Question

1. What is true at the quantity where total revenue is maximized?

Select one:

a. Demand is inelastic.

b. The elasticity value = 1

c. MR is positive

d. MR is negative

2. "Every company needs to worry about a recession." This statement should be modified because

Select one:

a. companies with a negative cross-price elasticity will likely enjoy more sales because recessions do not affect the sales of complementary products.

b. companies that sell goods with high own-price elasticity of demand will likely enjoy more sales as their prices rise during a recession.

c. companies that sell normal goods will likely enjoy more sales during a recession with falling incomes.

d. companies that sell inferior goods (negative income elasticity) will likely enjoy more sales during a recession with falling incomes.

3. Everyone knows that the biggest rival to your company (Frank's Fantastic Fudge-Filled Fedoras) is Nate's Nutella-eNgorged Neckerchiefs. On a lark and using sales and price data, you estimate the cross-price elasticity between Frank's and Nate's two products to be 0.08, while the cross-price elasticity between Frank's product and Cole's Cocoa-Covered Corduroy Caps is 1.12. Your calculations suggest that

Select one:

a. consumers consider Frank's and Cole's products to be more complementary to each other than are Frank's and Nate's products.

b. consumers consider Frank's and Nate's products to be better substitutes than are Frank's and Cole's products.

c. consumers consider Frank's and Cole's products to be better substitutes than are Frank's and Nate's products.

d. Frank's should be more concerned if Nate's drops the price of their product than if Cole's drops the price of their product.

Answer 1

1. Total revenue is maximum when the demand is unit elastic, that is, absolute value of the price elasticity of demand = 1. When PED = 1, % Change in quantity demanded = % change in Quantity supplied.

Answer: option B

2. In case of inferior goods, demand increases when income falls and vice versa. If a company sells inferior goods, during the recession, people's income will fall and they will demand more of the inferior goods, therefore sales of that company will increase.

Answer: option D

3. The positive cross price elasticity of demand means two goods are substitute of each other (increase in price of one good increases the demand for the other).

The value of the cross price elasticity of demand between Frank's and Nate's, and Frank's and Cole's are positive. But The value of the cross price elasticity of demand between Frank's and Cole's is greater than the value of the cross price elasticity between Frank's and Nate's. Therefore, Consumers find Frank's and Cole's product to be better substitute than Frank's and Nate's.

Answer: option C