Reading 8: topics in demand and supply analysis Flashcards
Total revenue is greatest in the part of a demand curve that is:
elastic
inelastic
unit elastic.
Total revenue is maximized at the quantity at which own-price elasticity equals –1. (Module 8.1, LOS 8.a)
A demand function for air conditioners is given by:
QDair conditioner = 10,000 – 2 Pair conditioner + 0.0004 income + 30 Pelectric fan – 4 Pelectricity
At current average prices, an air conditioner costs 5,000 yen, a fan costs 200 yen, and electricity costs 1,000 yen. Average income is 4,000,000 yen. The income elasticity of demand for air conditioners is closest to:
0.0004.
0.444.
40,000.
Substituting current values for the independent variables other than income, the demand function becomes:
The slope of income is 0.0004, and for an income of 4,000,000 yen, QD = 3,600.
Income elasticity = I0 / Q0 × ∆Q / ∆I = 4,000,000 / 3,600 × 0.0004 = 0.444. (Module 8.1, LOS 8.a)
When the price of a good decreases, and an individual’s consumption of that good also decreases, it is most likely that:
the income effect and substitution effect are both negative.
the substitution effect is negative and the income effect is positive.
the income effect is negative and the substitution effect is positive.
The substitution effect of a price decrease is always positive, but the income effect can be either positive or negative. Consumption of a good will decrease when the price of that good decreases only if the income effect is both negative and greater than the substitution effect. (Module 8.2, LOS 8.b)
A good is classified as an inferior good if its:
income elasticity is negative.
own-price elasticity is negative.
cross-price elasticity is negative.
An inferior good is one that has a negative income elasticity of demand. (Module 8.2, LOS 8.c)
Increasing the amount of one productive input while keeping the amounts of other inputs constant results in diminishing marginal returns:
in all cases.
when it causes total output to decrease.
when the increase in total output becomes smaller.
Productive inputs exhibit diminishing marginal returns at the level where an additional unit of input results in a smaller increase in output than the previous unit of input. (Module 8.2, LOS 8.d)
A firm’s average revenue is greater than its average variable cost and less than its average total cost. If this situation is expected to persist, the firm should:
shut down in the short run and in the long run.
shut down in the short run but operate in the long run.
operate in the short run but shut down in the long run.
If a firm is generating sufficient revenue to cover its variable costs and part of its fixed costs, it should continue to operate in the short run. If average revenue is likely to remain below average total costs in the long run, the firm should shut down. (Module 8.2, LOS 8.e)
If a firm’s long-run average total cost increases by 6% when output is increased by 6%, the firm is experiencing:
economies of scale.
diseconomies of scale.
constant returns to scale.
Increasing long-run average total cost as a result of increasing output demonstrates diseconomies of scale. (Module 8.2, LOS 8.f)
