Chapter 6
- Refer to the section on “Calculating the Price Elasticity of Demand”. Review the formula for calculating price elasticity of demand and work out the following problem:
A number of retail stores in San Diego form a “District”. In that district, a popular brand of lady’s handbag was selling at $400.00 per bag. In one week, the combined sale in the district was 200. The District Manager then declared a sale of 25% on the handbags. As a result, sale of the handbags increased to 550 in the following week.
- Calculate price elasticity of demand. (Use the following formula: Elasticity =(Change in quantity demanded/Average quantity)/(Change in price/Average price)
- What does the coefficient of elasticity indicate? Explain your answer.
- A recent study determined the following elasticities for Volkswagen Beetles:
Price elasticity of demand = 2
Income elasticity of demand = 1.5
Based on this information, answer the following questions:
- What will happen if the price of Volkswagen Beetles is reduced by 10%?
- What will happen to the price and quantity of Beetles if consumer income increases?
Chapter 9
Define the following with appropriate examples. You will not receive any point if you do not provide example of each of the definitions.
- Constant marginal cost
- Implicit cost
- Risk aversion
- Sunk cost
- Optimal quantity
Chapter 10
Fill in the gap:
(a). If good X is cheaper than good Y, and a consumer decides to consume more of good X and less of good Y, the effect is known as —- effect.
(b). If the price of a good goes down and, a consumer decides to consume more of that good, the effect is known as ——– effect.
(c). If a consumer’s income goes up and the consumer consumes less of good M, good M is known as —— good.
(d). A consumer’s budget line assumes that the consumer spends —– of their income.
Chapter 11
Complete the following Table:
| Quantity Q | Fixed Cost FC | Variable Cost VC | Total Cost TC = FC +VC | Marginal Cost MC= ∆TC/∆Q |
| 0 | $108 | 0 | ||
| 1 | 12 | |||
| 2 | 48 | |||
| 3 | 108 | |||
| 4 | 192 | |||
| 5 | 300 | |||
| 6 | 432 | |||
| 7 | 588 | |||
| 8 | 768 | |||
| 9 | 972 | |||
| 10 | 1200 |
