price and quantity, the marginal revenue is -$15 and the price elasticity of demand for a linear demand function is -0.75. Then we know that the equilibrium price is:

A. -$5. B. $45. C. -$45. D. $5. AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-04 Explain the relationship between marginal revenue and the own price elasticity of demand. Topic: Own Price Elasticity of Demand

122.

Suppose the equilibrium price in the market is $100 and the marginal revenue associated with the linear (inverse) demand function is $50. Then we know that the own price elasticity of demand is:

A. -2. B. 1. C. 2. D. It cannot be determined from the information contained in the question. AACSB: Analytic Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-04 Explain the relationship between marginal revenue and the own price elasticity of demand. Topic: Own Price Elasticity of Demand

3-62

123.

Suppose the equilibrium price in the market is $60 and the marginal revenue associated with the linear (inverse) demand function is $20. Then we know that the own price elasticity of demand is:

A. -2. B. 2. C. -1.5. D. It cannot be determined from the information contained in the question. AACSB: Analytic Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-04 Explain the relationship between marginal revenue and the own price elasticity of demand. Topic: Own Price Elasticity of Demand

124.

A firm derives revenue from two sources: goods X and Y. Annual revenues from good X and Y are $10,000 and $20,000, respectively. If the price elasticity of demand for good X is -4.0 and the cross-price elasticity of demand between Y and X is 2.0, then a 2 percent decrease in the price of X will:

A. increase total revenues from X and Y by $520. B. decrease total revenues from X and Y by $200. C. leave total revenues from X and Y unchanged. D. decrease total revenues for X and Y by $600. AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-04 Explain the relationship between marginal revenue and the own price elasticity of demand. Topic: Own Price Elasticity of Demand

3-63

125.

A firm derives revenue from two sources: goods X and Y. Annual revenues from good X and Y are $10,000 and $20,000, respectively. If the price elasticity of demand for good X is -2.0 and the cross-price elasticity of demand between Y and X is 1.5, then a 4 percent increase in the price of X will:

A. increase total revenues from X and Y by $800. B. increase total revenues from X and Y by $8,000. C. decrease total revenues from X and Y by $400. D. increase total revenues from X and Y by $400. AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-04 Explain the relationship between marginal revenue and the own price elasticity of demand. Topic: Own Price Elasticity of Demand

3-64

126.

The demand function in Table 3-1 is QXd = 100 - 2PX. Based on this information, when QX = 80, the price, PX (point A), is:

A. $5. B. $10. C. $15. D. $20. AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 03-05 Show how to determine elasticities from linear and log-linear demand functions. Topic: Obtaining Elasticities From Demand Functions

3-65

127.

The demand function in Table 3-1 is QXd = 100 - 2PX. Based on this information, when PX = $30, quantity demand, QXd (point B), is:

A. 100. B. 80. C. 60. D. 40. AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 03-05 Show how to determine elasticities from linear and log-linear demand functions. Topic: Obtaining Elasticities From Demand Functions

3-66

128.

The demand function in Table 3-1 is QXd = 100 - 2PX. Based on this information, compute the own price elasticity of demand when PX = $25 (point C).

A. -1.09 B. -1 C. -0.50 D. -0.25 AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-05 Show how to determine elasticities from linear and log-linear demand functions. Topic: Obtaining Elasticities From Demand Functions

3-67

129.

The demand function in Table 3-1 is QXd = 100 - 2PX. Based on this information, compute the total revenue when QX = 20 (point D).

A. $750 B. $800 C. $850 D. $900 AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 03-05 Show how to determine elasticities from linear and log-linear demand functions. Topic: Obtaining Elasticities From Demand Functions

3-68

130.

Use the regression output to compute the R-square and adjusted R-square (points A and B, respectively).

A. 0.056 and 0.017 B. 0.944 and 0.942 C. 0.944 and -0.428 D. 0.06 and 0.02 AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 03-06 Explain how regression analysis may be used to estimate demand functions; and how to interpret and use the output of a regression. Topic: Regression Analysis

3-69

131.

