Assignment 3 : Demand Analysis

1. Which of the following best represents management's objective(s) in utilizing demand

analysis?
a. it provides insights necessary for the effective manipulation of demand
b. it helps to measure the efficiency of the use of company resources
c. it aids in the forecasting of sales and revenues
d. a and b
e. a and c

2. Identify the reasons why the quantity demanded of a product increases as the price of that
product decreases.
a. as the price declines, the real income of the consumer increases
b. as the price of product A declines, it makes it more attractive than product B
c. as the price declines, the consumer will always demand more on each successive price
reduction
d. a and b
e. a and c

3. An increase in the quantity demanded could be caused by:

a. an increase in the price of substitute goods
b. a decrease in the price of complementary goods
c. an increase in consumer income levels
d. all of the above
e. none of the above

4. Iron ore is an example of a:

a. durable good
b. producers' good
c. nondurable good
d. consumer good
e. none of the above

5. If the cross price elasticity measured between items A and B is positive, the two products are
referred to as:
a. complements
b. substitutes
c. inelastic as compared to each other
d. both b and c
e. a, b, and c

6. When demand is _____________ a percentage change in ___________ is exactly offset by the

same percentage change in _____________ demanded, the net result being a constant total
consumer expenditure.
a. elastic; price; quantity
b. unit elastic; price; quantity
c. inelastic; quantity; price
d. inelastic; price; quantity
e. none of the above

7. Marginal revenue (MR) is ____________ when total revenue is maximized.

a. greater than one
b. equal to one
c. less than zero
d. equal to zero
e. equal to minus one
8. The factor(s) which cause(s) a movement along the demand curve include(s):
a. increase in level of advertising
b. decrease in price of complementary goods
c. increase in consumer disposable income
d. decrease in price of the good demanded
e. all of the above

9. An increase in each of the following factors would normally provide a subsequent increase in
quantity demanded, except:
a. price of substitute goods
b. level of competitor advertising
c. consumer income level
d. consumer desires for goods and services
e. a and b

10. Producers' goods are:

a. consumers' goods
b. raw materials combined to produce consumer goods
c. durable goods used by consumers
d. always more expensive when used by corporations
e. none of the above

11. The demand for durable goods tends to be more price elastic than the demand for non-durables.
a. true
b. false

12. A price elasticity (ED) of 1.50 indicates that for a ____________ increase in price, quantity
demanded will ____________ by ______________.
a. one percent; increase; 1.50 units
b. one unit; increase; 1.50 units
c. one percent; decrease; 1.50 percent
d. one unit; decrease; 1.50 percent
e. ten percent; increase; fifteen percent

13. Those goods having a calculated income elasticity that is negative are called:
a. producers' goods
b. durable goods
c. inferior goods
d. nondurable goods
e. none of the above

14. An income elasticity (Ey) of 2.0 indicates that for a _____________ increase in income,
____________ will increase by __________________.
a. one percent; quantity supplied; two units
b. one unit; quantity supplied; two units
c. one percent; quantity demanded; two percent
d. one unit; quantity demanded; two units
e. ten percent; quantity supplied; two percent

15. When demand elasticity is ___________ in absolute value (or _________), an increase in price
will result in a(n) __________ in total revenues.
a. less than 1; elastic; increase
b. more than 1; inelastic; decrease
c. less than 1; elastic; decrease
d. less than 1; inelastic; increase
e. none of the above

16. The basic reason(s) for the increase in quantity demanded as the result of a price reduction is
(are) _____________.
a. income effect
b. substitution effect
 c. complementary effect
d. a and b only
e. a, b, and c

17. Empirical estimates of the price elasticity of demand suggest that the demand for household
consumption of alcoholic beverages is:
a. highly price elastic
b. price inelastic
c. unitarily elastic
d. an inferior good
e. none of the above

18. Consumers will be in equilibrium with respect to the consumption of two goods if:
a. the ratio of marginal utility to price is equal for both goods.
b. the marginal utility of the lowest price good is greater than the marginal utility of the
highest price good.
c. the ratio of the marginal utility of A to the marginal utility of B is equal to the ratio of the
price of B to the price of A.
d. the marginal utility of both goods is identical, regardless of the price.
e. none of the above.

