Microeconomics

Question 1

Why does demand curve shift upward for changes other than price?

Answer 1

Price of substitute good increases
Expected future price increase
Income increases so demand for normal goods increase
Market size increases

Question 2

Why does demand curve shift downward for changes other than price?

Answer 2

Price of complement good increases
Income increases so demand for inferior goods decrease
Consumer boycotts

Question 3

What is formula for Price Elasticity of Demand?

Answer 3

Ed = % change in quantity demanded / % change in price

Ed > 1.0 = Elastic (TR decreases if P increases)
Ed < 1.0 = Inelastic (TR increases if P increases)
ED = 1.0 = Unitary (TR not sensitive to changes in P)

Question 4

What is formula for Income Elasticity of Demand?

Answer 4

% change in quantity demanded / % change in income

```
+) = normal good (D increases when I increases
(-) = inferior good (D decreases when I increases)
~~~

Question 5

What is formula for Cross-Elasticity of Demand?

Answer 5

% change in quantity demanded for X / % change in price of Y

(+) = substitutes
(-) = complements

Question 6

Why does supply curve shift outward for changes other than price?

Answer 6

Number of producers increase
Government subsidies
Expected future price increase
Technological advances
Reduction in production costs

Question 7

Why does supply curve shift inwards for changes other than price?

Answer 7

Increase in production costs

Other products more profitable to produce

Question 8

What is formula for Price Elasticity of Supply?

Answer 8

Es = % change in quantity supplied / % change in price

Es > 1.0 = Elastic (S decreases if P increases)
Es < 1.0 = Inelastic (S not sensitive to changes in P)

Question 9

What is a price ceiling?

Answer 9

Maximum legal price at which product or service may be sold - results in shortages

Question 10

What is price floor?

Answer 10

Minimum legal price at which product or service may be sold - results in supluses

Question 11

What is formula for Marginal Propensity to Consume (MPC)?

Answer 11

MPC = change in consumption / change in disposable income

Question 12

What is formula for Marginal Propensity to Save (MPS)?

Answer 12

MPS = change in savings / change in disposable income

Question 13

What is formula for Returns to Scale?

Answer 13

% increase in output / % increase in input

> 1 = Increasing returns to scale
= 1 = Constant returns to scale
< 1 = Decreasing returns to scale

Question 14

When is an industry perfectly competitive?

Answer 14

Large number of sellers that are too small to affect price
Homogeneous products
No advertising
Easy entry and exit from market
Horizontal demand curve

Question 15

When is an industry a pure monopoly?

Answer 15

One producer
No close substitutes available
Blocked entry to market
Vertical demand curve

Question 16

When is an industry monopolistic competition?

Answer 16

Large number of sellers
Heterogeneous products
Lots of advertising
Easy entry and exit from market
Slightly downward sloping demand curve

Question 17

When is an industry an oligopoly?

Answer 17

Small number of sellers
Barriers to entry
Advertising exists
Rival actions observed
Kinked demand curve

Question 18

What is SWOT analysis?

Answer 18

Strengths
Weaknesses
Opportunities
Threats

Question 19

What are product differentiation strategies?

Answer 19

Develop range of slightly different products that are more attractive in order to:

1) make firm’s sales less responsive to price from competitors
2) allow firm to charge a different price
3) allow firm to ultimately charge higher price

Question 20

What are cost leadership strategies?

Answer 20

Concentrate on cutting costs of producing, selling, and distributing products
Includes process reengineering, lean manufacturing, and supply chain management

Question 21

What is included in a firm’s value chain?

Answer 21

Inbound logistics
Operations
Outbound logistics
Marketing and sales
Customer service