630. Microeconomics

Question 1

Price Elasticity of Demand Formula

Answer 1

%∆Q demanded / %∆P

Question 2

If |e| is less than one, demand is said to be ___.

Answer 2

Inelastic

Question 3

If |e| is greater than one, demand is said to be __.

Answer 3

Elastic

Question 4

First Law of Demand

Answer 4

• consumers demand more (purchase more) as price falls, assuming other factors are held constant.

Question 5

Consumers make consumption decisions using ___.

Answer 5

marginal analysis, consume more if marginal value > price

Question 6

law of diminishing marginal utility

Answer 6

the marginal value of consuming each subsequent unit diminishes the more you consume

Question 7

price must fall in order to ___

Answer 7

encourage consumers to purchase more units

Question 8

Demand curves

Answer 8

depict the function that relates the price of a product to the quantity demanded by consumers

Question 9

Demand curves describe

Answer 9

buyer behavior and tell you how much they will buy at a given price

Question 10

If something other than price causes an increase in demand, we say that

Answer 10

“demand shifts” to the right or “demand increases” such that consumers purchase more at each possible price than they had previously

Question 11

Pricing is

Answer 11

an extent decision

Question 12

Profit=

Answer 12

Revenue - Cost

Question 13

Demand curves turn pricing decisions into

Answer 13

quantity decisions:

“what price should I charge?” is equivalent to “how much should I sell?

Question 14

Fundamental tradeoff:

Answer 14

Lower price to sell more, but earn less on each unit sold

Higher price to sell less, but earn more on each unit sold

Question 15

Tradeoff created by

Answer 15

downward sloping demand curve

Question 16

Marginal analysis finds the profit increasing solution to the pricing tradeoff.
It tells you

Answer 16

which direction to go (to raise or lower price), but not how far to go.

Question 17

marginal revenue (MR) is

Answer 17

change in total revenue from selling another unit.

Question 18

If MR>0, then

Answer 18

total revenue will increase if you sell one more.

Question 19

If MR>MC,

Answer 19

then total profit will increase if you sell one more.

Question 20

Profit is maximized when

Answer 20

MR = MC

Question 21

Price elasticity (e)=

Answer 21

= %∆Qd / %∆P

= (ΔQ/Qaverage) ÷ (ΔP/Paverage)

Question 22

MR =

Answer 22

ΔTR/ΔQ

Question 23

When demand is elastic

Answer 23

If P↑ then Revenue↓

If P↓ then Revenue↑

Question 24

When demand is inelastic

Answer 24

If P↓ then Rev ↓

If P↑ then Rev ↑

Question 25

To estimate MR from a given price change using elasticity

Answer 25

MR = Paverage [(1 + e)÷e]

Note that in this formula you should not take the absolute value of e.

Question 26

What is price elasticity of demand?

Answer 26

it gives the percentage change in quantity demanded in response to a one percent change in price (ceteris paribus)

Question 27

|e| shows the ??% ∆ in Q for every

Answer 27

1%∆ in Price

Question 28

marginal revenue

Answer 28

is the additional revenue that will be generated by increasing product sales by one unit.

also called unit revenue