The residual sum of squares and degrees of freedom due to the regression are:

A. 44,539.54 and 2, respectively. B. 747,851.57, and 98, respectively. C. 1,540,242.68 and 48, respectively. D. There is not sufficient information to answer this question. AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 03-06 Explain how regression analysis may be used to estimate demand functions; and how to interpret and use the output of a regression. Topic: Regression Analysis

3-70

132.

Determine the intercept coefficient (point E) and whether that estimate is statistically significant at the 5 percent level.

A. 1,664.46 and statistically significant since the P-value is less than 5 percent. B. 2.32 and statistically significant since the t-statistic is greater than 2 in absolute value. C. 1,664.46 and statistically insignificant since the P-value is less than 5 percent. D. 2.32 and statistically insignificant since the t-statistic is less than 2 in absolute value. AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 03-06 Explain how regression analysis may be used to estimate demand functions; and how to interpret and use the output of a regression. Topic: Regression Analysis

3-71

133.

Determine the standard error of the estimated slope coefficient for the price of roses (point F) and whether that estimated slope coefficient is statistically significant at the 5 percent level.

A. 9.42 and statistically significant since the t-statistic is greater than 2 in absolute value. B. 9.42 and statistically insignificant since the t-statistic is less than 2 in absolute value. C. 4.74 and statistically insignificant since the P-value is greater than 5 percent. D. 4.74 and statistically significant since the P-value is greater than 5 percent. AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 03-06 Explain how regression analysis may be used to estimate demand functions; and how to interpret and use the output of a regression. Topic: Regression Analysis

3-72

134.

Determine the t-statistic of the estimated slope coefficient for disposable income (point G) and whether that estimated slope coefficient is statistically significant at the 5 percent level.

A. 3.31 and statistically significant since the t-statistic is greater than 2 in absolute value. B. 0.03 and statistically insignificant since the t-statistic is less than 2 in absolute value. C. 3.31 and statistically insignificant since the P-value is less than 5 percent. D. 28.62 and statistically significant since the P-value is less than 5 percent. AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 03-06 Explain how regression analysis may be used to estimate demand functions; and how to interpret and use the output of a regression. Topic: Regression Analysis

3-73

135.

From the regression output, the predicted regression line is:

A. QRd = 1664.46 - 6.68PR + 9.73M. B. PR = 1664.46 - 6.68QR + 9.73M. C. QRd = 2.32 - 6.68PR + 9.73M. D. There is not sufficient information to answer the question. AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 03-06 Explain how regression analysis may be used to estimate demand functions; and how to interpret and use the output of a regression. Topic: Regression Analysis

3-74

136.

A price elasticity of infinity corresponds to a demand curve that is:

A. horizontal. B. downward sloping with a slope always equal to 1. C. vertical. D. either vertical or horizontal. AACSB: Reflective Thinking Blooms: Remember Difficulty: 2 Medium Learning Objective: 03-01 Apply various elasticities of demand as a quantitative tool to forecast changes in revenues; prices; and/or units sold. Topic: Own Price Elasticity of Demand

137.

As we move up along a linear demand curve, the price elasticity of demand becomes more:

A. elastic. B. inelastic. C. log-linear. D. variable. AACSB: Reflective Thinking Blooms: Remember Difficulty: 2 Medium Learning Objective: 03-01 Apply various elasticities of demand as a quantitative tool to forecast changes in revenues; prices; and/or units sold. Topic: Own Price Elasticity of Demand

3-75

138.

If the cross-price elasticity between goods X and Y is positive, we know the goods are:

A. inferior goods. B. complements. C. inelastic. D. substitutes. AACSB: Reflective Thinking Blooms: Remember Difficulty: 2 Medium Learning Objective: 03-01 Apply various elasticities of demand as a quantitative tool to forecast changes in revenues; prices; and/or units sold. Topic: Cross-Price Elasticity

139.

