Managerial economics and business strategy test bank 8th edtion baye prince

Managerial Economics And Business Strategy Test Bank 8th Edtion Baye Prince Chapter 03 Quantitative Demand Analysis Test Bank With Answer Key Multiple Choice Questions 3-1 Assume that the price elasticity of demand is -2 for a certain firm's product If the firm raises price, the firm's managers can expect total revenue to: A decrease B increase C remain constant D either increase or remain constant, depending upon the size of the price increase AACSB: Reflective Thinking Blooms: Remember Difficulty: Easy Learning Objective: 03-02 Illustrate the relationship between the elasticity of demand and total revenues Topic: Own Price Elasticity of Demand A price elasticity of zero corresponds to a demand curve that is: A horizontal B downward sloping with a slope always equal to C vertical D either vertical or horizontal AACSB: Reflective Thinking Blooms: Remember Difficulty: Medium Learning Objective: 03-02 Illustrate the relationship between the elasticity of demand and total revenues Topic: Own Price Elasticity of Demand 3-2 As we move down along a linear demand curve, the price elasticity of demand becomes more: A elastic B inelastic C log-linear D variable AACSB: Reflective Thinking Blooms: Remember Difficulty: Medium Learning Objective: 03-02 Illustrate the relationship between the elasticity of demand and total revenues Topic: Own Price Elasticity of Demand If the demand for a product is Qxd = 10 - ln Px, then product x is: A elastic B inelastic C unitary elastic D Cannot be determined without more information AACSB: Reflective Thinking Blooms: Remember Difficulty: Easy Learning Objective: 03-05 Show how to determine elasticities from linear and log-linear demand functions Topic: Obtaining Elasticities From Demand Functions 3-3 The demand for good X has been estimated by Qxd = 12 - 3Px + 4Py Suppose that good X sells at $2 per unit and good Y sells for $1 per unit Calculate the own price elasticity A -0.2 B -0.3 C -0.5 D -0.6 AACSB: Analytic Blooms: Apply Difficulty: Easy Learning Objective: 03-05 Show how to determine elasticities from linear and log-linear demand functions Topic: Obtaining Elasticities From Demand Functions The own price elasticity of demand for apples is -1.2 If the price of apples falls by percent, what will happen to the quantity of apples demanded? A It will increase percent B It will fall 4.3 percent C It will increase 4.2 percent D It will increase percent AACSB: Analytic Blooms: Apply Difficulty: Medium Learning Objective: 03-01 Apply various elasticities of demand as a quantitative tool to forecast changes in revenues; prices; and/or units sold Topic: Own Price Elasticity of Demand 3-4 If apples have an own price elasticity of -1.2 we know the demand is: A unitary B indeterminate C elastic D inelastic AACSB: Reflective Thinking Blooms: Remember Difficulty: Easy Learning Objective: 03-01 Apply various elasticities of demand as a quantitative tool to forecast changes in revenues; prices; and/or units sold Topic: Own Price Elasticity of Demand If quantity demanded for sneakers falls by 10 percent when price increases 25 percent, we know that the absolute value of the own price elasticity of sneakers is: A 2.5 B 0.4 C 2.0 D 0.27 AACSB: Analytic Blooms: Apply Difficulty: Medium Learning Objective: 03-01 Apply various elasticities of demand as a quantitative tool to forecast changes in revenues; prices; and/or units sold Topic: Own Price Elasticity of Demand 3-5 The quantity consumed of a good is relatively unresponsive to changes in price whenever demand is: A elastic B unitary C falling D inelastic AACSB: Reflective Thinking Blooms: Remember Difficulty: Easy Learning Objective: 03-01 Apply various elasticities of demand as a quantitative tool to forecast changes in revenues; prices; and/or units sold Topic: Own Price Elasticity of Demand 10 If the absolute value of the own price elasticity of steak is 0.4, a decrease in price will lead to: A a reduction in total revenue B an increase in total revenue C no change in total revenue D None of the statements is correct AACSB: Reflective Thinking Blooms: Understand Difficulty: Easy Learning Objective: 03-02 Illustrate the relationship between the elasticity of demand and