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MULTIPLE CHOICE
8. When the product demand curve is Q = 140 - 10P, and price is decreased
from P1 = $10 to P2 = $9, the arc price elasticity of demand is:
a. -0.1
b. -3
c. -4
d. -10
ANS: B
9. If the point price elasticity of demand equals -2 and the marginal cost per
unit is $5, the optimal price is:
a. $5
b. $10
c. $2
d. impossible to determine without further information.
ANS: B
12. Elasticity. The demand for mini cassette players can be characterized by
the following point elasticities: price elasticity = -2, cross-price elasticity with AA
Alkaline batteries = -1.5, and income elasticity = 3. Indicate whether each of the
following statements is true or false, and explain your answer.
A. A price increase for cassette players will decrease both the number
of units demanded and the total revenue of sellers.
C. Demand for cassette players is price elastic and they are cyclical
normal goods.
ANS:
A. True. A price increase will always decrease units sold, given a
downward sloping demand curve. The negative sign on the price
elasticity indicates that this is indeed the case here. The fact that
price elasticity equals -2 indicates that demand is elastic with
respect to price, and therefore that a price increase will also
decrease total revenues.
C. True. Demand is price elastic (see part a). Because the income
elasticity is positive, cassette players are a normal good. Moreover,
because the income elasticity is greater than one, cassette player
demand is also cyclical.
13. Demand Analysis. The Crank Yankers DVD (season two) has been a hot
seller during recent weeks. An analysis of weekly demand shows:
Q = 3,000 - 90P
ANS:
A. Q = 3,000 - 90P
= 3,000 - 90(20)
= 1,200
= -90
= -1.5 (elastic)
14. Optimal Price. Last week, Discount Food Stores, Inc. reduced the average
price on the 22 ounce size of Dishwashing Liquid by 1%. In response, sales
jumped by 8%.
A. Calculate the point price elasticity of demand for Dishwashing
Liquid.
ANS:
A.
=
= -8 (elastic)
B. The optimal price is found setting MC = MR and solving for P where:
MC = MR = P
0.7 = P
0.7 = 0.875P
P = 0.8 or 80
15. Arc Price Elasticity. Assume that amazon.com dropped the price on a
men's Seiko watch (SGF719) from $120 to $60, and sales jumped from 50 to 100
units per day.
ANS:
A.
=
= -1
During the past year, Deluxe sold 28 million square yards (units) of carpeting at
an average wholesale price of $16 per unit. This year, GNP per capita is expected
to fall from $19,000 to $17,000 as the nation enters a steep recession. Without
any price change, Deluxe expects current-year sales to fall to 20 million units.
B. Given the projected fall in income, the sales manager believes that
current volume of 28 million units could only be maintained with a
price cut of $2 per unit. On this basis, calculate the implied arc
price elasticity of demand.
C. Holding all else equal, would a further increase in price result in
higher or lower total revenue?
ANS:
A.
=
=3
=
= -2.5 (elastic)
22. When PX = $60, MPX = 5 and MPY = 2, relative employment levels are
optimal provided:
a. PY = 16.7.
b. PY = $24.
c. PY = $60.
d. PY = $150.
ANS: B
23. When PX = $100, MPX = 10 and MRQ = $5, the marginal revenue product of
X equals:
a. $100.
b. $50.
c. $10.
d. $5.
ANS: B
25. A firm will maximize profits by employing the quantity of each input where
the marginal:
a. revenue product of each input equals its price.
b. revenue equals the price of each input.
c. product of each input is equal.
d. product of each input equals its price.
ANS: A
26. Optimal Input Mix. Hydraulics Ltd. has designed a pipeline that provides a
throughput of 70,000 gallons of water per 24-hour period. If the diameter of the
pipeline were increased by 1 inch, throughput would increase by 4,000 gallons
per day. Alternatively, throughput could be increased by 6,000 gallons per day
using the original pipe diameter with pumps that had 100 more horsepower.
ANS:
B. No. The rule for optimal input proportions is:
=
0.02 0.10
27. Optimal Input Level. U-Do-It Furniture, Inc., sells hardwood chairs, in both kits
and fully assembled forms. Customers who assemble their own chairs benefit
from the lower kit price of $35 per chair. "Full-service" customers enjoy the luxury
of an assembled chair, but pay a higher price of $60 per chair. Both kit and fully
assembled chair prices are stable. The company has observed the following
relation between the number of assembly workers employed per day and
assembled chair output:
Number of
Workers Finished
per day Chairs
0 0
1 5
2 9
3 12
4 14
5 15
C. What is the highest daily wage rate U-Do-It Furniture would pay to
hire four assemblers per day?
ANS:
Net Marginal
Number of Fully Marginal Revenue
Assembler Assemble Product Product
s d of Labor of Labor
per Day Output (3) (4)=(3)$25
(1) (2)
0 0 -- --
1 5 5 $125
2 9 4 100
3 12 3 75
4 14 2 50
5 15 1 25
C. From the table above, the MRPA=4 = $50. Thus, a daily wage of $50
per assembler is the most U-Do-It Furniture would be willing to pay
to hire a staff of 4 assemblers.
C. What is the economic breakeven number of units for this operation? (Assume a $1.50 price
and ignore interest costs associated with the timing of the lease payments.)
=
= 26,000 units
29. Profit Contribution Analysis. Ben Laden Rugs, Inc., sells hand-made cotton rugs to tourists at a price of $50.
Of this amount, $40 is profit contribution. Ben Laden is considering an attempt to differentiate his product from
several other competitors by using high quality natural herb dyes. Doing so would increase Ben Laden's unit
cost by $15 per rug. Current annual profits are $35,000 on 1,000 rug sales.
A. Assuming average variable costs are constant at all output levels, what is Ben Laden's total
cost function before the proposed change?
B. What will the total cost function be if high quality natural herb dyes are used?
C. Assume rug prices remain stable at $50. What percentage increase in sales would be
necessary to maintain current profit levels?
ANS:
A. From the definition of profit contribution we know that on a per unit basis:
= TR - TC
= TR - TVC - TFC
= (P Q) - (AVC Q) - TFC
$35,000 = $50(1,000) - $10(1,000) - TFC
$35,000 = $40,000 - TFC
TFC = $5,000
C. The new number of rug sales necessary to maintain current profit levels would be:
= (P Q) - (AVC Q) - TFC
$35,000 = $50Q - $25Q - $5,000
25Q = 40,000
Q = 1,600
Percentage increase in Q = = 0.6 or 60%.
Thus, a 60% increase in rug sales would be needed to maintain current profit levels.