chapter 8 - Topics in Demand and Supply

Question 1

Price Elasticity of Demand

Answer 1

% Change in Qdemanded/% change in Pgood

Question 2

OWn-price elasticity

Answer 2

Measure of responsiveness of quantity demanded to change in price

Question 3

Perfectly inelastic demand

Answer 3

Elasticity = 0. One quantity for all prices. Doesn’t change to change in price.

Question 4

Perfectly elastic demand

Answer 4

Elasticity = infinity. Demand is forever increasing at same price.

Question 5

Cross price elasticity

Answer 5

% Change in quantity demanded/% change in price of related good

Question 6

Income elasticity

Answer 6

% change in quantity demanded/% change in income.

Question 7

Own Price Elasticity >1; Own price elasticity <1.

Answer 7

Demand is elastic, demand is inelastic.

Question 8

Cross price elasticity >0, cross price elasticity < 0.

Answer 8

Related good is substitute, related good is complement.

Question 9

Income elasticity < 0 , Income elasticity >0.

Answer 9

Good is an inferior good, good is a normal good.

Question 10

Normal good

Answer 10

Income effect of price decrease is positive. Consumer buys more and elasticity of demand is positive.

Question 11

Inferior good

Answer 11

income effect of P decreasing is negative, income elasticity of demand is negative. Incom increases, demand for good goes down.

Question 12

Giffen good

Answer 12

Inferior good where negative income effect outweighs positive substitution effect. Price goes down, quantity consumed goes down.

Question 13

Veblem good

Answer 13

Gucci. When price goes up i consume more.

Question 14

Marginal returns

Answer 14

additional output that can be produced by using 1 more unit of a productive input, but hold other quantities constant. As input quantities ^, at a certain point marginal returns decrease. This is called diminishing marginal returns.

Question 15

Perfect Competition PC: Breakeven quantitiy of production

Answer 15

P=ATC, TR = TC

Question 16

PC: Firm should shutdown

Answer 16

in LR if P< ACT, TR<TC; shutdown in SR and LR if P<AVC, TR,TVC.

Question 17

IC - downward sloping: breakeven quantity

Answer 17

TR=TC

Question 18

IC - firm should shutdown in LR

Answer 18

TR < TC

Question 19

IC: firm should shutdown in LR and SR

Answer 19

TR<TVC

Question 20

LRATC curve

Answer 20

shows minimum ATC for each level of output.

Question 21

Economies of Scale (on LRATC Curve)

Answer 21

downward slope, increasing the scale of firm reduces average total cost

Question 22

Diseconomies of scale

Answer 22

upward slope, average unit cost goes up as I scale out and increase output. No good : (