If the cross-price elasticity between goods X and Y is zero, we know the goods are:

A. independent. B. complements. C. inelastic. D. substitutes. AACSB: Reflective Thinking Blooms: Remember Difficulty: 2 Medium Learning Objective: 03-01 Apply various elasticities of demand as a quantitative tool to forecast changes in revenues; prices; and/or units sold. Topic: Cross-Price Elasticity

3-76

140.

Suppose the own price elasticity of demand for good X is -5, and the quantity of good X decreases by 5 percent. What would you expect to happen to the total expenditures on good X?

A. Increase B. Decrease C. Unchanged D. Neither increase, decrease, nor remain unchanged AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-02 Illustrate the relationship between the elasticity of demand and total revenues. Topic: Own Price Elasticity of Demand

141.

Suppose the own price elasticity of demand for good X is -0.25, and the quantity of good X increases by 5 percent. What would you expect to happen to the total expenditures on good X?

A. Increase B. Decrease C. Remain unchanged D. Neither increase, decrease nor remain unchanged AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-02 Illustrate the relationship between the elasticity of demand and total revenues. Topic: Own Price Elasticity of Demand

3-77

142.

When marginal revenue is negative for a linear (inverse) demand function, increases in output will cause total revenues to:

A. increase. B. decrease. C. remain unchanged. D. There is not sufficient information to answer the question. AACSB: Reflective Thinking Blooms: Understand Difficulty: 1 Easy Learning Objective: 03-04 Explain the relationship between marginal revenue and the own price elasticity of demand. Topic: Own Price Elasticity of Demand

143.

When marginal revenue is positive for a linear (inverse) demand function, decreases in output will cause total revenues to:

A. increase. B. decrease. C. remain unchanged. D. There is not sufficient information to answer the question. AACSB: Reflective Thinking Blooms: Understand Difficulty: 1 Easy Learning Objective: 03-04 Explain the relationship between marginal revenue and the own price elasticity of demand. Topic: Own Price Elasticity of Demand

3-78

144.

The elasticity of demand for gasoline has been estimated to be -2.0, and the standard error is 0.25. The t-statistic for the estimated elasticity of demand for gasoline is:

A. -8, indicating a statistically significant elasticity estimate at the 95 percent confidence level. B. -0.5, indicating a statistically insignificant elasticity estimate at the 95 percent confidence level. C. 8, indicating a statistically insignificant elasticity estimate at the 95 percent confidence level. D. 0.5, indicating a statistically significant elasticity estimate at the 95 percent confidence level. AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-06 Explain how regression analysis may be used to estimate demand functions; and how to interpret and use the output of a regression. Topic: Regression Analysis

145.

Suppose a regression with 51 observations returns a regression sum of squares of 56,000 and a total sum of squares of 250,000. The corresponding R2 is:

A. 0.776. B. 0.224. C. 0.345. D. 0.671. AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-06 Explain how regression analysis may be used to estimate demand functions; and how to interpret and use the output of a regression. Topic: Regression Analysis

3-79

146.

Suppose a regression with 51 observations returns a regression sum of squares of 56,000 and a total sum of squares of 250,000. The associated residual sum of squares is:

A. 194,000. B. 200,000. C. 150,000. D. None of the choices. AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 03-06 Explain how regression analysis may be used to estimate demand functions; and how to interpret and use the output of a regression. Topic: Regression Analysis

147.

Suppose the demand function is given by Qxd = 10Px0.9 Py0.5 M0.22 H. Then the cross-price elasticity between goods x and y is:

A. 0.9. B. 0.5. C. 0.22. D. -0.5. AACSB: Analytic Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-05 Show how to determine elasticities from linear and log-linear demand functions. Topic: Obtaining Elasticities From Demand Functions

3-80

148.

