Module 1

Question 1

___________ is the maximum amount of money a customer is willing to pay for a product or service.

Answer 1

Willingness to Pay (WTP)

Question 2

WTP is not the same as ______.

Answer 2

Price. A product may have a price of $0, but there may still be consumers who are willing to pay a lot for it. If the price of a product is higher than a consumer’s WTP, that consumer will not purchase the product.

Question 3

Differences in consumer WTP that arise from differences in, say, age, gender, income, or education are what we call ________ or ________ differences.

Answer 3

“extrinsic” or “observable”

Question 4

Other differences are ________ —things that you couldn’t know about a person without asking him or her.

Answer 4

“intrinsic”

Question 5

A demand curve for an _____________ simply summarizes that consumer’s willingness to pay for various quantities of a product.

Answer 5

Individual Buyer

Question 6

The convention for graphing demand curves is to represent _______on the y-axis, and _______ on the x-axis.

Answer 6

Price; Quantity Demanded

Question 7

Demand curves are convenient representations because one can easily see how a firm’s ________ correspond to
different prices.

Answer 7

Revenues

Question 8

A firm’s revenue is given by _________ (equation) or the area under a demand curve.

Answer 8

Price x Quantity Demanded = Revenues

Question 9

An individual’s demand curve is typically _______ sloping.

Answer 9

Downward

Question 10

A consumer will have a ______ WTP for the first

unit of a product, but a _______ WTP for subsequent units.

Answer 10

Higher; Lower

Question 11

When a factor that affects people’s WTP changes, the demand curve will ___________ in response.

Answer 11

Shift (left or right). Because now, at any given price the number of people with a WTP equal to that price will be different (higher or lower, depending on the event).

Question 12

_______ is not a factor that shifts the demand curve.

Answer 12

Price. By convention, price is on the y-axis of any demand curve. So a change in price will move us up or down along the existing demand curve but it will not shift the curve.

Question 13

Price affects _________, but doesn’t change the underlying WTP or demand.

Answer 13

quantity demanded

Question 14

What are three other phrases for saying the demand curve “shifted left?”

Answer 14

“shifted down, “shifted in,” or “demand has decreased”

Question 15

What factors determine whether the demand curve for a product is steep or flat?

Answer 15

Close Substitutes, Necessity/Luxury, and Time Horizon

Question 16

Why would a demand curve be so steep that it is perfectly vertical?

Answer 16

Here customers will buy a given quantity no matter what the price. One example that comes close to this case is the demand for insulin by diabetics.

Question 17

Why would a demand curve be flat?

Answer 17

Because a small increase in price would drive all customers away. A classic example is demand for paper currency. If someone tried to sell us a $20 bill for anything more than $20 worth of value, we would take our business elsewhere.

Question 18

Steep demand curves are ______.

Answer 18

“Inelastic”

Question 19

Flat demand curves are ______.

Answer 19

“Elastic”

Question 20

The market demand curve reports, at any given price, the ________ quantity demanded.

Answer 20

Aggregate

Question 21

Market demand curves are downward sloping because _____ consumers are willing to purchase the product at higher prices.

Answer 21

Fewer

Question 22

What causes the demand curve to shift?

Answer 22

Changes in consumer’s WTP

Question 23

An increase in a consumer’s WTP for a product will shift her demand curve _______.

Answer 23

Outward

Question 24

A decrease in WTP will shift her demand curve _______.

Answer 24

Inward

Question 25

Changes in price correspond to _______ the demand curve.

Answer 25

Movements Along

Question 26

Non-price factors that affect WTP correspond to _______ the demand curve.

Answer 26

Shifts (inward or outward)

Question 27

Factors that shift _______ demand curves up or down also shift the ________ demand curve.

Answer 27

Individual; Market

Question 28

The _____ of a market demand curve measures how responsive buyers are to changes in price.

Answer 28

Slope

Question 29

When the curve is flat or near-flat, a small-dip in price sparks a ______ in the quantity demanded.

Answer 29

Large Surge

Question 30

When the curve is steep or vertical, changes in price have __________ on the quantity demanded.

Answer 30

Little Impact

Question 31

Steep curves are often called _______, and flat curves

are often called _______.

Answer 31

Inelastic; Elastic

Question 32

Demand is typically ____ elastic if a product is a luxury rather than a necessity, or if the product has many substitutes.

Answer 32

More

Question 33

The ________ of demand is calculated as the percentage change in quantity demanded divided by the
percentage change in price.

Answer 33

“Price Elasticity”

Question 34

The important advantage of the elasticity measure over a slope measure is…

Answer 34

Elasticity is a unit-less measure. It doesn’t change as the units used to measure quantity demanded change.

Question 35

One can easily ______ the elasticities of demand for different products.

Answer 35

Compare

Question 36

Elasticity is _______ at each point on a demand curve with constant slope (i.e., a straight-line demand curve).

Answer 36

Different

Question 37

The __________ of demand measures how sensitive quantity demanded is to a change in
consumers’ income.

Answer 37

Income Elasticity

Question 38

________ —setting prices based on WTP rather than (just) costs is an important one.

Answer 38

“value-based pricing”

Question 39

If demand is inelastic, it pays to _____ prices.

Answer 39

Raise

Question 40

If demand is elastic, it pays to ______ prices.

Answer 40

Lower

Question 41

For a company facing a linear demand curve, revenue is maximized:

Answer 41

midway down the demand curve. Revenue is maximized midway down the demand curve, where elasticity equals 1.