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ECO101H1 Lecture Notes - Lecture 7: Demand Curve, Normal Good, Inferior Good

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indigolion451
5 Apr 2017
School
UTSG
Department
Economics
Course
ECO101H1
Professor
Jessica Burley

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ECO101H1 Full Course Notes
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Document Summary

Inelastic demand curve (tr if p ) Tr0 = p0 x q0 (revenue at old price) Tr1 = p1 x q1 (revenue at higher price) In this case, revenue increase exceeds revenue decrease , so total revenue rises as prices increases. Two opposing forces when there is an increase in price: revenue increases because continuing customers pay the higher price, revenue decreases because some customers will. For an inelastic demand curve, 1 is greater than 2. For an elastic demand curve, 2 is greater than 1. 1 of 10 toll bridges across a river. A: increase the price of the ttc since there the demand is inelastic. A: the price where demand is unit elastic (equilibrium) Above the unit elastic price, demand is elastic and a higher price reduces total revenue. Below the unit elastic price, demand is inelastic and a lower price reduces total revenue. Most goods are normal goods, few goods are inferior goods.

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Related Questions

A. A competitive firm

  1. can consider only its location in setting the price.
  2. must base its competitive price on product differentiation.
  3. has the ability to set its own price.
  4. must accept the price determined by the intersection of the market supply and demand curves.
  5. has no supply curve.

B. If a firm is making an economic profit, then

  1. the factors of production are being paid their opportunity costs.
  2. there will be no change in the number of firms if the industry is perfectly competitive.
  3. the factors of production are being paid less than their opportunity costs.
  4. the factors of production are being paid more than their opportunity costs.
  5. the firm will exit the industry

C. Along a downward-sloping monopoly demand curve,

  1. marginal revenue is greater than price.
  2. the elasticity of demand is constant.
  3. marginal revenue decreases when the price decreases.
  4. marginal revenue is equal to zero when the price is equal to zero

D. If, in the short run, a perfectly competitive firm is producing at a point where the total cost is greater than total revenue, then the firm should

  1. shut down because economic profits are negative.
  2. continue to produce as long as P > AVC.
  3. continue to produce because accounting profits are positive.
  4. set a higher price for its output.
  5. set a lower price for its output

E. For a perfectly competitive firm, the demand curve is

  1. the marginal revenue curve.
  2. perfectly inelastic.
  3. always equal to marginal cost.
  4. the same as the market demand curve

F. A firm in a(n) industry will have the most elastic demand curve

  1. monopolistic
  2. oligopolistic
  3. monopolistically competitive
  4. perfectly competitive

G. If the demand curve of a monopolist is in the inelastic range, then

  1. total revenue will fall if the price increases.
  2. total revenue will be unchanged if the price increases.
  3. total revenue will rise if the price increases.
  4. the total supply will increase by an equal amount if demand increases.
  5. the price will be unchanged if total revenue increases

H. Monopolistic competition and oligopoly are examples of

  1. monopoly.
  2. perfect competition.
  3. theories of consumer behavior.
  4. imperfect competition.
  5. the extreme cases on the market structure continuum

I. Under which market structure do firms face the flattest (most elastic) demand curve?

  1. perfect competition
  2. monopolistic competition
  3. oligopoly
  4. monopoly

J. At the point of long-run equilibrium for a perfectly competitive firm,

  1. economic profits are zero.
  2. TR > TC.
  3. TR < TC.
  4. P = AVC.
  5. normal profits are zero.

A small firm faces an inverse demand function of P = 100 - Q. Its total cost function is given by TC = .5Q2. (You should see right away that marginal revenue is thus MR = 100 - 2Q, and it also happens that marginal cost is just MC = Q. Both MR and MC are the first derivatives of total revenue and total cost. And a quick comment on MC: unlike some marginal cost functions we've seen, this one is not constant, because marginal cost is getting $1 higher with each additional unit of output.)

The Chief Executive Officer will manage the firm, choosing output and price. Currently, the CEO is negotiating an incentive-based contract with the shareholders of the company.
(Hint: basing compensation on revenue will motivate revenue maximization rather than profit maximization!)

Hint: since the plan creates incentives for the CEO to maximize revenue rather than profit, you should not set MR = MC at this point. BIG hint: revenue is maximized when selling an additional unit won't increase your revenue, or in math terms, when MR = 0.)

Owners' proposal: CEO keeps 10% of TR.

Firm price:

  

Firm output:

  

Total revenue:

  

Firm profit:

  

CEO compensation:

  

Remaining profit for owners:

  