Attempt all Questions.

1. The manager of the Sell-Rite drug store accidentally mismarked a shipment of 20-pound bags
of charcoal at $4.38 instead of the regular price of $5.18. At the end of a week, the store's
inventory of 200 bags of charcoal was completely sold out. The store normally sells an
average of 150 bags per week.
(a) What is the store's arc elasticity of demand for charcoal?
(b) Give an economic interpretation of the numerical value obtained in part (a)

Initial Price:

𝑃0= $5.18

End Price:

𝑃1= $4.38

Proportionate Change in Price

𝑃
= $𝘗0#𝘗$ %
2

&.()*+.1)
=
$&.()2#*.$)
%
0.)
= -&.7)
= -0.167

Percentage Decrease in Price

= 0.167  100 = 16.7

Initial Quantity Demanded:

𝑄0 = 150

End Quantity Demanded:

𝑄1 = 200

Proportionate Change in Quantity Demanded

Q
= $+0 #+$ %
2

200*1+0
=
$2002#$*0%

+0
= 17+
= 0.28
Percentage Increase in Quantity Demanded 0.28
 100 = 28

The Own Price Elasticity of Demand for Charcoal

𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎g𝑒 i𝑛𝑐𝑟𝑒𝑎𝑠𝑒𝑠 i𝑛 𝑞𝑢𝑎𝑛𝑡i𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑
= 𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎g𝑒 𝑑𝑒𝑐𝑟𝑒𝑎𝑠𝑒 i𝑛 𝑝𝑟i𝑐𝑒

0.2)×100
= *0.1@7 ×100
= -1.67

As per the price elasticity of demand for charcoal, customers are very responsive to the a price
adjustment during the week. The pharmacy store’s income grew to $876 from $777 in the specific
week even if the manager mislabeled a bag of cement and set the price lower. The pharmacy store's
weekly profit grew because of this mislabeling, if the cost remained constant. Therefore, cutting
prices will increase the pharmacy store's profitability assuming expenses remain same for the
upcoming few weeks.
2. The Future Flight Corporation manufactures a variety of frisbees selling for $2.98 each.
Sales have averaged 10,000 units per month during the last year. Recently Future Flight's
closest competitor, Soaring Free Company, cut its prices on similar frisbees from $3.49 to
$2.59. Future Flight noticed that its sales declined to 8,000 units per month after the price
cut.
(a) What is the arc cross elasticity of demand between Future Flight's and Soaring Free's
frisbees?
(b) If Future Flight knows the arc price elasticity of demand for its frisbees is -2.2, what
price would they have to charge in order to obtain the same level of sales as before
Soaring Free's price cut?

(a)

𝐸𝐷= (%Q)/(%P)

𝐸𝐷= ((𝑄2-𝑄1)/(𝑃2-𝑃1))×(( 𝑃2+𝑃1)/( 𝑄2+𝑄1))

𝐸𝐷= ((8000-10000)/2.59-3.49))×((2.59+3.49)/(8000+10000))

𝐸𝐷= 0.75

The arc cross elasticity of demand is 0.75

(b)

𝐸𝐷= (%Q)/(%P)

𝐸𝐷= ((𝑄2-𝑄1)/(𝑃2-𝑃1))×(( 𝑃2+𝑃1)/( 𝑄2+𝑄1))

𝐸𝐷= ((8000-10000)/𝑃2 -3.49))×(( 𝑃2+3.49)/(8000+10000))

𝐸𝐷= (-2000/𝑃2 -3.49))×(( 𝑃2+3.49)/18000)

-2.2 = (-2000/𝑃2 -3.49))×(( 𝑃2+3.49)/18000)

𝑃2= 2.64