If the short-term own price elasticity for food is estimated to be -0.4, then long-term own price elasticity is expected to be:

A. -0.4. B. greater than -0.4. C. less than -0.4. D. neither greater than, less than, nor equal to -0.4. AACSB: Reflective Thinking Blooms: Understand Difficulty: 3 Hard Learning Objective: 03-03 Discuss three factors that influence whether the demand for a given product is relatively elastic or inelastic. Topic: Own Price Elasticity of Demand

149.

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:

A. greater than 1. B. less than 1. C. 1. D. zero. AACSB: Reflective Thinking Blooms: Understand Difficulty: 3 Hard Learning Objective: 03-01 Apply various elasticities of demand as a quantitative tool to forecast changes in revenues; prices; and/or units sold. Topic: Own Price Elasticity of Demand

3-81

150.

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:

A. the demand for corn is elastic. B. the demand curve for corn is upward sloping. C. corn is a Giffen good. D. the demand for corn is inelastic. AACSB: Reflective Thinking Blooms: Understand Difficulty: 3 Hard Learning Objective: 03-02 Illustrate the relationship between the elasticity of demand and total revenues. Topic: Own Price Elasticity of Demand

151.

Suppose the equilibrium price in the market is $200 and the marginal revenue associated with the linear (inverse) demand function is -$200. Then we know that the own price elasticity of demand is:

A. -0.5. B. -1. C. 2. D. It cannot be determined from the information contained in the question. AACSB: Analytic Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-04 Explain the relationship between marginal revenue and the own price elasticity of demand. Topic: Own Price Elasticity of Demand

3-82

152.

If a price increase from $8 to $10 causes quantity demanded to fall from 500 to 400, what is the absolute value of the own price elasticity at a price of $10?

A. 0.80 B. 1.25 C. 1.00 D. 0.75 AACSB: Reflective Thinking Blooms: Remember Difficulty: 3 Hard Learning Objective: 03-05 Show how to determine elasticities from linear and log-linear demand functions. Topic: The Elasticity Concept

153.

If the price of ground beef falls from $7 to $4, and this leads to an increase in demand for beans from 80 to 120 cans, what is the cross-price elasticity of beans and ground beef at a ground beef price of $4?

A. -0.87 B. 1.21 C. 0.52 D. -0.44 AACSB: Analytic Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-01 Apply various elasticities of demand as a quantitative tool to forecast changes in revenues; prices; and/or units sold. Topic: Cross-Price Elasticity

3-83

154.

If the demand function for a particular good is Q = 20 - 8P, then demand at a price of $1 is:

A. elastic. B. unit elastic. C. inelastic. D. The elasticity cannot be determined. AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-05 Show how to determine elasticities from linear and log-linear demand functions. Topic: Obtaining Elasticities From Demand Functions

155.

If the demand function for a particular good is Q = 50 - 4P, then demand at a price of $10 is:

A. elastic. B. unit elastic. C. inelastic. D. Elasticity cannot be determined. AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-05 Show how to determine elasticities from linear and log-linear demand functions. Topic: Obtaining Elasticities From Demand Functions

3-84

156.

Suppose the equilibrium price in the market is $24 and the price elasticity of demand for the linear demand function at the market equilibrium is -1.5. Then we know that:

A. demand is inelastic. B. marginal revenue is $8. C. marginal revenue is $20. D. demand is unit elastic. AACSB: Analytic Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-04 Explain the relationship between marginal revenue and the own price elasticity of demand. Topic: Own Price Elasticity of Demand

Essay Questions

3-85

157.

Several years ago the National Association of Broadcasters imposed restrictions on the amount of nonprogram material (commercials) that could be aired during children's television shows, effectively reducing the quantity of advertising allowed during children's viewing hours by 33 percent. Within four months, the price of a minute of advertising on network television increased by roughly 14 percent. What impact do you think this had on the revenues of the networks?

