Problem set for week 4

Question 1

3. The price elasticity of demand tells us about
   a. The sensitivity of price to quantity
   b. The sensitivity of quantity to price
   c. The sensitivity of income to price
   d. The sensitivity of income to quantity

Answer 1

B

Question 2

4. Jim saw a decrease in the quantity demanded for his firm’s product from 8000 to 6000 units a week
   when he raised the price of the product from $200 to $250. What is Jim’s own price elasticity of
   demand?
   a. - 1.29
   b. - 1
   c. - 0.25
   d. - 0.78

Answer 2

A

Question 3

5. If the price elasticity of demand is -0.8 and the firm increases price, revenue will
   a. Increase
   b. Decrease
   c. Stay constant
   d. become zero, they would lose all their customers

Answer 3

A

Question 4

6. The marginal cost curve:
   a. Usually declines initially as output increases and then rises with further increases in output
   b. Is equal to the average variable cost curve
   c. Usually rises initially

Answer 4

A

Question 5

7. You would expect that your firm is experiencing increasing returns to scale if
   a. Long run average costs increase with output
   b. Long run average costs decrease with output
   c. Long run average costs are constant with respect to output
   d. None of the above

Answer 5

B

Question 6

8. Sony found that instead of producing a dvd player and a gaming system separately, it is cheaper to
   incorporate dvd playing capabilities in their new version of the gaming system. Sony is taking
   advantage of
   a. Economies of Scale
   b. Learning curve
   c. Economies of Scope
   d. Decreasing marginal costs

Answer 6

C

Question 7

9. A firewood supplier has a very seasonal demand for its product. Its transport trucks lay idle during
   the warmer parts of the year. It can exploit economies of scope if
   a. It merges with a manufacturer of wooden Christmas ornaments
   b. It turns into a rental trucking company during the warmer months for other seasonal
   producers such as ice-cream makers
   c. It starts producing other seasonal products that would sell mostly during the warmer
   months such as rustic lawn chairs
   d. B and C

Answer 7

D

Question 8

10. It costs firm A $800 to produce five radios and it costs firm B $500 to produce five batteries. If
    Firm A merges with Firm B, it can produce both the five radios and the five batteries for $1500. The
    firm has experienced
    a. Economies of Scale
    b. Economies of Scope
    c. Diseconomies of Scale
    d. Diseconomies of Scope

Answer 8

D

Question 9

What is the mark-up?

Answer 9

P - MC