Question 1 (1 point) Question 1 Unsaved In a competitive market the equilibrium price is determined: Question 1 options: at the intersection of the firm’s demand and the market supply curves. at the intersection of the market demand and supply curves. at the intersection of the firm’s demand and marginal cost curves. so as to cover the costs of the potential firms. so as to cover the costs of the firms currently in the industry. Save Question 2 (1 point) Question 2 Unsaved If the perfectly competitive market demand for gym shoes is given by QD = 100 – P and the market supply is given by QS = 10 + 2P, then the equilibrium price and quantity will be: Question 2 options: P = 50 and Q = 50. P = 40 and Q = 90. P = 40 and Q = 60. P = 30 and Q = 70. P = 25 and Q = 75. Save Question 3 (1 point) Question 3 Unsaved A constant-cost industry is one in which: Question 3 options: input prices do not change over time. technology does not change over time. input prices and technology do not change as firms enter or exit the industry. input prices and technology do not change over time. firms have reached the maturity phase of the industry’s life cycle. Save Question 4 (1 point) Question 4 Unsaved At the profit-maximizing level of output for the monopolist: Question 4 options: total revenue is equal to total cost. total costs are minimized. total revenue is maximized. marginal revenue is equal to marginal cost. average revenue is equal to average cost. Save Question 5 (1 point) Question 5 Unsaved Craig’s Red Sea Restaurant is the only restaurant in Columbia, South Carolina, that sells Ethiopian food. The demand for Ethiopian food is given by Q = 25 – P. Craig’s costs are given by TC = 25 + Q + 5Q2. Its maximum monopoly profit is: Question 5 options: –$1. $21. $22. $24. $26. Save Question 6 (1 point) Question 6 Unsaved So long as price exceeds average variable cost, in the model of monopolistic competition, a firm maximizes profits by producing where: Question 6 options: the difference between marginal revenue and marginal cost is maximized. marginal cost equals marginal revenue. marginal revenue equals price. the difference between price and marginal cost is maximized. price equals marginal cost. Save Question 7 (1 point) Question 7 Unsaved If a firm in a monopolistically competitive industry is profit maximizing, it should choose its level of advertising such that the marginal revenue of an additional dollar of advertising: Question 7 options: is equal to the elasticity of its demand curve minus 1. is exactly $1. increases revenues by $1. is equal to 1 plus the elasticity of its demand curve. is equal to the elasticity of its demand curve. Save Question 8 (1 point) Question 8 Unsaved Firms advertise in order to: Question 8 options: build brand loyalty. appeal to the price-sensitive consumers. increase the demand elasticities of their loyal customers. shift the market supply curve to the left. shift the market demand curve to the left. Save Question 9 (1 point) Question 9 Unsaved Firms offer promotions in order to: Question 9 options: build brand loyalty. appeal to the price-sensitive consumers. increase the demand elasticities of their loyal customers. shift the market supply curve to the left. shift the market demand curve to the left. Save Question 10 (1 point) Question 10 Unsaved If the demand increases for the product of a decreasing-cost industry: Question 10 options: short-run price goes up, but long-run price falls. long-run output goes up, but long-run price may go up or down. short-run output goes up, but long-run output may go up or down. long-run output goes up, but short-run price remains constant. long-run price goes up, but short-run price may go up or down. Save Question 11 (1 point) Question 11 Unsaved If the demand increases for the product of an increasing-cost industry: Question 11 options: short-run price goes up, but long-run price falls. long-run output goes up, but long-run price may go up or down. short-run output goes up, but long-run output may go up or down. long-run output goes up, but short-run price remains constant. short-run price goes up, and long-run price goes up. Save Question 12 (1 point) Question 12 Unsaved When Pan United Airlines gives a $400 fare discount to persons with student IDs, they are practicing: Question 12 options: first-degree price discrimination. second-degree price discrimination. third-degree price discrimination. markup pricing. tying. Save Question 13 (1 point) Question 13 Unsaved When a utility charges homeowners less than big industrial users, it is practicing: Question 13 options: first-degree price discrimination. fourth-degree price discrimination. third-degree price discrimination. markup pricing. tying. Save Question 14 (1 point) Question 14 Unsaved Cereal manufacturers’ use of coupons can be partially explained by: Question 14 options: first-degree price discrimination. second-degree price discrimination. third-degree price discrimination. markup pricing. tying. Save Question 15 (1 point) Question 15 Unsaved If a firm supplies separable markets with price elasticities h1 and h2, it should set prices P1 and P2 so that: Question 15 options: P1h1 = P2h2. P1 /h1 = P2 /h2. P1(1 + 1/h1) = P2 (1 + 1/h2). P1/(1 – 1 /h1) = P2 / (1 – 1/h2). P1 = 1 – 1/h1 and P2 = 1 – 1/h2. Save Question 16 (1 point) Question 16 Unsaved If a firm supplies separable markets with price elasticities h1 = –3 and h2 = –2, it should set prices P1 and P2 so that: Question 16 options: P1 = P2. 3P1 = 2P2. 2P1 = 3P2. 2/3P1 = 1/2P2. 2P1 = 2/3P2. Save Question 17 (1 point) Question 17 Unsaved Women are often charged more than men for haircuts performed by the same haircutter. This is not considered price discrimination because: Question 17 options: women receive more consumer surplus from haircuts than men receive. haircutters claim to spend more time on women’s hair, raising the cost of the haircut to the firm. firms make up the extra cost to consumers by giving women free samples of products. men receive more consumer surplus from haircuts than women receive. women have a lower price elasticity of demand for haircuts. Save Question 18 (1 point) Question 18 Unsaved If price is above the average variable cost but below the average total cost of a representative firm in a competitive industry: Question 18 options: there will be entry to the industry over time. there will be exit from the industry over time. the firms in the industry are just earning a normal rate of return. the firms in the industry are earning a supranormal rate of return. the industry is in long-run equilibrium. Save Question 19 (1 point) Question 19 Unsaved Joe’s T-shirts has costs given by TC = $100 + 3Q, where Q is the number of shirts. If Joe charges $5 each, the percentage markup for 100 shirts is: Question 19 options: 20%. 25%. 33%. 50%. 67%. Save Question 20 (1 point) Question 20 Unsaved In the model of monopolistic competition, there can be short-run: Question 20 options: losses or profits, but there must be profits in long-run equilibrium. profits, but there must be losses in long-run equilibrium. losses or profits, but there must be losses in long-run equilibrium. losses or profits, but there must be neither profits nor losses in long-run equilibrium. losses, but there must be profits in long-run equilibrium.