Testbank Chapter5 New

7/23/2019 Testbank Chapter5 New

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Presented by Suong Jian & Liu Yan, MGMT Panel , Guangdong University of Finance.

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CHAPTER 5DEMAND ANALYSIS

MULTIPLE CHOICE

1. Point elasticity measures elasticity:

a. over a given range of a function.b. at a spot on a function.c. over a given range along a function.d. before non-price effects.

2. Arc elasticity is measured:a. over a given range of a function.b. at a spot on a function.c. over a given range along a function.d. before non-price effects.

3. With elastic demand, a price increase will:a. decrease marginal revenue.b. decrease total revenue.c. increase total revenue.d. decrease marginal revenue and total revenue.

4. With unitary elasticity of demand, a price increase will:a. be associated with zero marginal revenue.

b. decrease total revenue.c. increase total revenue.d. decrease marginal and total revenue.

5. With inelastic demand, a price increase produces:a. a less than proportionate decline in quantity demanded.b. lower total revenue.c. lower marginal revenue.d. lower marginal and total revenue.

6. With inelastic demand, a price increase produces:a. higher profits.b. lower profits.c. lower marginal revenue.d. lower total revenue.

7. A direct relation exists between the price of one product and the demand for:a. complements.


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b. substitutes.c. normal goods.d. inferior goods.

8. The demand for a product tends to be inelastic if:a. it is expensive.b. a small proportion of consumer's income is spent on the good.c. consumers are quick to respond to price changes.d. it has many substitutes.

9. Two products are complements if the:a. cross-price elasticity of demand is less than zero.b. cross-price elasticity of demand equals zero.c. cross-price elasticity of demand is greater than zero.d. price elasticity of demand for each good is greater than zero.

10. If the income elasticity of demand for a good is greater than one, the good is:a. a noncyclical normal good.b. a cyclical normal good.c. neither a normal nor an inferior good.d. an inferior good.

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

a. a noncyclical normal good.b. a cyclical normal good.c. neither a normal nor an inferior good.d. an inferior good.

12. The point advertising elasticity reveals the:a. percentage change in demand following a change in advertising.b. percentage change in the quantity demanded following a change in advertising.c. percentage change in advertising following a change in the quantity demanded.d. percentage change in advertising following a change in demand.

13. When the product demand curve is Q = 140 - 10P, and price is decreased from P1= $10 to P2= $9, thearc price elasticity of demand is:a. -0.1b. -3c. -4d. -10


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14. If the point price elasticity of demand equals -2 and the marginal cost per unit is $5, the optimal priceis:a. $5b. $10c. $2d. impossible to determine without further information.

15. The concept of cross-price elasticity is used to examine the responsiveness of demand:a. to changes in income.b. for one product to changes in the price of another.c. to changes in "own" price.d. to changes in income.

16. When the cross-price elasticity PX= 3:a. demand rises by 3% with a 1% increase in the price of X.b. the quantity demanded rises by 3% with a 1% increase in the price of X.c. the quantity demanded rises by 1% with a 3% increase in the price of X.d. demand rises by 1% with a 3% increase in the price of X.

17. Goods for which I> 1 are often referred to as:a. cyclical normal goods.b. noncyclical normal goods.c. being relatively unaffected by changing income.d. inferior goods.

18. If P= -3 and MC = $0.66, the profit-maximizing price is:a. $3b. $0.99c. $0.66d. $1.98

19. In demand analysis, endogenous variables include:a. the weather.b. consumer incomes.c. interest rates.d. company advertising.

20. In demand analysis, factors within the control of the firm are called:a. independent variables.b. exogenous variables.c. endogenous variables.d. nonrandom variables.


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21. Arc elasticity:a. gives accurate estimates of the effect on Y of very small (less than 5%) changes in X.b. varies at different points along a function.c. measures the effect on a dependent variable Y of a marginal change in an independent

variable X.

d. measures the effect of change in a dependent variable Y of more than a marginal amounton an independent variable X.

22. In terms of advertising, the expected change in demand following a one-unit ($1,000) change inadvertising is:a. A/Qb. Q/Ac. Ad. P

23. With elastic demand:a. a given percentage increase in price causes quantity to decrease by a larger percentage.b. |P| > 1 and the relative change in quantity is smaller than the relative change in price.c. a price increase raises total revenued. A price decrease causes total revenues to fall.

