AGEC 105 Study Guide - Midterm Guide: Marginal Product, Average Variable Cost, Arc Elasticity

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AG Econ 105 – Exam 2 Review
Good Price Quantity Demanded
Haircuts Per Week $20
$16
40
60
Manicures Per Week $12
$8
80
120
Use the table above to answer the next three questions. Suppose that the current price for a
haircut is $20 and the current price for a manicure is $12, and Earl has a sale of $4 off the price
of either a haircut or a manicure.
1. The above table shows the prices of two services offered by Earl’s Barber Shop and the
resulting quantities demanded by customers. The price elasticity of demand for
manicures (using Arc elasticity approach) is
a. -1
2. The above table shows the prices of two services offered by Earl’s Barber Shop and the
resulting quantities demanded by customers. The price elasticity of demand for haircuts
(using Arc elasticity approach) is
a. -1.8
3. In the example
a. Haircuts have the smaller absolute change in quantity demanded and the more
elastic demand
4. Which of the following is true?
a. If the cross-price elasticity of demand between two goods is negative, then the
two goods are complements
5. The Dixie Chicken sells 1500 Freddie Burger platters per month at $3.50 each. The own
price elasticity for this platter is estimated to be -1.30. If the Chicken reduces the price
of the platter by 50 cents:
a. How many platters will the Chicken sell?
a.i. 1800 platters
b. What will happen to the Chicken’s monthly revenue?
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b.i. Go up or increase by $150
c. Consumers will be ____ off as a result of this price change because the demand
curve for these platters is _____.
c.i. Better, elastic
6. The own price elasticity of demand for rice was said to be -.1467 while the income
elasticity for rice was said to be -.3664. Given this information, please complete the
following blanks:
a. A 10 percent increase in the quantity of rice coming onto the market would
cause the price of rice to _____ by _____ percent.
a.i. Decrease, 3.664
b. The elasticity of the demand curve is _____.
b.i. 0.1476
c. The income elasticity of demand for rice suggests that rice is an _____ good as
income increases.
c.i. Inferior
d. A 10 percent increase in income would cause the demand for rice to _____ by
_____ percent.
d.i. Decrease, 3.664
7. The cross price elasticity for beef with respect to chicken is 0.0572. The cross price
elasticity for chicken with respect to beef, however, is 0.2927. If the price of beef rose
10 percent, the demand for chicken would ____ by ____ percent. If the price of chicken
rose by 10 percent the demand for beef would ____ by only _____ percent
a. Increase, 2.927, increase, 0.572
8. _____ : a measure of the response of consumption of a good or service to changes in
the price of another good or service.
a. Cross-price elasticity
9. _____ : a measure of the relative response of consumption of a good or service to
changes in price.
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a. Own-price elasticity
10. _____ : substitution of a product for another because the price of the former has
declined or increase
a. Substitution effect
11. _____ : a measure of the relative response of demand to income changes.
a. Income elasticity
12. Which of the following is true?
a. If the cross-price elasticity of demand between two goods is negative, then the
two good are complements
13. The price elasticity of demand measures the responsiveness of quantity demanded to
changes in prices.
a. True
14. A price elasticity of demand -2 for a specific cola means that if the price increases 1
percent, the quantity demanded of the cola will decrease by 2 percent.
a. True
15. A local store notices that when it increase the price of milk from $2.50 to $3.50 per
gallon, it sold the same amount of milk per week (165 gallons). Since everything else
remains the same, we would say the
a. Demand for milk is perfectly inelastic
16. The demand for necessity tends to be
a. Less elastic than the demand for a luxury
17. Level of output at which average total costs equal average revenue or market price
a. Breakeven output
18. The variable costs incurred by the business in the current period per unit of output
a. Average variable costs
19. The change in output or total product the business would achieve in the current period
by expanding the use of an input by another unit
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Document Summary

Use the table above to answer the next three questions. The price elasticity of demand for manicures (using arc elasticity approach) is a. 1: the above table shows the prices of two services offered by earl"s barber shop and the resulting quantities demanded by customers. The price elasticity of demand for haircuts (using arc elasticity approach) is a. In the example: haircuts have the smaller absolute change in quantity demanded and the more elastic demand, which of the following is true? a. If the cross-price elasticity of demand between two goods is negative, then the two goods are complements: the dixie chicken sells 1500 freddie burger platters per month at . 50 each. The own price elasticity for this platter is estimated to be -1. 30. If the chicken reduces the price of the platter by 50 cents: how many platters will the chicken sell? a. i. 1800 platters: what will happen to the chicken"s monthly revenue? b. i.

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