Lecture No. 4 The Firm’s Revenue: Demand & Price Elasticity of Demand

Q31 Figure No.4 shows the demand curve for a firm’s brand of tennis shoes. Currently the firm’s selling price is £50 a pair and annual sales are 24,000 pairs. A 20% reduction in the price of tennis shoes sees the quantity demanded to expand by 30%. What will the new selling price and quantity demanded given this fall in price?

?

Price = £40, Quantity (Qd) = 31,200 annually (пропарция)

Figure No.4

Q32 Figure No.4 shows the demand curve for a firm’s brand of tennis shoes. Currently the firm’s selling price is £50 for a pair of tennis shoes and annual sales are 24,000 pairs. A 20% reduction in the price of tennis shoes sees the quantity demanded to expand by 30%. As a result the firm’s total revenue from this particular brand of tennis shoes will change by what percentage?

4.00% (24000*50=1200000 (100%),31200*40=1248000 (104%))

Q33 When the price of a good rises, the quantity demanded falls, this inverse relationship between price and the quantity demanded is explained by the income and substitution effects of a price rise. The Decide whether the following statements about the income and substitution effects of a price raise are correct.

1. The income effect refers to the effect on price and quantity demanded of a change in consumer income.

2. The substitution effect refers to the effect on the quantity demanded of a change in the price of a substitute good. 3. The often heard comment: ‘Well I can’t afford that, I’ll buy another brand instead!” is in fact referring to the income and substitution effect of a price rise.

Only No.1 and No.2 are correct

Q34 The formula for price elasticity of demand (PED) is

The percentage change in quantity demanded ÷ the percentage change in price

Q35 The price elasticity of demand for a given product is -1.23; a change in the price of this product from £250 to £262.50 should see the quantity demanded change by how much?

Fall by 6.15%

Q36 With respect to price elasticity of demand which of the following statements is correct

1. The sign of price elasticity of demand indicates the nature of the relationship between price and the quantity demanded; therefore in normal circumstances this should be negative.

2. The absolute value (ignoring the sign) indicates the magnitude of the relationship between price and quantity demanded.

3. An absolute value greater than one indicates that demand is responsive to changes in price.

4. An absolute value less than one indicates that demand is inelastic with respect to price.

5. For goods whose demand is elastic with respect to price any rise in price will see a fall in total revenue.

6. For goods whose price elasticity of demand is –0.75, a rise in price will see total revenues rise (and visa-versa)

All statements are correct

Q37 The Figure No. 5 shows the demand curves for two different products (Good A and Good B). In both cases the price has fallen; Good A from £1.10 to £1.00, Good B, from £110 to £100. Given the change in the quantity demanded (Qd) what is the price elasticity of demand for each product?

Figure No.5

A = – 0.58, B = – 2.75

Q38 Of the following statements, which are considered to be the determinants of price elasticity of demand?

1. The number of substitute goods available.

2. The percentage of consumer’s income spent on the good.

3. The market clearing price

4. The closeness of definition.

5. Whether the product is habit forming.

All but 3

Q39 The demand for petrol driven cars would shift LEFT if which of the following were to happen?

1. The price of these types of cars increased

2. The price and availability of viable substitutes to petrol driven cars fell 3. Price and availability of complements (e.g. car insurance) fell 4. A rise in consumers' real incomes

5. Consumers believe a sales tax on cars is likely to be abolished in the near

future

6. Consumers in general believe the selling price of all cars is likely to fall in the near future.

2, 3, and 4

Q40 If a decrease in consumer income increases the demand for a good, then the good is a

inferior good

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