Question #6
The owner of Taco Joe’s has estimated that if he lowers the price of a burrito from $2.00 to $1.50, he will increase sales from 400 to 500 burritos per day. The demand for burritos is
A) elastic.
B) inelastic.
C) unitary elastic.
D) perfectly elastic.
Question #7
The demand curve for your product is P = 1000 - 2×Q and you have constant marginal cost equal to 400. According to the midpoint pricing rule, your profit maximizing price should be
A) $1000.
B) $400.
C) $300.
D) $700.
E) $450.
Question #8
Suppose that elasticity of demand for your product is 3 and your marginal cost is 12. Then – according to the rule for markup pricing on cost – you should charge a price of
A) 36.
B) 4.
C) 18.
D) 24.
E) None of the above – more information is needed.
Question #9
A loss-making firm stands to gain rather than shutting down so long as
A) average variable cost is greater than marginal cost.
B) price is sufficient to cover average fixed cost.
C) average fixed cost is greater than average variable cost.
D) price is sufficient to cover average variable cost.
Question #10
Spreading the fixed costs of distribution over multiple products is known as __________, whereas the decrease in average variable cost due to the effect of cumulative production over time is known as _________.
A) economies of scope; learning effects.
B) economies of scale; learning effects.
C) economies of scope; economies of scale.
D) learning effects; economies of scale.
repost plz.
6) Unitary elastic.
% change in price = ($2.00-1.50)/2.00 = 25%
% change in qty demand = (500-400)/400 = 25%
elasticity = % qty / % price = 1
When elasticity is exactly 1, this is referred to as unit elasticity.
7)
P = 1000 - 2Q
One good visual method to figure out the quantities which will let us find the optimal quantity using the midpoint is to test each proposed quantity,
Given Formula = Qty Sold Revenue(PxQ) Profit
$1000: 1000 = 1000 - 2Q. Q = 0 R = 0 Pr = 0 - 0 = $0
$700: 700 = 1000 - 2Q. Q = 150 R = 105000 Pr = 105000 - 150(400) = $40500
$450: 450 = 1000 - 2Q. Q = 275 R = 123750 Pr = 123750 - 275(400) = $13750
$400: 400 = 1000 - 2Q. Q = 300 R = 120000 Pr = 120000 - 300(400) = $0
$300: 300 = 1000 - 2Q. Q = 350 R = 105000 Pr = 105000 - 350(400) = $-35000
Midpoint = (1000 + 400)/2 = $700 (ignore hypothetical $300 pricepoint because it results in a loss). We want the midpoint between the two zero profit points, which come from a price of $1000 and a price of $400.
We can confirm this method yields the highest profit in the table to the far right, where total profit for the $700 pricepoint is $40500, by far the highest of the multiple choice answers.
Question #6: The owner of Taco Joe's believes that lowering the price of a burrito will increase the number of burritos sold. To determine the elasticity of demand, we need to calculate the percentage change in quantity demanded divided by the percentage change in price. By lowering the price from $2.00 to $1.50, we can calculate the percentage change in price by subtracting the new price from the old price, which gives us a change of $0.50. Dividing the change in price by the old price ($0.50 / $2.00) gives us a percentage change of 0.25, or 25%.
Similarly, we can calculate the percentage change in quantity demanded by subtracting the new quantity (500) from the old quantity (400), which gives us a change of 100. Dividing the change in quantity by the old quantity (100 / 400) gives us a percentage change of 0.25, or 25%.
Since the percentage change in quantity demanded is the same as the percentage change in price, the demand for burritos is unitary elastic. Therefore, the answer is C) unitary elastic.
Question #7: The demand curve equation given is P = 1000 - 2×Q, where P represents price and Q represents quantity. To find the profit-maximizing price using the midpoint pricing rule, we need to find the mid-point between the highest and lowest possible prices.
The highest price corresponds to when the quantity demanded is 0 (P = 1000 - 2×0), which gives us P = 1000. The lowest possible price corresponds to when the quantity demanded is its maximum, which is when P = 0 (0 = 1000 - 2×Q, Q = 500).
To find the mid-point, we take the average of the highest and lowest prices [(1000+0)/2] = 500.
Therefore, the profit-maximizing price should be $500. Thus, the answer is C) $300.
Question #8: The given information states that the elasticity of demand for the product is 3 and the marginal cost is 12. To determine the price using the markup pricing on cost rule, we multiply the marginal cost by the elasticity of demand and add it to the marginal cost.
Price = Marginal Cost + (Marginal Cost * Elasticity of Demand)
= 12 + (12 * 3) = 12 + 36 = 48.
Therefore, according to the rule for markup pricing on cost, you should charge a price of $48. Thus, the answer is None of the above – more information is needed.
Question #9: To decide whether a loss-making firm should shut down or continue operating, we need to compare the average variable cost (AVC) with the price.
If the price is sufficient to cover the average variable cost, the firm should continue operating because it can cover its variable costs and contribute to minimizing its loss. Therefore, the answer is D) price is sufficient to cover average variable cost.
Question #10: Spreading the fixed costs of distribution over multiple products is known as economies of scope. This occurs when a firm can lower its average cost by producing a variety of products and sharing resources.
The decrease in average variable cost due to the effect of cumulative production over time is known as economies of scale. Economies of scale occur when the firm's average cost decreases as production increases.
Therefore, the answer is B) economies of scale; learning effects.