The own price elasticity of demand for advertising time is the percentage change in quantity demanded (-33 percent) divided by the percentage change in price (+14 percent), which is 2.36. Thus, the demand for advertising minutes by those who sell children's products is elastic. By the total revenue test, we would expect this to decrease network revenues.

AACSB: Reflective Thinking Blooms: Understand Difficulty: 1 Easy Learning Objective: 03-02 Illustrate the relationship between the elasticity of demand and total revenues. Topic: Own Price Elasticity of Demand

158.

A study sponsored by the American Medical Association suggests that the absolute value of the own price elasticity for surgical procedures is smaller than that for the own price elasticity for office visits. Explain why this would be expected.

The demand for surgical procedures is generally more inelastic than the demand for office visits, since most surgical procedures do not have close substitutes. In contrast, there are close substitutes for many types of office visits. For example, a patient can purchase over-thecounter drugs. Another explanation is that surgical procedures are usually needed immediately, while office visits can often wait.

AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-03 Discuss three factors that influence whether the demand for a given product is relatively elastic or inelastic. Topic: Own Price Elasticity of Demand

3-86

159.

Suppose the monthly demand for soda by a consumer is given by

.

a. If the price of soda is $1 per can, how many sodas will the consumer purchase in a typical month? b. What is the elasticity of demand for soda?

a. Sodas purchased by a consumer in a typical month: Q = 10 - 8(1) = 2 (cans). b. EQ,P = -8P/Q = -8 (1/2) = -4.

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 03-05 Show how to determine elasticities from linear and log-linear demand functions. Topic: Obtaining Elasticities From Demand Functions

3-87

160.

The demand function for DVD players has been estimated to be QPlayer = 134 - 1.07PDVD + 46Pm - 2.1PDVD - 5M, where QPlayer is the quantity of DVD players, PDVD is the price of a videocassette, Pm is the price of a movie, PPlayer is the price of a DVD player, and M is income. Based on this information, answer the following questions. a. Are DVD players normal or inferior goods? b. Are movies substitutes or complements for DVD players? c. What additional information is needed to calculate the price elasticity of demand for DVD players?

a. Since the coefficient associated with income is negative, an increase in income leads to a reduction in demand for DVD players. Hence, DVD players are inferior goods. b. Movies are substitutes for DVD players, since the coefficient associated with the price of a movie is positive. c. The actual values of prices and income are needed to calculate the price elasticity of demand for DVD players.

AACSB: Reflective Thinking Blooms: Understand Difficulty: 1 Easy Learning Objective: 03-05 Show how to determine elasticities from linear and log-linear demand functions. Topic: Obtaining Elasticities From Demand Functions

3-88

161.

When the price of butter was "low," consumers spent $5 billion annually on its consumption. When the price doubled, consumer expenditures increased to $7 billion. Recently you read that this means that the demand curve for butter is upward sloping. Do you agree? Explain.

Disagree. Let P be the initial price and 2P the new price. Then Q(P) × P = $5 billion Q(P) × P = $5 billion Q(2P) × P = $7 billion

An increase in price leads to a reduction in quantity demanded. Thus, the demand curve for butter is negatively sloped. The rise in expenditures is due to inelastic demand.

AACSB: Analytic Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-01 Apply various elasticities of demand as a quantitative tool to forecast changes in revenues; prices; and/or units sold. Topic: Own Price Elasticity of Demand

3-89

162.

The cross-price elasticity for textbooks and copies of old exams is -3.5. If the price of copies of old exams increases by 10 percent, what will happen to the quantity demanded of textbooks?

By definition,

Substitute EQ,P = -3.5 and %ΔP = 10 into the equation to get %ΔQ = -35.

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 03-01 Apply various elasticities of demand as a quantitative tool to forecast changes in revenues; prices; and/or units sold. Topic: Own Price Elasticity of Demand

163.

