Managerial Economics (Froeb) EXAM 2 KU Exam Questions With Correct Answers.
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Course
Managerial Economics
Institution
Managerial Economics
Managerial Economics (Froeb) EXAM 2 KU
Exam Questions With Correct Answers.
Individual demand - answerHow many units an individual will purchase at a given price
Aggregate demand - answeralso called market demand
the total number of units that will be purchased by a group of consumers at a give...
Managerial Economics (Froeb) EXAM 2 KU
Exam Questions With Correct Answers.
Individual demand - answer✔How many units an individual will purchase at a given price
Aggregate demand - answer✔also called market demand
the total number of units that will be purchased by a group of consumers at a given price
What kind of decision is pricing? - answer✔Extent decision
When should price be reduced? Increased? - answer✔Reduce price (increase quantity) if MR >
MC
Increase price (reduce quantity) if MR < MC
What is the optimal price? - answer✔Where MR = MC
Price elasticity of demand - answer✔Measure of how responsive quantity demanded is to
changes in price
Price elasticity of demand (e) = (% change in quantity demanded) / (% change in price)
if absolute value of e is >1 then demand is elastic
if absolute value of e is <1 then demand is inelastic
Estimated price elasticity = [(Qt-Q2)/(Q1+Q2)] / i(P1-P2)/(P1+P2)]
this equation is used to estimate demand from a price and quantity change
What happens to revenue when prices increase in a product with elastic demand? -
answer✔Revenue decreases
What happens to revenue when prices increase in a product with inelastic demand? -
answer✔Revenue increases
The more elastic a product is the _____ the optimal price - answer✔lower
The five factors that affect elasticity:
(answer "more" or "less")
1. Products with close substitutes have ____ elastic demand
2. Products with any complements have _____ elastic demand
3. Demand for brands is _____ elastic than industry demand
4. In the long run, demand becomes _____ elastic
5. As price increases, demand becomes _____ elastic - answer✔1. more
2. less
3. more
4. more
5. more
What are three other measures of elasticity that affect demand? - answer✔income elasticity
cross-price elasticity
advertising elasticity
Stay-even analysis - answer✔can be used to determine the quantity change required to offset a
price change
%change quantity = %change price / (%change price + margin)
When is a proposed price increase profitable? (regarding stay-even quantity) - answer✔If the
predicted quantity loss is less than the stay-even quantity
How to use elasticity to forecast changes in demand - answer✔%change Quantity = %change
Price / (%change Price + margin)
Jim has estimated elasticity of demand for gasoline to be -0.7 in the short run and -1.8 in the long
run. A decrease in taxes on gasoline would
a) lower tax revenue in both the short and long run
b) raise tax revenue in both the short and long run
c) raise tax revenue in the short run but lower tax revenue in the long run
d) lower tax revenue in the short run but raise tax revenue in the long run - answer✔c) raise tax
revenue in the short run but lower tax revenue in the long run
Which of the following is true?
a) Nike has a less elastic demand curve than shoes
b) the demand curve for gas is more elastic in the short run than in the long run
c) cigarettes have a more elastic demand than televisions
d) salt has a less elastic demand than ice cream - answer✔d) salt has a less elastic demand than
ice cream
Jim recently graduated from college. His income increased tremendously from $5000 a year to
$60000 a year. He decided instead of renting he will buy a house. What type of goods does this
imply that houses are for Jim? - answer✔normal goods
Which of the following goods has a negative income elasticity of demand?
a) cars
b) items from dollar stores
c) shoes
d) bread - answer✔b) items from dollar stores
An economist estimated the cross-price elasticity for peanut butter and jelly to be 1.5. Based on
this information, we know peanut butter and jelly are what type of goods? -
answer✔Complements
Christine has purchased five bananas and is considering purchasing a sixth. What must be true of
the marginal benefit for her to purchase the extra banana? - answer✔She will purchase if
marginal benefit of the sixth banana exceeds the marginal price
Buyers consider Marlboro cigarettes and Budweiser beer to be complements. If Marlboro just
increased prices, what do you expect will occur in the Budweiser market? - answer✔Demand
will fall and Budweiser would reduce prices
Which of the following is the reason for the existence of consumer surplus?
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