24. When marginal cost is greater than zero, the profit-maximizing point price elasticity of demand mustbe:a. greater than zero but less than one.

b. equal to one.c. greater than one.d. equal to zero.

25. When the product demand curve is P = $5 - $0.05Q, and Q = 40, the point price elasticity of demandis:a. -2/3b. -3/2c. -8/3d. -3/8

PROBLEM

1. Elasticity. The demand for mini cassette players can be characterized by the following pointelasticities: price elasticity = -2, cross-price elasticity with AA Alkaline batteries = -1.5, and incomeelasticity = 3. Indicate whether each of the following statements is true or false, and explain youranswer.

A. A price increase for cassette players will decrease both the number of units demanded and


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the total revenue of sellers.

B. The cross-price elasticity indicates that a 2% reduction in the price of cassette players willcause 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 cassetteplayers and batteries.

E. A 3% price reduction in cassette players would be necessary to overcome the effects of a 2%decline in income.

2. 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 thetotal revenue of sellers.

B. The cross-price elasticity indicates that a 2% increase in the price of Value Lean will cause a3% 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 ofboth 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.

3. 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

where Q is DVD sales and P is price.

A. How many DVDs could be sold at a $20 price?

B. Calculate the point price elasticity of demand at a price of $20.

4. Demand Analysis. The South Park DVD (season three) has been a slow seller during recent months.An analysis of monthly demand shows:

Q = 5,000 - 160P


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5. Demand Analysis. The CSI DVD (season four) has been a hot seller during recent weeks. An analysisof weekly demand shows:

Q = 15,000 - 500P,




6. Demand Analysis. KRDY-FM is contemplating a T-shirt advertising promotion. Monthly sales datafrom T-shirt shops marketing the "Listen to KRDY-FM" design indicate that:

Q = 15,000 - 800P,

where Q is T-shirt sales and P is price.

A. How many T-shirts could KRDY-FM sell at $15 each?

B. What price would KRDY-FM have to charge to sell 5,000 T-shirts?

C. At what price would T-shirt sales equal zero?

D. How many T-shirts could be given away?

E. Calculate the point price elasticity of demand at a price of $15.

7. 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 indicatethat:

Q = 50,000 - 1,000P

where Q is Panda bear sales and P is price.

A. How many pandas could the zoo sell at $30 each?

B. What price would the zoo have to charge to sell 25,000 pandas?

C. At what price would panda sales equal zero?


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D. How many bears could be given away?


8. Demand Analysis. Robert E. Lee Grade School is contemplating a chocolate bar fund raiser. Weeklysales data from Mrs. Grant's fifth grade class indicate that:

Q = 4,000 - 1,000P,

where Q is chocolate bar sales and P is price.

A. How many chocolate bars could be sold at $2 each?

B. What price would have to be charged to sell 2,500 chocolate bars?

C. At what price would sales equal zero?

D. How many chocolate bars could be given away?


9. Demand Analysis. Aspen, Colorado is engaging in a bumper-sticker advertising campaign. Monthlysales data from ski shops selling the "Don't Worry-Be Happy (in Aspen)" bumper-stickers indicatethat:

Q = 6,000 - 2,000P

where Q is bumper-sticker sales and P is price.

A. How many bumper-stickers could Aspen sell at $2 each?

B. What price would Aspen have to charge to sell 5,000 bumper-stickers?

C. At what price would bumper-sticker sales equal zero?

D. How many bumper-stickers could be given away?


10. Optimal Price. Last week, Discount Food Stores, Inc. reduced the average price on the 22 ounce sizeof Dishwashing Liquid by 1%. In response, sales jumped by 8%.

A. Calculate the point price elasticity of demand for Dishwashing Liquid.

B. Calculate the optimal price for Dishwashing Liquid if marginal cost is 70 per unit.


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11. Optimal Price. Last week, Wally's Burgers, Inc. reduced the average price on the 1/2-pound Papaburger 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.

12. Optimal Price. Last month, Forest Lumber, Inc. reduced the average price on the eight-foot pine 24sby 1%. In response, sales jumped by 4%.

A. Calculate the point price elasticity of demand for eight-foot 24s.

B. Calculate the optimal price for eight-foot 24s if marginal cost is $1.50 per unit.

13. Optimal Price. Last month, Rick's Bike Shop, Inc. increased the price on the 24 ounce can of bearinggrease by 1%. In response, sales dropped by 4%.

