Question 1: Explain how the equilibrium price and quantity changes from the initial equilibrium when:
a. demand increases
b. supply decreases
c. supply and demand increase simultaneously
d. supply increases and demand decreases
Question 2: Assume that the correct demand estimation of a good is P = 12 – 7Q. What are the total revenue, marginal revenue, and average revenue equations that this demand equation generates?
Question 3: Given the following equation: Q = 13 – 4p -- 41I -12S, where Q is quantity, P is price, I is income, and S is the price of a related good, CIs it elastic, inelastic or unit elastic? What is the income elasticity assuming I = 40 and Q = 20? Is the good a normal good? Explain
Question 4: Explain the relationship between elasticity and total revenue when the price of the good changes. Include explanations for the different elasticities along the demand curve.
Question 5: Write a short essay explaining why a profit-maximizing manager should never price in the Inelastic portion of the demand curve. Assume that total costs never decrease when output increases
Answer: A profit maximizing manager should never and will never price in the inelastic portion of the demand curve because it is not very responsive to a change in price. There will be a zero response in quantity demanded to a change in price and the demand curve will be vertical.
Question 6: Explain the nonsatiation principle.
Question 7: Briefly identify and define four determinants of own-price elasticity.
Question 8: Explain why a firm that uses some fixed cost and some variable cost will always price in the elastic range of the demand curve. In your answer, identify the profit maximization rule.