Which of the following goods would you expect to have the most inelastic demand? Why? a. Swiss cheese b. Cheese c. Dairy products

Dairy products are expected to have the most inelastic demand because it is the most broadly defined group, followed by cheese and then Swiss cheese. A more specifically defined category has more substitutes and, therefore, more elastic demand.

AACSB: Reflective Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-03 Discuss three factors that influence whether the demand for a given product is relatively elastic or inelastic. Topic: Own Price Elasticity of Demand

3-90

164.

The following estimates have been obtained for the market demand for cereal: ln Q = 9.01 0.68 ln P + 0.75 ln A - 1.3 ln M, where Q is the quantity of cereal, P is the price of cereal, A is the level of advertising, and M is income. Based on this information, determine the effect on the consumption of cereal of a. A 5 percent reduction in the price of cereal. b. A 4 percent increase in income. c. A 20 percent reduction in cereal advertising.

a. Since the own price elasticity is -0.68, we use the elasticity formula to write

Solving for %ΔQ we see that there will be a 3.4 percent increase in

the quantity demanded of cereal. b. There will be a 5.2 percent reduction in the demand for cereal. c. There will be a 15 percent reduction in the demand for cereal.

AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-05 Show how to determine elasticities from linear and log-linear demand functions. Topic: Obtaining Elasticities From Demand Functions

3-91

165.

Suppose you are the manager of a home-building company and the government is considering eliminating the tax deductibility of mortgage interest payments. A typical consumer's marginal tax rate is 25 percent, and the elasticity of demand for new homes is -1.5. Your boss wants to know the impact of the proposed government policy on your business. What do you tell him?

The price is no longer reduced by 25 percent, so the new price is 33.33 percent higher than the discounted price with the deduction. Use the elasticity formula to write

Solving,

we see that the demand for new homes will be reduced by 50 percent.

AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-01 Apply various elasticities of demand as a quantitative tool to forecast changes in revenues; prices; and/or units sold. Topic: Own Price Elasticity of Demand

3-92

166.

You work for an unemployment agency that distributes unemployment checks to unemployed workers in your state. Your boss recently learned that the president proposed a 21 percent increase in the minimum wage, and she wants you to provide her with an estimate of the number of additional workers who will file for unemployment compensation claims next year if the bill passes. Based on library research at a nearby university, you learn that about 200,000 workers in your state earn at or below the current minimum wage. Further library research turns up a study that reports the own price elasticity of demand for minimum wage earners to be 0.30. Based on your findings, how many additional workers do you think will file unemployment claims in your state?

Since the elasticity of demand for minimum wage earners equals - 0.3, the 21 percent increase in the minimum wage would decrease the quantity demanded of minimum wage earners by 6.3 percent. This would translate into .063 × 200,000 = 12,600 lost jobs, and presumably, 12,600 additional workers who file unemployment claims. Your boss may need to hire some additional workers to help process claims if the bill passes.

AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-01 Apply various elasticities of demand as a quantitative tool to forecast changes in revenues; prices; and/or units sold. Topic: Own Price Elasticity of Demand

3-93

167.

The income elasticity of demand for your firm's product is estimated to be 0.75. A recent report in The Wall Street Journal says that national income is expected to decline by 3 percent this year. a. What should you do with your stock of inventories? b. What do you expect to happen to your sales? c. How would you answer parts a and b if you expected a 5 percent increase in income instead of a decrease?

a.

or

The manager should reduce the stock

of inventories by 2.25 percent. b. Sales are expected to decrease by 2.25 percent. c. Using the elasticity formula, The stock of inventories should be increased by 3.75 percent, since sales are expected to rise by 3.75 percent.

AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-01 Apply various elasticities of demand as a quantitative tool to forecast changes in revenues; prices; and/or units sold. Topic: Own Price Elasticity of Demand

3-94

168.

A consumer spends all of her income on only one good. What is the income elasticity of demand for this good? What is the own price elasticity of demand for this good?