A. Calculate the point price elasticity of demand for bearing grease.

B. Calculate the optimal price for bearing grease if marginal cost is $4.50 per unit.

14. 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.

A. Calculate the implied arc price elasticity of demand.

B. Is a further price decrease warranted? Why or why not?

15. Arc Price Elasticity. Assume that amazon.com cut the price on a 1.10ct Princess Cut DiamondSolitaire engagement ring from $4,500 to $2,500, and sales rose from 50 to 75 units per week.

A. Calculate the implied arc price elasticity of demand.

B. Is a further price decrease warranted? Why or why not?

16. Arc Income Elasticity. Glenco Motors sells an average of 20 Toyota Camry XLE four-door sedansper 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 customersearn $125,000 per year.


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A. Calculate the implied arc income elasticity of demand.

B. How would you characterize demand for these Toyota Camrys?

17. Cross-Price Elasticity. During the past year, the average price of lots along Lake Michigan in CarolBeach rose from $2,500 to $3,000 per foot of lakefront. At the same time, sales of new homes locatedoff the Lake rose from 40 to 70 units.

A. Calculate the implied cross-price elasticity of demand.

B. Are lakefront lots and new homes complements or substitutes? Why?

18. Elasticity Analysis. Bloomington's, Inc. is a retailer of distinctive clothing. At the end of thecompany's fiscal year, you have been asked to evaluate sales of traditional wool suits and classicblazers using the following data:

Month

Number of

Suits Sold,

Q

Suit

Advertising

Expenditures

A

Suit

Price

P

Blazer

Price

PBJuly 400 $50,000 $700 $350August 500 50,000 650 350September 700 55,000 650 350October 900 55,000 650 450November 1,000 65,000 700 450December 600 65,000 700 350January 500 60,000 800 350February 700 60,000 700 350March 800 60,000 650 300April 900 63,000 600 300May 700 57,000 600 300June 500 57,000 750 300In particular, you have been asked to estimate relevant demand elasticities. Remember that in order toestimate the required elasticities, you should only consider months when the other important factorsconsidered above have not changed. Note also that by restricting your analysis to consecutive months,changes in any additional factors not explicitly included in the analysis are less likely to affectestimated elasticities. Finally, the average arc elasticity of demand for each factor is simply theaverage of monthly elasticities calculated over the past year.

A. Indicate whether there was a change or no change in each respective variable for eachmonth-pair during the past year.

Month-Pair

Suit

Advertising

Expentitures

A

Suit

Price

P

Blazer

Price

PBJuly-Aug. __________ __________ __________Aug.-Sept. __________ __________ __________


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Sept-Oct. __________ __________ __________Oct.-Nov. __________ __________ __________Nov.-Dec. __________ __________ __________Dec.-Jan. __________ __________ __________Jan.-Feb. __________ __________ __________Feb.-March __________ __________ __________

March-April __________ __________ __________April-May __________ __________ __________May-June __________ __________ __________

B. Calculate and interpret the average arc advertising elasticity of demand for suits.

C. Calculate and interpret the average arc price elasticity of demand for suits.

D. Calculate and interpret the average arc cross-price elasticity of demand between suits andblazers.

19. Elasticity Analysis. Almost Famous Footwear, Inc., is a retailer of bargain-priced shoes. At the end ofthe company's fiscal year, you have been asked to evaluate sales of its traditional business wing-tip andloafer dress shoes using the following data:

Month

Pairs of

Wing-Tips

Sold

Q

Wing-Tip

Advertising

Expenditures

A

Wing-Tips

Price

P

Loafer

Price

PLJuly 30,000 $100,000 $110 $70August 50,000 100,000 90 70September 60,000 120,000 90 70

October 100,000 120,000 90 90November 120,000 140,000 100 90December 80,000 140,000 100 70January 45,000 125,000 120 70February 75,000 125,000 100 70March 85,000 125,000 90 60April 105,000 130,000 80 60May 75,000 110,000 80 60June 45,000 110,000 120 60In particular, you have been asked to estimate relevant demand elasticities. Remember that in order toestimate the required elasticities, you should only consider months when the other important factors

considered above have not changed. Note also that by restricting your analysis to consecutive months,changes in any additional factors not explicitly included in the analysis are less likely to affectestimated elasticities. Finally, the average arc elasticity of demand for each factor is simply theaverage of monthly elasticities calculated over the past year.