total revenues Topic: Own Price Elasticity of Demand 3-6 11 If a price increase from $5 to $7 causes quantity demanded to fall from 150 to 100, what is the absolute value of the own price elasticity at a price of $7? A 0.57 B 1.75 C 0.02 D 1.24 AACSB: Reflective Thinking Blooms: Remember Difficulty: Hard Learning Objective: 03-05 Show how to determine elasticities from linear and log-linear demand functions Topic: The Elasticity Concept 12 Demand is perfectly elastic when the absolute value of the own price elasticity of demand is: A zero B one C infinite D unknown AACSB: Reflective Thinking Blooms: Remember Difficulty: Easy Learning Objective: 03-02 Illustrate the relationship between the elasticity of demand and total revenues Topic: Own Price Elasticity of Demand 3-7 13 The demand curve for a good is horizontal when it is: A a perfectly inelastic good B a unitary elastic good C a perfectly elastic good D an inferior good AACSB: Reflective Thinking Blooms: Remember Difficulty: Easy Learning Objective: 03-02 Illustrate the relationship between the elasticity of demand and total revenues Topic: Own Price Elasticity of Demand 14 Suppose Qxd = 10,000 - Px + Py - 4.5M, where Px = $100, Py = $50, and M = $2,000 What is the own price elasticity of demand? A -2.34 B -0.78 C -0.21 D -1.21 AACSB: Analytic Blooms: Apply Difficulty: Medium Learning Objective: 03-05 Show how to determine elasticities from linear and log-linear demand functions Topic: Obtaining Elasticities From Demand Functions 3-8 15 Suppose Qxd = 10,000 - Px + Py - 4.5M, where Px = $100, Py = $50, and M = $2,000 Then good X has a demand which is: A elastic B inelastic C unitary D neither elastic, inelastic, nor unitary elastic AACSB: Analytic Blooms: Apply Difficulty: Easy Learning Objective: 03-05 Show how to determine elasticities from linear and log-linear demand functions Topic: Obtaining Elasticities From Demand Functions 16 Suppose Qxd = 10,000 - Px + Py - 4.5M, where Px = $100, Py = $50, and M = $2,000 How much of good X is consumed? A 100 units B 500 units C 1,100 units D 950 units AACSB: Analytic Blooms: Apply Difficulty: Easy Learning Objective: 03-05 Show how to determine elasticities from linear and log-linear demand functions Topic: Obtaining Elasticities From Demand Functions 3-9 17 Which of the following factors would NOT affect the own price elasticity of a good? A Time B Price of an input C Available substitutes D Expenditure share AACSB: Reflective Thinking Blooms: Remember Difficulty: Medium Learning Objective: 03-03 Discuss three factors that influence whether the demand for a given product is relatively elastic or inelastic Topic: Own Price Elasticity of Demand 18 Lemonade, a good with many close substitutes, should have an own price elasticity that is: A unitary B relatively elastic C relatively inelastic D perfectly inelastic AACSB: Reflective Thinking Blooms: Understand Difficulty: Medium Learning Objective: 03-03 Discuss three factors that influence whether the demand for a given product is relatively elastic or inelastic Topic: Own Price Elasticity of Demand 3-10 162 The cross-price elasticity for textbooks and copies of old exams is -3.5 If the price of copies of old exams increases by 10 percent, what will happen to the quantity demanded of textbooks? By definition, Substitute EQ,P = -3.5 and %ΔP = 10 into the equation to get %ΔQ = -35 AACSB: Analytic Blooms: Apply Difficulty: Easy Learning Objective: 03-01 Apply various elasticities of demand as a quantitative tool to forecast changes in revenues; prices; and/or units sold Topic: Own Price Elasticity of Demand 163 Which of the following goods would you expect to have the most inelastic demand? Why? a Swiss cheese b Cheese c Dairy products Dairy products are expected to have the most inelastic demand because it is the most broadly defined group, followed by cheese and then Swiss cheese A more specifically defined category has more substitutes and, therefore, more elastic demand AACSB: Reflective Thinking Blooms: Understand Difficulty: Medium Learning Objective: 03-03 Discuss three factors that influence whether the demand for a given product is relatively elastic or inelastic Topic: Own Price Elasticity of Demand 3-90 164 The following estimates have been obtained for the market