Question

1. If a product has a very low price elasticity of demand, then:

sellers will want to produce a lot more of the product when the price increases.

buyers will be very reluctant to buy the product when the price increases.

If buyers are very interested in buying the product, they will still be very interested in buying the product even if the price increases a lot.

buyers will not be very eager to buy the product regardless of the price.

2.

Let's say that a car dealer lowers the price of a certain model car from $32,000 to $26,000. If it observes that it sells 14 cars instead of 10 per month as a result of this price decrease, what is this product's price elasticity of demand?

.44

1.61

5.00

1.00

2.25

3.

Let's say that a flower shop raises the price of a dozen roses by 40% and finds that it sells 100% fewer bouquets of roses. What is the price elasticity of roses for this flower shop?

2.5

200

10

30

.5

4.

A coffee shop notices that after it decreased the price of one of its premium coffees from $5 to $4, its daily revenue from this product decreased from $100 to $96. What is this product's price elasticity of demand? (choose the closest answer)

1.34

.81

.43

.61

2.34

5.

A gas station raises its price and notices that its total revenue decreases. This must mean that gasoline at this gas station around this price is:

price elastic

price inelastic

unit elastic, i.e. not affected by any price changes

causing the gas station to operate at a loss

6.

Average incomes of buyers rises by 20%. As a result, buyers are buying 5% more of a certain product. This means that this product is ___________ and its income elasticity of demand is _____________.

an inferior good; -.50

a normal good; .25

a normal good; 4

an inelastic good; -.50

an inferior good; 2

7.

Let's say that Samsung raises the price of its smart phones from $600 to $700. As a result, Apple finds that it can sell 10% more Iphones. Based on this hypothetical example, what is the cross price elasticity of demand for Iphones relative to Samsung phones?

1.54

-.70

1.25

2

.65

8.

The steeper (closer to vertical) a product's demand curve, the:

the lower its price elasticity of demand

lower the company's total revenue

higher its price elasticity of demand

higher the company's total revenue

9.

Let's say that you know that a product is essential for people's lives, and that this product has very few substitutes (little competition), then you also know that this product has:

a very low price elasticity of demand and if the company raises the price of this product it will decrease its revenue.

a very high price elasticity of demand and if the company raises the price of this product it will increase its revenue.

a very low price elasticity of demand and if the company raises the price of this product it will increase its revenue.

a very high price elasticity of demand and if the company raises the price of this product it will decrease its revenue.

10.

Let's say that you sell health insurance to two groups of buyers: 1. people who work for a company and whose company is paying for the health insurance; 2. people who don't work for a company and who have to pay for the health insurance out of their own pockets. Most likely, the people in group 1 have a _________ price elasticity of demand, and as a result, you can charge a _________ price, compared to those in group 2, in order to increase your revenue.

higher, higher

lower; lower

higher; lower

lower; higher

11.

a ___________ reflects a firm's calculations of how many products it can produce with a certain number of inputs (labor, machines, etc.). A firm can also calculate its average production of labor, which is its ___________, and its marginal production of labor, which is ____________.

production possibilities curve; total production divided by the number of workers; additional production per worker

production function; total production divided by the number of workers; additional production per worker

production function; additional production per worker; total production divided by the number of workers

production possibilities curve; additional production per worker; total production divided by the number of workers

12.

Examples of variable inputs are _________ and _________, and examples of fixed inputs are _________ and __________.

land; heavy machinery; raw materials; labor

labor; heavy machinery; land; raw materials

land; labor; raw materials; heavy machinery

labor; raw materials; land; heavy machinery

13.

The law of diminishing marginal returns reflects business production behavior that shows that:

in the short run, because all inputs are variable, marginal production decreases after a certain point.

in the short run, because certain inputs are fixed, marginal production decreases after a certain point.

in the long run, because certain inputs are fixed, marginal production decreases after a certain point.

in the long run, because all inputs are variable, marginal production increases after a certain point.

14.

