Nonprice determinants of demand

Question

Problem 1. Consider the following table for the demand and supply of a certain product:

Price	Quantity Demanded	Quantity Supplied
$1000	0	500
$750	125	375
$500	250	250
$250	375	125

What is the equilibrium price and quantity?

• P = $250, Q = 125
• P = $500, Q = 250
• P = $750, Q = 125
• P = $1000, Q = 250
• P = $250, Q = 375

Problem 2. Which of the following statements is NOT correct regarding nonprice determinants of demand?

• An increase of income shifts the demand curve of Mercedez Benz to the right.
• An increase of immigrants to the United States would bring a positive effects to the demand for fast foods.
• Increasing preferences for healthy foods decrease the demand for junk foods.
• Technical innovation in cellular phone production causes an increase in demand for cellular phones.
• Before Christmas sales begin, the retail business is slow.

Problem 3. Consider the demand and supply table of question number one.

Due to a sudden windfall increase in income, the demand curve has immediately shifted out and the new demand has become:

Price	OLD Quantity Demanded	NEW Quantity Demanded	Quantity Supplied
$1000	0	500	500
$750	125	625	375
$500	250	750	250
$250	375	875	125

The original equilibrium price has not changed yet. Then, what is the excess demand for pizza?

• 125
• 375
• 500
• 750
• 1000

Problem 4. The suppliers begin to notice the increased demand. What would they do and what would happen next?

• They raise the price and the new price will be $1000 and the equilibrium quantity will be 750.
• The products are short-supplied and the demand will back down to the original level.
• They increase the price and it will be $750, and the equilibrium quantity will be 750.
• The new equilibrium price will be $1000, and the quantity will be 500.
• The new equilibrium price will be $500, and the quantity will be 500.

Problem 5. Continuing the analysis, in the long-run, what would happen to the product market?

• Price will fall due to a continued decrease in demand.
• Price will fall due to an increase in supply.
• Quantity will decrease due to the elimination of the excess demand.
• Quantity will increase due to the elimination of the excess demand.
• None of above.

Problem 6. A demand function is given as Q = 100 - 4P. What is the point price elasticity at P = $5 and Q = 80?

• -0.5
• -4
• - 1/64
• -0.25
• -16

Problem 7. If $5 and 80 are the market-equilibrium price and quantity of the above product, what do we know about the product?

• Since the price elasticity is less than unity, the product must be an inferior good.
• Since the price elasticity is greater than unity, the product must be a superior good.
• Since the price elasticity is less than unity, the product must be a luxury good.
• Since the price elasticity is greater than unity, the product must be a normal good.
• Since the price elasticity is less than unity, it must be hard to find a substitute for the good.

Problem 8. If a company faces a price-elastic demand curve, it can increase the revenue by decreasing the price.

• True
• False

Problem 9. The income elasticity of demand for tomatoes is estimated to be 0.25. What does that mean? One percent increase in income would increase 0.25% increase of the demand for tomatoes.

• One percent increase in income would increase 25% increase of the demand for tomatoes.
• One dollar increase in income would increase 25 dollar increase in the demand for tomatoes.
• One dollar increase in income would increase 25 cent increase in the demand for tomatoes.
• Both (1) and (4).

Problem 10. In the summer of 2002, the price of the U.S. first-class postage stamp was raised from 34 cents to 37 cents. But, the U.S. Postal Service has been losing money (revenue decreased). What is NOT a correct explanation for that?

• The decision makers thought that the demand for the postage stamps was price inelastic.
• In the short run, they may be price inelastic but not in the long run.
• Given time, more postal customers have adjusted their consumption patterns and swiched to alternative services such as emails, electronic bill payments, and faxes.
• The 3-cent increase was not enough to compensate for the revenue loss caused by the anticipated decrease in demand.

Problem 11. Improved technology for hybrid automobiles and increase in household income will increase the market-equilibrium quantity and decrease the market-equilibrium price.

• True
• False