LM1: Demand and Supply analysis

Question 1

What is the own-price elasticity of demand equation?

Answer 1

E = % change Qdx / % change Px

(Own price elasticity of demand is usually negative)

Question 2

What is the PED of an INELASTIC good?

Answer 2

PED<1 demand is INELASTIC

Question 3

What is the PED of an ELASTIC good?

Answer 3

PED>1, demand is ELASTIC

Question 4

What is the PED of a UNITARY ELASTIC good?

Answer 4

PED=1 demand is UNIT ELASTIC

Question 5

What is the PED of a PERFECTLY ELASTIC good?

Answer 5

PED= infinite, demand is PERFECTLY ELASTIC -> horizontal demand curve

Question 6

What is the PED of a PERFECTLY INELASTIC good?

Answer 6

PED=0, demand is PERFECTLY INELASTIC -> Vertical demand curve

Question 7

What is income elasticity of demand equation?

Answer 7

E = % change Qdx / % change Income

Question 8

Is Income elasticity of demand +VE or -VE for a normal good?

Answer 8

+VE

Question 9

Is Income elasticity of demand +VE or -VE for an inferior good?

Answer 9

-VE

Question 10

What is the cross-price elasticity of demand equation?

Answer 10

E = % change Qdx / % change Py

Question 11

Is CPED +VE/-VE for substitutes?

Answer 11

+VE

Question 12

Is CPED +VE/-VE for compliments?

Answer 12

-VE

Question 13

What is the definition of a Veblen good?

Answer 13

Status good, where demand increases when price increases

Question 14

What are is Substitution effect / Income effect / consumption for a Normal good, when the price of good x rises?

Answer 14

Positive, Positive, increases

Question 15

What are is Substitution effect / Income effect / consumption for a inferior good, when the price of good x rises?

Answer 15

Positive, Negative (Smaller than the substitution effect), increases

Question 16

What are is Substitution effect / Income effect / consumption for a Giffen good, when the price of good x rises?

Answer 16

Positive, Negative (larger than substitution effect), decreases

Question 17

What is the definition of profit maximization?

Answer 17

Occurs when the difference between Total Revenue (TR) and Total Cost (TC) is the greatest

The level of output at which this occurs is MC = MR and where MC is rising

Question 18

Breakeven occurs under which 2 circumstances?

Answer 18

TR = TC

Price = ATC (At this breakeven level economic profit is ZERO, although it may still earn a positive accounting profit (normal profit))

Question 19

Under which circumstances should a business exit the market in the short run?

Answer 19

TR < TVC

Question 20

Under which circumstances should a business exit the market in the long run?

Answer 20

Any point less than TR = TC