ECON 101 Midterm: ECON101 Term Test 2 2009 Spring

1. Grand TV Manufacturer wants to increase the quantity of TVs it sells by 8%. If the price elasticity of demand is 4, the manufacturer must:

a. decrease price by 1.5%.

b. increase price by 1.5%.

c. increase price by 2.0%.

d. decrease price by 2.0%.

2. Suppose that an Italian ice cream firm is facing a linear demand curve and that the current price for the Italian ice cream is set at a point where the price elasticity is 0.7. If the firm decreases the product price,

Select one:

a. the demand becomes less inelastic, and total revenue increases.

b. the demand becomes more inelastic, and total revenue decreases.

c. the demand becomes more inelastic, and total revenue increases.

d. the demand becomes less inelastic, and total revenue decreases.

3. Suppose that in a month, the price of movie rentals decreases from $3.25 to $3. At the same time, the quantity of movie rentals demanded increases from 100 to 120. The price elasticity of demand for movie rentals (calculated using the midpoint formula) is:

a. elastic.

b. zero.

c. inelastic.

d. unitary elastic.

4. The price elasticity of demand for color printers is 1.6, and you would like to see the quantity demanded of color printers increase by 32%. Then the percentage change in price should be:

Select one:

a. 15%.

b. 25%.

c. 10%.

d. 20%.

5. The price of apple increases from $1 to $1.10. At the same time, the quantity of apples demanded decreases from 100 to 90. The price elasticity of demand for apples (calculated using the initial value formula) is:

a. 0.9.

b. 0.02.

c. 1.1.

d. 1.

1. Suppose there is an increase in the supply of a product. Rank the following own price elasticity of demand classifications according to which has BOTH the largest effect on price and the smallest effect on quantity: perfectly (infinitely) elastic, elastic, inelastic, unit elastic, or perfectly (infinitely) inelastic. Diagrams may be useful.

2. If the own price elasticity of demand for beer is approximately unity, what would be the direction of the change (increase, decrease, no change) in total revenue, total cost and profits of an increase in price.

The change in the direction of total revenue is:_________________________________

The change in the direction of total cost is:_________________________________

The change in the direction of profits is:_________________________________

3. 11. The own price elasticity of demand for cigarettes is 0.5. Suppose all of the

cigarette manufacturers colluded to raise prices by 20%. Predict the direction of the change (increase, decrease, no change) in total revenue, total costs and profits of all companies combined if price were to increase.

The change in the direction of total revenue is:_________________________________

The change in the direction of total cost is:_________________________________

The change in the direction of profits is:_________________________________

4. Christmas toys at Thanksgiving time, Christmas toys on Christmas Eve

The product that is more elastic is ________________________

The own price elasticity of demand determinant(s) involved is/are_________________________________________________________________

Answer the following questions:

If a 10% increase in the price of hamburgers leads to a decrease in the quantity demanded of hamburgers by 12%, what is the price elasticity of hamburgers? (Use the formula presented in the video: Episode 16: Elasticity of Demand)

https://www.youtube.com/watch?v=4oj_lnj6pXA&feature=youtu.be&list=PL336C870BEAD3B58B

The video, Episode 16: Characteristics that Determine Elasticity, presents 4 characteristics that determine how elastic the demand for a product is. List each of these. For each one, explain how the level of price elasticity is impacted by it. Does it make prices more or less elastic? Write a separate paragraph for each.

For each of the goods listed below, explain whether demand for it would be elastic or inelastic. Make sure to give specific reasons for your determination. Your discussion of Question 2 relates to this.

Eggs

Concert tickets

A packaged trip to Paris

Landline telephone service

Electricity in your home

A new car

The gasoline demand is inelastic and the demand for t-shirts is elastic. Let us assume that Company A produces and sells gasoline and Company B produces and sells t-shirts.

Explain what happens to total revenue if Company A increases its prices.

Explain what happens to total revenue if Company B increases its price