Let's say that a business has 9 workers at a cost of $800 per worker per week, 5 machines at a cost per machine of $200 per week, and office space that costs $1,000 per week. The business produces 180 products. If the business wants to produce 200 products, it would have to hire one more worker at $800 per week. What is this business's total, average, and marginal cost at output 200?

total cost = $9,000; average cost = $45; marginal cost = $80.

total cost = $7,600; average cost = $38; marginal cost = $35.

total cost = $8,000; average cost = $35; marginal cost = $800.

total cost = $10,000; average cost = $50; marginal cost = $40.

15.

Labor	Total Production	Marginal Production	Average Production
0	0
2	12
4		9
6			10
8	70

In the above table, the total and marginal production of workers 5 and 6 (the values in the row for worker 6) are, respectively:

30; 30

60; 15

30; 15

60; 30

16.

Labor	Total Production	Marginal Production	Average Production
0	0
4	200
8		140
12			160
16	1,000

In the above table, the total and average production values in the row for worker 8 are, respectively:

320; 40

900; 112.5

760; 95

340; 42.5

17.

If a business hires employees at the minimum wage rate, and the minimum wage is set higher than what the business would pay in the free market (without government interference), then, according to our text:

it reduces the incentive for people to find a job, and it raises the cost of doing business; employment is usually not affected.

it reduces the chances for exploitation, but it raises business costs, and lowers full-time employment.

it increases the chances for exploitation, and it lowers the cost of doing business by giving people more incentive to produce.

it increases the incentive for people to find a job, but it lowers prices that businesses charge their customers, so it lowers their profits.

18.

If you deposit money into a savings account at a bank, and the bank awards you an interest rate of 2%, and the inflation rate is 3%, then:

your nominal interest rate is +1%, and your real interest rate is -1%.

your nominal interest rate is -1%, and your real interest rate is +3%.

your nominal interest rate is +2%, and your real interest rate is -1%.

your nominal interest rate is +2%, and your real interest rate is +1%.

your nominal interest rate is +3%, and your real interest rate is +1%.

19.

A business expands its operations and invests $10,000 now. In 3 years from now, it is expected to earn a return of $13,000. The going interest rate (on investments) is 5%. From a purely financial point of view, was expanding its operations a wise decision?

Yes, because receiving $13,000 in three years, is worth $11,239 now. This is better than having $10,000 now.

No, because receiving $13,000 in three years, is worth $8,295 now. This is worse than having $10,000 now.

No, because receiving $13,000 in three years, is worth $9,447 now. This is worse than having $10,000 now.

Yes, because receiving $13,000 in three years, is worth $10,286 now. This is better than having $10,000 now.

20.

Economists define short run as a period in which _____________ and long run as a period in which _____________.

at least two inputs are fixed; all inputs are variable.

at least one input is fixed; all inputs are variable.

all inputs are fixed; all inputs are variable.

at least one input is fixed; at least one input is variable.

Answer 1

Q1 to Q7.

1.

If a product has a very low price elasticity of demand, then sellers will want to produce a lot more of the product when the price increases. A rise in price will raise revenues for the firm given the demand is inelastic.

2.

P	Q	Change in P	Change inQ	Average P	Average Q	Ed Arc
32000	10
26000	14	-6000	4	29000	12	-1.61

The formula used= (Change in Q/Change in P)*(Average P/Average Q)

3.

Ed=% Change in Quantity demanded/% Change in Price

= 100/40 = 2.5

4.

P	Q	TR	Change in P	Change inQ	Average P	Average Q	Ed Arc
20	5	100
24	4	96	4	-1	22	4.5	-1.22

The formula used= (Change in Q/Change in P)*(Average P/Average Q)

5.

If A gas station raises its price and notices that its total revenue decreases. This must mean that gasoline at this gas station around this price is Elastic. When the demand is inelastic a price rise will raise revenues and if demand is elastic than a price fall will raise revenues for the firm.

6.

Average incomes of buyers rise by 20%. As a result, buyers are buying 5% more of a certain product. This means that this product is a normal good and its income elasticity of demand is 0.25.

Income Ed = % Change in Qty demanded/%Change in income = 5/20 = 0.25

7.

% Change in price of Samsung = (700/600-1)*100 = 16.67%

Ed Cross = % Change in Quantity demanded of Iphones/% Change in price of Samsung

=10/16.67 = 0.60