demand for cereal: ln Q = 9.01 0.68 ln P + 0.75 ln A - 1.3 ln M, where Q is the quantity of cereal, P is the price of cereal, A is the level of advertising, and M is income Based on this information, determine the effect on the consumption of cereal of a A percent reduction in the price of cereal b A percent increase in income c A 20 percent reduction in cereal advertising a Since the own price elasticity is -0.68, we use the elasticity formula to write Solving for %ΔQ we see that there will be a 3.4 percent increase in the quantity demanded of cereal b There will be a 5.2 percent reduction in the demand for cereal c There will be a 15 percent reduction in the demand for cereal AACSB: Analytic Blooms: Apply Difficulty: Medium Learning Objective: 03-05 Show how to determine elasticities from linear and log-linear demand functions Topic: Obtaining Elasticities From Demand Functions 3-91 165 Suppose you are the manager of a home-building company and the government is considering eliminating the tax deductibility of mortgage interest payments A typical consumer's marginal tax rate is 25 percent, and the elasticity of demand for new homes is -1.5 Your boss wants to know the impact of the proposed government policy on your business What you tell him? The price is no longer reduced by 25 percent, so the new price is 33.33 percent higher than the discounted price with the deduction Use the elasticity formula to write Solving, we see that the demand for new homes will be reduced by 50 percent AACSB: Analytic Blooms: Apply Difficulty: Medium Learning Objective: 03-01 Apply various elasticities of demand as a quantitative tool to forecast changes in revenues; prices; and/or units sold Topic: Own Price Elasticity of Demand 3-92 166 You work for an unemployment agency that distributes unemployment checks to unemployed workers in your state Your boss recently learned that the president proposed a 21 percent increase in the minimum wage, and she wants you to provide her with an estimate of the number of additional workers who will file for unemployment compensation claims next year if the bill passes Based on library research at a nearby university, you learn that about 200,000 workers in your state earn at or below the current minimum wage Further library research turns up a study that reports the own price elasticity of demand for minimum wage earners to be 0.30 Based on your findings, how many additional workers you think will file unemployment claims in your state? Since the elasticity of demand for minimum wage earners equals - 0.3, the 21 percent increase in the minimum wage would decrease the quantity demanded of minimum wage earners by 6.3 percent This would translate into 063 × 200,000 = 12,600 lost jobs, and presumably, 12,600 additional workers who file unemployment claims Your boss may need to hire some additional workers to help process claims if the bill passes AACSB: Analytic Blooms: Apply Difficulty: Medium Learning Objective: 03-01 Apply various elasticities of demand as a quantitative tool to forecast changes in revenues; prices; and/or units sold Topic: Own Price Elasticity of Demand 3-93 167 The income elasticity of demand for your firm's product is estimated to be 0.75 A recent report in The Wall Street Journal says that national income is expected to decline by percent this year a What should you with your stock of inventories? b What you expect to happen to your sales? c How would you answer parts a and b if you expected a percent increase in income instead of a decrease? a or The manager should reduce the stock of inventories by 2.25 percent b Sales are expected to decrease by 2.25 percent c Using the elasticity formula, The stock of inventories should be increased by 3.75 percent, since sales are expected to rise by 3.75 percent AACSB: Analytic Blooms: Apply Difficulty: Medium Learning Objective: 03-01 Apply various elasticities of demand as a quantitative tool to forecast changes in revenues; prices; and/or units sold Topic: Own Price Elasticity of Demand 3-94 168 A consumer spends all of her income on only one good What is the income elasticity of demand for this good? What is the own price elasticity of demand for this good? Since PQ = M, we can solve for the demand function as Q = M/P Taking