Exam 4: Demand Analysis

Elasticity. The demand for Penn's Oil motor oil can be characterized by the following point elasticities: price elasticity = -2.5, cross-price elasticity with Value Lean motor oil = 1.5, and income elasticity = 0.75. Indicate whether each of the following statements is true or false, and explain your answer. A. A price increase for Penn's Oil will decrease both the number of units demanded and the total revenue of sellers. B. The cross-price elasticity indicates that a 2% increase in the price of Value Lean will cause a 3% increase in Penn's Oil demand. C. Demand for Penn's Oil is price elastic and the motor oil is a cyclical, normal good. D. Falling Value Lean prices will definitely increase revenues received by manufacturers of both brands of oil. E. A 0.9% price reduction for Penn's Oil would be necessary to overcome the effects of a 3% decline in income.

An increase in the quantity purchased following a price cut is:

Optimal Price. Last week, Wally's Burgers, Inc. reduced the average price on the 1/2-pound Papa burger by 1%. In response, sales jumped by 2%. A. Calculate the point price elasticity of demand for Papa burgers. B. Calculate the optimal price for Papa burgers if marginal cost is $1 per unit.

Demand Analysis. KRDY-FM is contemplating a T-shirt advertising promotion. Monthly sales data from T-shirt shops marketing the "Listen to KRDY-FM" design indicate that: where Q is T-shirt sales and P is price.

Demand Analysis. The CSI DVD (season four) has been a hot seller during recent weeks. An analysis of weekly demand shows: where Q is DVD sales and P is price.

Demand Analysis. The San Diego Zoo is contemplating a stuffed panda bear advertising promotion. Annualized sales data from local shops marketing the "Can't Bear it When You're Away" bear indicate that: where Q is Panda bear sales and P is price.

If the income elasticity of demand for a good is greater than one, the good is:

Arc Income Elasticity. The Omaha Best Buy sells seventy-five 50" HDTVs per week whereas the Des Moines store sells only fifty 50" HDTVs per week. Based upon data obtained in the financing process, Omaha customers earn an average income of $55,000 per year, while Des Moines customers earn $45,000 per year. A. Calculate the implied arc income elasticity of demand. B. How would you characterize demand for these 50" HDTVs?

Given limited budgets, consumers obtain the most satisfaction if they purchase goods and services that:

A direct relation exists between the price of one product and the demand for:

When preferences are transitive, consumers are able to:

Goods for which e_I > 1 are often referred to as:

Consumer Surplus. Explain why each of the following statements is true or false. A. Consumer surplus exists if an individual consumer is able to buy something for less than the maximum amount they are willing to pay. B. Consumer surplus is the value of purchased goods and services and equals the amount paid to sellers. C. A firm can enhance profits by charging each customer a per-unit fee equal to marginal cost, plus a fixed fee equal to the amount of consumer surplus generated at that per-unit fee. D. The optimal bundle price is a single lump sum amount equal to the total area under the demand curve at that point. E. If exact information about the value of each individual product for each individual consumer was available, the firm could earn maximum profits by precisely tying the price charged to the marginal value derived by each customer.

The increase in overall consumption made possible by a price cut is the:

The demand for a product tends to be inelastic if:

When marginal cost is greater than zero, the profit-maximizing point price elasticity of demand must be:

Income Elasticity. The Electronics Warehouse, Inc. is a leading retailer of home theater systems. Demand for home theater systems is sensitive to changes in national income. Electronics retailing is highly competitive, so retail demand for home theater systems is also very price-sensitive. During the past year, the Electronics Warehouse sold 550,000 home theater systems at an average retail price of $4,000 per unit. This year, GDP per household is expected to fall from $58,800 to $53,200 as the nation enters a steep recession. Without any price change, the Electronics Warehouse expects current-year sales to fall to 450,000 units. A. Calculate the implied arc income elasticity of demand. B. Given the projected fall in income, the sales manager believes that current volume of 550,000 units could only be maintained with a price cut of $500 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?

The marginal rate of substitution is always equal to:

Arc Income Elasticity. Glenco Motors sells an average of 20 Toyota Camry XLE four-door sedans per month. Evanston Toyota sells twice as many. Based upon data obtained in the financing process, Glenco customers earn an average household income of $100,000 per year, while Evanston customers earn $125,000 per year. A. Calculate the implied arc income elasticity of demand. B. How would you characterize demand for these Toyota Camrys?

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%.