Since PQ = M, we can solve for the demand function as Q = M/P. Taking logarithms, we see that ln Q = ln M - ln P. Thus, the income elasticity is 1, and the own price elasticity is -1.

AACSB: Reflective Thinking Blooms: Understand Difficulty: 3 Hard Learning Objective: 03-01 Apply various elasticities of demand as a quantitative tool to forecast changes in revenues; prices; and/or units sold. Topic: Own Price Elasticity of Demand

3-95

169.

As the manager of a local hotel chain, you have hired an econometrician to estimate the demand for one of your hotels (H). The estimation has resulted in the following demand function: QH = 2,000 - PH - 1.5PC - 2.25PSE + 0.8POH + 0.01M, where PH is the price of a room at your hotel, PC is the price of concerts in your area, PSE is the price of sporting events in your area, POH is the average room price at other hotels in your area, and M is the average income in the United States. What would be the impact on your firm of: a. A $500 increase in income? b. A $10 reduction in the price charged by other hotels? c. A $7 increase in the price of tickets to local sporting events? d. A $5 increase in the price of concert tickets, accompanied by an $8 increase in income?

a. ΔQH = (0.01)ΔM = (0.01)(500) = 5. Thus, the demand for your hotel will increase by five units. b. ΔQH = (0.8)ΔPOH = (0.8)(-10) = -8. Thus, the demand for your hotel will decrease by eight units. c. ΔQH = (-2.25)ΔPSE = (-2.25)(7) = -15.75. Thus, the demand for your hotel will decrease by 15.75 units. d. ΔQH = (-1.5)ΔPC + 0.01(ΔM) = -1.5(5) + 0.01(8) = -7.42. Thus, the demand for your hotel will decrease by 7.42 units.

AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-01 Apply various elasticities of demand as a quantitative tool to forecast changes in revenues; prices; and/or units sold. Topic: Own Price Elasticity of Demand

3-96

170.

Your firm's research department has estimated the elasticity of demand for toys to be -0.7. As the manager of a local chain of toy stores, determine the impact of an 8 percent increase in toy prices on your total revenues.

Since the elasticity of demand for toys is less than 1 in absolute value, an increase in toy prices will increase your total revenues.

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 03-01 Apply various elasticities of demand as a quantitative tool to forecast changes in revenues; prices; and/or units sold. Topic: Own Price Elasticity of Demand

3-97

171.

The demand for Wanderlust Travel Services (X) is estimated to be Q x = 22,000 - 2.5Px + 4Py 1M + 1.5Ax, where Ax represents the amount of advertising spent on X and the other variables have their usual interpretations. Suppose the price of good X is $450, good Y sells for $40, the company utilizes 3,000 units of advertising, and consumer income is $20,000. a. Calculate the own price elasticity of demand at these values of prices, income, and advertising. b. Is demand elastic, inelastic, or unitary elastic? c. How will your answers to parts a and b change if the price of Y increases to $50?

a. Qx = 22,000 - 2.5 (450) + 4(40) - 1(20,000) + 1.5(3,000) = 5,535.

b. Since the elasticity is less than 1 in absolute value, demand is inelastic. c. Qx = 22,000 - 2.5(450) + 4(50) - 1(20,000) + 1.5(3,000) = 5,575, so

The elasticity changes from -0.203 to -0.202 as Py changes from $40 to $50.

AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-05 Show how to determine elasticities from linear and log-linear demand functions. Topic: Obtaining Elasticities From Demand Functions

3-98

172.

The demand for company X's product is given by Qx = 12 - 3Px + 4Py. Suppose good X sells for $3.00 per unit and good Y sells for $1.50 per unit. a. Calculate the cross-price elasticity of demand between goods X and Y at the given prices. b. Are goods X and Y substitutes or complements? c. What is the own price elasticity of demand at these prices? d. How would your answers to parts a and c change if the price of X dropped to $2.50 per unit?

a. Qx = 12 - 3(3) + 4(1.5) = 9, so b. They are substitutes.

c. d. Qx = 12 - 3(2.5) + 4(1.5) = 10.5, so

AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-05 Show how to determine elasticities from linear and log-linear demand functions. Topic: Obtaining Elasticities From Demand Functions

3-99

173.