logarithms, we see that ln Q = ln M - ln P Thus, the income elasticity is 1, and the own price elasticity is -1 AACSB: Reflective Thinking Blooms: Understand Difficulty: Hard Learning Objective: 03-01 Apply various elasticities of demand as a quantitative tool to forecast changes in revenues; prices; and/or units sold Topic: Own Price Elasticity of Demand 3-95 169 As the manager of a local hotel chain, you have hired an econometrician to estimate the demand for one of your hotels (H) The estimation has resulted in the following demand function: QH = 2,000 - PH - 1.5PC - 2.25PSE + 0.8POH + 0.01M, where PH is the price of a room at your hotel, PC is the price of concerts in your area, PSE is the price of sporting events in your area, POH is the average room price at other hotels in your area, and M is the average income in the United States What would be the impact on your firm of: a A $500 increase in income? b A $10 reduction in the price charged by other hotels? c A $7 increase in the price of tickets to local sporting events? d A $5 increase in the price of concert tickets, accompanied by an $8 increase in income? a ΔQH = (0.01)ΔM = (0.01)(500) = Thus, the demand for your hotel will increase by five units b ΔQH = (0.8)ΔPOH = (0.8)(-10) = -8 Thus, the demand for your hotel will decrease by eight units c ΔQH = (-2.25)ΔPSE = (-2.25)(7) = -15.75 Thus, the demand for your hotel will decrease by 15.75 units d ΔQH = (-1.5)ΔPC + 0.01(ΔM) = -1.5(5) + 0.01(8) = -7.42 Thus, the demand for your hotel will decrease by 7.42 units AACSB: Analytic Blooms: Apply Difficulty: Medium Learning Objective: 03-01 Apply various elasticities of demand as a quantitative tool to forecast changes in revenues; prices; and/or units sold Topic: Own Price Elasticity of Demand 3-96 170 Your firm's research department has estimated the elasticity of demand for toys to be -0.7 As the manager of a local chain of toy stores, determine the impact of an percent increase in toy prices on your total revenues Since the elasticity of demand for toys is less than in absolute value, an increase in toy prices will increase your total revenues AACSB: Analytic Blooms: Apply Difficulty: Easy Learning Objective: 03-01 Apply various elasticities of demand as a quantitative tool to forecast changes in revenues; prices; and/or units sold Topic: Own Price Elasticity of Demand 3-97 171 The demand for Wanderlust Travel Services (X) is estimated to be Q x = 22,000 - 2.5Px + 4Py 1M + 1.5Ax, where Ax represents the amount of advertising spent on X and the other variables have their usual interpretations Suppose the price of good X is $450, good Y sells for $40, the company utilizes 3,000 units of advertising, and consumer income is $20,000 a Calculate the own price elasticity of demand at these values of prices, income, and advertising b Is demand elastic, inelastic, or unitary elastic? c How will your answers to parts a and b change if the price of Y increases to $50? a Qx = 22,000 - 2.5 (450) + 4(40) - 1(20,000) + 1.5(3,000) = 5,535 b Since the elasticity is less than in absolute value, demand is inelastic c Qx = 22,000 - 2.5(450) + 4(50) - 1(20,000) + 1.5(3,000) = 5,575, so The elasticity changes from -0.203 to -0.202 as Py changes from $40 to $50 AACSB: Analytic Blooms: Apply Difficulty: Medium Learning Objective: 03-05 Show how to determine elasticities from linear and log-linear demand functions Topic: Obtaining Elasticities From Demand Functions 3-98 172 The demand for company X's product is given by Qx = 12 - 3Px + 4Py Suppose good X sells for $3.00 per unit and good Y sells for $1.50 per unit a Calculate the cross-price elasticity of demand between goods X and Y at the given prices b Are goods X and Y substitutes or complements? c What is the own price elasticity of demand at these prices? d How would your answers to parts a and c change if the price of X dropped to $2.50 per unit? a Qx = 12 - 3(3) + 4(1.5) = 9, so b They are substitutes c d Qx = 12 - 3(2.5) + 4(1.5) = 10.5, so AACSB: Analytic Blooms: Apply Difficulty: Medium Learning Objective: 03-05 Show how to determine elasticities from linear and log-linear demand functions Topic: Obtaining Elasticities From Demand Functions 3-99 173 Your firm's research department has estimated the income elasticity of