Exam 4: Demand Analysis

All combinations of goods and services that provide the same utility are identified by the:

A utility function is:

If e_P = -3 and MC = $0.66, the profit-maximizing price is:

If two services provide the same amount of satisfaction or utility, the consumer is said to display:

With elastic demand:

A utility function is a descriptive statement that relates total utility to:

Income Elasticity. Deluxe Carpeting, Inc., is a leading manufacturer of stain-resistant carpeting. Demand for Deluxe products is tied to the overall pace of building and remodeling activity and, therefore, is sensitive to changes in national income. The carpet manufacturing industry is highly competitive, so Deluxe demand is also very price-sensitive. During the past year, Deluxe sold 28 million square feet of carpeting at an average wholesale price of $16 per square foot. This year, GDP per capita is expected to fall from $57,000 to $51,000 as the nation enters a steep recession. Without any price change, Deluxe expects current-year sales to fall to 20 million 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 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?

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

According to the law of diminishing marginal utility:

A product that enjoys rapidly growing demand over time is likely to be:

Utility Theory. Determine whether each of the following statements is true or false. Explain why. A. According to the theory of consumer behavior, more is not always better. B. Consumers must know how much one product is preferred over another in order to make informed consumption decisions. C. A utility function is a descriptive statement that relates satisfaction or well-being to the consumption of goods and services. D. The nonsatiation principle is specific to a given time and place. E. Total utility measures the consumer's overall level of satisfaction derived from consumption activities

Price Elasticity. Z-Best Pizza recently decided to raise its regular price on medium pizzas from $9 to $12 following increases in the costs of labor and materials. Unfortunately, sales dropped sharply from 8,100 to 4,500 pizzas per month. In an effort to regain lost sales, Z-Best ran a coupon promotion featuring $5 off the new regular price. Coupon printing and distribution costs totaled $100, and caused only a modest increase in the typical advertising budget of $2,400 per month. The promotion was judged a success as it proved highly popular with consumers. In the period prior to expiration, coupons were used on 40% of all purchases and monthly sales rose to 7,500 pizzas. A. Calculate the arc price elasticity implied by the initial response to Z-Best's price increase. B. Calculate the effective price reduction resulting from the coupon promotion. C. In light of this price reduction, and assuming no change in the price elasticity of demand, calculate Z-Best's arc advertising elasticity. D. Why might the true arc advertising elasticity differ from that calculated in Part C?

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. B. The cross-price elasticity indicates that a 2% reduction in the price of cassette players will cause a 3% increase in battery demand. C. Demand for cassette players is price elastic and they are cyclical normal goods. D. Falling battery prices will definitely increase revenues received by sellers of both cassette players and batteries. E. A 3% price reduction in cassette players would be necessary to overcome the effects of a 2% decline in income.

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:

An indifference curve is a set of market baskets that:

Consumer Preferences. Indicate whether each of the following statements is true or false. Explain why. A. According to the more is better principle, all goods and services are desirable in the sense of being able to satisfy consumer wants. B. When preferences are complete, consumers know how much a given good or service is preferred compared to another good or service. C. The nonsatiation principle dictates that each incremental unit of consumption causes marginal utility to rise. D. If two services provide the same amount of satisfaction or utility, the consumer is said to display indifference between the two. E. The consumer's understanding of cardinal utility makes possible a rank ordering of preferred goods and services.

Optimal Price. Last month, Forest Lumber, Inc. reduced the average price on the eight-foot pine 2´4s by 1%. In response, sales jumped by 4%. A. Calculate the point price elasticity of demand for eight-foot 2´4s. B. Calculate the optimal price for eight-foot 2´4s if marginal cost is $1.50 per unit.

Indifference Curves. Confirm that each of the following statements is true or false. Explain why. A. Intersecting indifference curves would reflect a violation of the "more is better" principle. B. Indifference curves must have positive slope. C. Higher indifference curves are better. D. The law of diminishing marginal utility gives indifference curves a bowed outward, or convex to the origin, appearance E. Indifference curves represents all market baskets that provide a given consumer the same amount of utility or satisfaction.

Substitutes and Complements. Determine whether each of the following statements is true or false. Indicate why. A. Substitutes are goods and services that become more desirable when consumed together. B. Complements are goods and services that can be used to fulfill a similar need or desire. C. When goods and service can be freely but imperfectly substituted, indifference curves have a U-shape. D. Perfect substitutes are goods and services that satisfy the same need or desire and have a L-shaped appearance.. E. Perfect complements are goods and services consumed together in the same combination and have a straight-line appearance.

Point elasticity measures elasticity: