Question

Part I

1. A car manufacturer producers two (2) core products: SUVs (product X) and sports cars (Product Y).    Sports cars are selling at $20,000 per units, and SUVs have a selling price of $40,000 per unit.   Due to changing consumer preferences, the price of sports cars increases by 50%; as a result, the demand for SUVs falls from 10,000 units to 5,000

a. 0.67

3. - 1.675

d. +1.675

b) Your firm offers two core products: X and Y. The cross price elasticity of demand between X and Y is given as 0.15.

Which of the following statements is TRUE?

A 225% increase in the price of X will decrease the demand for Y by 15%

b. A 225% increase in the price of Y will decrease the demand for X by 15%.

c. A 15% increase in the price of X will increase the demand for Y by 2.25%.

d. A 15% increase in the price of Y will increase the demand for X by 2.25%

4. Your analysis of the responsiveness of the quantity demanded of Good X to price changes reveals that the own price elasticity of demand for Good X is -1.5.

If your firm increases the price of Good X by 5%,

1. the quantity demanded of Good X will decrease by 5%.
2. the quantity demanded of Good X will increase by 5%.
3. the quantity demanded of Good X will decrease by 7.5%.
4. the quantity demanded of Good X will increase by 7.5%.

5. Which of the following statements best describes the relationship between short-run supply elasticity and long-run supply elasticity?

1. For products that can be recycled, long-run supply is likely to be more price elastic than short-run supply.
2. For many products, long-run supply is likely to be more price elastic than short-run supply.
3. Both the short-run and long-run elasticities of supply represent the responsiveness of prices to changes in quantities supplied ( for profit-maximizing firms).
4. For many products, long-run supply is likely to be less price elastic than short-run supply because producers (or suppliers) can adjust supply more efficiently in the short-run.

6. When the price of good A is $5, the quantity demanded of good B is 30 units, and when the price of good A increases to $10, the quantity demanded of good B decreases to 15 units. Based on this information, we can conclude that:

1. Goods A and B are complements in consumption because the cross price elasticity coefficient is -0.50.
2. Both goods are inferior (lower demand) goods.
3. Goods A and B are substitutes in consumption.
4. The cross price elasticity of demand of good B with respect to the price of good A is 0.5

7. The firm's production function is given as follows: . qx represents the output produced by the firm, Lx represents the labor input and Kx the capital input. In the long-run, the firm uses both inputs to produce output.

An increase in the supply of capital (K) reduces the cost of capital from $6 per unit to $2 per unit.   As a result, the firm's demand for the labor input (L) decreases from 200 to 120 units.

Based on this information, the cross-price elasticity of labor demand is:

a. -0.25

b. 0.25

c. 0.50

d. 0.75

h) The own price elasticity of demand for Good Y is -1.75.    Management reduces the price of Good Y by 5% to stimulate demand.

As a result of this "pricing strategy,"

1. The firm’s total revenue will increase since demand is price elastic
2. There is no relationship between the firm’s own price elasticity of demand and its total revenue
3. The firm’s total revenue will decrease since demand is price inelastic

1. A measure of the rate of percentage change of quantity demanded with respect to price, holding all other determinants of demand constant is

1. Own price elasticity
2. Cross price elasticity of demand
3. Price elasticity of market equilibrium
4. Income elasticity of demand

10. Demand is considered to be unitary (or unit) elastic when

1. A 10% increase in price results in a 20% increase in quantity demanded
2. A 10% decrease in price results in a 10% decrease in quantity demanded
3. A 10% decrease in price results in a 10% increase un a quantity demanded
4. A 10% increase in a price results in a 20% decrease in quantity demanded

Answer 1

(Question a) Question is incomplete. It's not clear what the question is asking for.

(Question b) Option (d)

Cross-price elasticity = % Change in demand for good X / % Change in price of good Y

0.15 = % Change in demand for good X / % Change in price of good Y

Therefore, when price of good Y increases by 1%, demand for good X increases by 0.15%. So

When price of good Y increases by 15%, demand for good X increases by (15 x 0.15%) = 2.25%.

(Question d) Option (c)

Cross-price elasticity = % Change in quantity demanded of X / % Change in price of X

-1.5 = % Change in quantity demanded of X / 5%

% Change in quantity demanded of X = 5% x (-1.5) = -7.5% (Quantity demanded decreases by 7.5%)

(Question e) Option (b)

Since firms can have more flexibility about inputs in long run than in short run, supply is more elastic in long run than in short run.

(Question f) Option (a)

% Change in price of good A = $(10 - 5)/$5 = $5/$5 = 1 = 100%

% Change in demand for good B = (15 - 30)/30 = -15/30 = -0.5 = -50%

Cross-price elasticity = % Change in demand for good B / % Change in price of good A = -50%/100% = -0.5

Since cross price elasticity < 0, A and B are complements.

NOTE: As per Answering Policy, 1st 4 questions are answered.