A. Indicate whether there was a change or no change in each respective variable for eachmonth-pair during the past year.

Wing-Tip

Advertising

Expentitures

Wing-Tip

Price

Loafer

Price


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Month-Pair A P PBJuly-Aug. __________ __________ __________Aug.-Sept. __________ __________ __________Sept-Oct. __________ __________ __________Oct.-Nov. __________ __________ __________Nov.-Dec. __________ __________ __________

Dec.-Jan. __________ __________ __________Jan.-Feb. __________ __________ __________Feb.-March __________ __________ __________March-April __________ __________ __________April-May __________ __________ __________May-June __________ __________ __________

B. Calculate and interpret the average arc advertising elasticity of demand for wing-tips.

C. Calculate and interpret the average arc price elasticity of demand for wing-tips.

D. Calculate and interpret the average arc cross-price elasticity of demand between wing-tips

and loafers.

20. 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 highlycompetitive, so Deluxe's demand is also very price-sensitive.

During the past year, Deluxe sold 28 million square yards (units) of carpeting at an average wholesaleprice of $16 per unit. This year, GNP per capita is expected to fall from $19,000 to $17,000 as thenation 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 28million units could only be maintained with a price cut of $2 per unit. On this basis, calculatethe implied arc price elasticity of demand.

C. Holding all else equal, would a further increase in price result in higher or lower totalrevenue?

21. 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 ishighly competitive, so retail demand for home theater systems is also very price-sensitive. During thepast 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 thenation enters a steep recession. Without any price change, the Electronics Warehouse expectscurrent-year sales to fall to 450,000 units.



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B. Given the projected fall in income, the sales manager believes that current volume of550,000 units could only be maintained with a price cut of $500 per unit. On this basis,calculate the implied arc price elasticity of demand.


22. Income Elasticity.CarZone, Inc., is a leading retailer of replacement car parts and accessories.Demand for replacement car parts and accessories is tied to the overall pace of new car sales and,therefore, is sensitive to changes in national income. The replacement car parts and accessoriesindustry is also very price sensitive. During the past year, CarZone sold 150,000 pairs of brake shoesat an average wholesale price of $13 per pair. This year, per capita income is expected to fall from$33,600 to $30,400 as the nation enters a steep recession. Without any price change, CarZone expectscurrent-year sales to fall to 100,000 units.


B. Given the projected fall in income, the sales manager believes the current volume of 150,000units could only be maintained with a price cut of $1 per unit. On this basis, calculate theimplied arc price elasticity of demand.


23. Income Elasticity. Environmental Interiors, Inc. is a leading distributor of potted plants and theirmaintenance for business environments. Demand for Environmental Interior services is tied to theoverall pace of business activity and, therefore, is sensitive to changes in national income. Thegreenery service sector is highly competitive, so Environmental Interiors' demand is also veryprice-sensitive. During the past year, Environmental Interiors sold 10,500 potted plants at an averagewholesale price of $25 per plant. This year, per capita income is expected to fall from $34,200 to$30,600 as the nation enters a steep recession. Without any price change, Interior's expectscurrent-year sales to fall to 7,500 potted plants.


B. Given the projected fall in income, the sales manager believes the current volume of 10,500plants could only be maintained with a price cut of $5 per unit. On this basis, calculate theimplied arc price elasticity of demand.



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24. 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 from8,100 to 4,500 pizzas per month. In an effort to regain lost sales, Z-Best ran a coupon promotionfeaturing $5 off the new regular price. Coupon printing and distribution costs totaled $100, and causedonly a modest increase in the typical advertising budget of $2,400 per month. The promotion wasjudged 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?

25. Price and Advertising Elasticity. EZ Auto Wash recently decided to raise its regular price on washand wax cycles from $5 to $7 following increases in the costs of equipment and materials.Unfortunately, sales dropped sharply from 6,000 to 2,000 washes per month. In an effort to regain lostsales, EZ ran a coupon promotion featuring $4 off the new regular price. Coupon printing anddistribution costs totaled $100, and caused only a modest increase in the typical advertising budget of$1,650 per month. The promotion was judged a success as it proved highly popular with consumers. Inthe period prior to expiration, coupons were used on 25% of all purchases and monthly sales rose to3,600 washes.

A. Calculate the arc price elasticity implied by the initial response to EZ'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 EZ's arc advertising elasticity.

D. Why might the true arc advertising elasticity differ from that calculated in part C?

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Testbank Chapter5 New