demand for Art Deco lawn furniture to be -0.85 You have just learned that due to an upturn in the economy, consumer incomes are expected to rise by percent next year How will this event affect your ordering decision for PVC pipe, which is the main component in your furniture? Using the formula for the income elasticity, we see that the demand for your lawn furniture will be reduced by 4.25 percent this year You may want to order about 4.25 percent less PVC pipe AACSB: Analytic Blooms: Apply Difficulty: Easy Learning Objective: 03-01 Apply various elasticities of demand as a quantitative tool to forecast changes in revenues; prices; and/or units sold Topic: Own Price Elasticity of Demand 3-100 174 Suppose the demand for sunscreen (X) has been estimated to be ln Q x = - 1.7 ln Px + ln S ln Ay, where S denotes the average hours of sunshine per day and A y represents the level of advertising for good Y a What would be the impact on demand of a percent increase in the daily amount of sunshine? b What would be the impact of a 10 percent reduction in the amount of advertising toward good Y? c What might be good Y in this example? a A percent increase in the daily amount of sunshine leads to a 15 percent increase in the demand for sunscreen (X) b A 10 percent reduction in the amount of advertising toward good Y results in a 30 percent increase in demand for X c Beach umbrellas AACSB: Analytic Blooms: Apply Difficulty: Medium Learning Objective: 03-01 Apply various elasticities of demand as a quantitative tool to forecast changes in revenues; prices; and/or units sold Topic: Own Price Elasticity of Demand 3-101 175 An econometrician has estimated the inverse demand relation P = a + bQ + e and found that and = 0.75 Find the approximate 95 percent confidence interval for the true values of a and b A 95 percent confidence interval for a is Thus, you can be 95 percent confident that a is within the range of 384 and 416 A 95 percent confidence interval for b is Thus, you can be 95 percent confident that b is within the range of -4.25 and -1.25 AACSB: Analytic Blooms: Apply Difficulty: Easy Learning Objective: 03-06 Explain how regression analysis may be used to estimate demand functions; and how to interpret and use the output of a regression Topic: Regression Analysis 3-102 176 A firm is considering raising its price by percent and has hired an econometrician to estimate the elasticity of demand for its product The econometrician estimates the parameters of a logliner demand function and reports that the parameter estimate for the elasticity of demand is 1.5 and the standard error of the estimate is 0.3 a If the firm raises its price by percent, what is the expected change in quantity demanded? b Approximate the upper and lower bounds on the 95 percent confidence interval for the change in quantity demanded a Using the estimated own price elasticity of -1.5, the percent increase in price is expected to reduce quantity demanded by 13.5 percent b The lower bound for the 95 percent confidence interval for the elasticity is -1.5 - 2(.3) = -2.1 Based on this lower bound, the percent increase in price would reduce quantity demanded by 18.9 percent The upper bound for the 95 percent confidence interval for the elasticity is -1.5 + 2(.3) = -0.9 Based on this upper bound, the percent increase in price would reduce quantity demanded by 8.1 percent In summary, the manager can be 95 percent confident that the percent price increase will reduce quantity demanded somewhere between 8.1 and 18.9 percent AACSB: Analytic Blooms: Apply Difficulty: Medium Learning Objective: 03-06 Explain how regression analysis may be used to estimate demand functions; and how to interpret and use the output of a regression Topic: Regression Analysis Related download links: managerial economics and business strategy 8th edition solution manual pdf managerial economics and business strategy test bank pdf managerial economics and business strategy 8th edition test bank pdf managerial economics and business strategy 8th edition test bank free sample 3-103 managerial economics and business strategy 7th edition test bank managerial economics test bank pdf managerial economics 8th edition test bank managerial economics and business strategy 8th edition answer key 3-104