Your firm's research department has estimated the income elasticity of demand for Art Deco lawn furniture to be -0.85. You have just learned that due to an upturn in the economy, consumer incomes are expected to rise by 5 percent next year. How will this event affect your ordering decision for PVC pipe, which is the main component in your furniture?

Using the formula for the income elasticity, we see that the demand for your lawn furniture will be reduced by 4.25 percent this year. You may want to order about 4.25 percent less PVC pipe.

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 03-01 Apply various elasticities of demand as a quantitative tool to forecast changes in revenues; prices; and/or units sold. Topic: Own Price Elasticity of Demand

3-100

174.

Suppose the demand for sunscreen (X) has been estimated to be ln Q x = 5 - 1.7 ln Px + 3 ln S 3 ln Ay, where S denotes the average hours of sunshine per day and A y represents the level of advertising for good Y. a. What would be the impact on demand of a 5 percent increase in the daily amount of sunshine? b. What would be the impact of a 10 percent reduction in the amount of advertising toward good Y? c. What might be good Y in this example?

a. A 5 percent increase in the daily amount of sunshine leads to a 15 percent increase in the demand for sunscreen (X). b. A 10 percent reduction in the amount of advertising toward good Y results in a 30 percent increase in demand for X. c. Beach umbrellas.

AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-01 Apply various elasticities of demand as a quantitative tool to forecast changes in revenues; prices; and/or units sold. Topic: Own Price Elasticity of Demand

3-101

175.

An econometrician has estimated the inverse demand relation P = a + bQ + e and found that

and

= 0.75. Find the approximate 95 percent

confidence interval for the true values of a and b.

A 95 percent confidence interval for a is

Thus, you can be 95 percent

confident that a is within the range of 384 and 416. A 95 percent confidence interval for b is

Thus, you can be 95 percent confident that b is within the range

of -4.25 and -1.25.

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 03-06 Explain how regression analysis may be used to estimate demand functions; and how to interpret and use the output of a regression. Topic: Regression Analysis

3-102

176.

A firm is considering raising its price by 9 percent and has hired an econometrician to estimate the elasticity of demand for its product. The econometrician estimates the parameters of a logliner demand function and reports that the parameter estimate for the elasticity of demand is 1.5 and the standard error of the estimate is 0.3. a. If the firm raises its price by 9 percent, what is the expected change in quantity demanded? b. Approximate the upper and lower bounds on the 95 percent confidence interval for the change in quantity demanded.

a. Using the estimated own price elasticity of -1.5, the 9 percent increase in price is expected to reduce quantity demanded by 13.5 percent. b. The lower bound for the 95 percent confidence interval for the elasticity is -1.5 - 2(.3) = -2.1. Based on this lower bound, the 9 percent increase in price would reduce quantity demanded by 18.9 percent. The upper bound for the 95 percent confidence interval for the elasticity is -1.5 + 2(.3) = -0.9. Based on this upper bound, the 9 percent increase in price would reduce quantity demanded by 8.1 percent. In summary, the manager can be 95 percent confident that the 9 percent price increase will reduce quantity demanded somewhere between 8.1 and 18.9 percent.

AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-06 Explain how regression analysis may be used to estimate demand functions; and how to interpret and use the output of a regression. Topic: Regression Analysis

Related download links: managerial economics and business strategy 8th edition solution manual pdf managerial economics and business strategy test bank pdf managerial economics and business strategy 8th edition test bank pdf managerial economics and business strategy 8th edition test bank free sample 3-103

managerial economics and business strategy 7th edition test bank managerial economics test bank pdf managerial economics 8th edition test bank managerial economics and business strategy 8th edition answer key

3-104