Hi again k9queen,
Here are the answers to the questions with a brief explanation:
1) A 4 percent reduction in the price of a product causes consumer
expenditure to remain increase. The price of demand is:
b)greater than one
c)greater thanzero but less than 1
d)equal to 1
REASON: In a 'typical' supply/demand situation demand would always
increase with a decrease in price. The fact that it doesn't here means
that there demand is independant of price (in other words it wouldn't
change no matter how much price was reduced).
2)A firm produces and sells two goods, A and B. Good A is known to
have many close subtitutes; good B makes up a significant portion of
most families budgets. A price increase for each good would most
likely cause total revenue from good A to :
a) increase and total revenues from good B to decrease.
c)decrease and total revenues from good B to increase.
d)decrease and total revenues from good B to decrease.
REASON: The fact that Good A has many substitutes means that cosumers
have a choice when buying a product to meet a specific need. A
high-priced Good A will drive people to buy substitutes instead, thus
decreasing revenues from Good A. Since Good B appear to be a staple
product (and we can't assume that it has any substitutes) people will
continue to purchase this product if price increases. This, in effect,
will increase revenues from Good B.
3)A person who has high cholesterol and must exercise an hour every
day has what type of a demand for exercise equipment?
REASON: This person's demand is inelastic - they must exercise or risk
death or serious health problems. Therefore they will purchase the
exercise equipment without any sensitivity to price.
4)A product priced at $5 has annual sales of 1,000 units. When priced
is reduced to $4, quantity increases to 1,250 units. Other things
unchanged, the price of elasticity of demand for the product is:
REASON: Notice that the revenues in each situation are the same
($5000). This means that for any change in price, the quantity
purchased at that price will adjust itself such that revenue remains
unchanged (we can assume so give these figures). Thus, elasticity of
demand is unitary.
5)A study of mass-transit systems in America cities revealed that in
the long run revenues generally decline after substantial fare
increases. This would suggest that:
a)the demand for mass-transit is price-elastic in the long run.
b)the demand for mass-transit is price-inelastic in the long run.
c)mass-transit service deteriorates in the long run as price rises.
d)there are few good substitutes for such systems in urban areas.
REASON: The factors affecting revenue are unit cost and units sold (in
this case transit fares). Increasing unit cost results in a long-term
decrease in units sold *more* than the offset of the higher cost. This
is the classic situation of price elasticity.
Hopefully this is helpful - let me know if you have any problems
understanding the information above :)