Elasticity and the Nash Equilibrium

Part A

1. The quantity of a good demanded rises from 1000 to 1500 units when the price falls from $1.50 to $1.00 per unit. The price elasticity of demand for this product is approximately:

A. 1.0

B. .16

C. 2.5

D. 4.0

2. If the elasticity of demand for a commodity is estimated to be 1.5, then a decrease in price from $2.10 to $1.90 would be expected to increase daily sales by:

A. 50%

B. 1.5%

C. 5%

D. 15%

3. Demand is said to be inelastic when:

A. the percentage change in quantity demanded is greater than the percentage change in price of a good

B. in a linear demand curve, quantity demanded is close to zero (given the price) so that the percentage change in quantity demanded will be very high

C. the percentage change in price exceeds the percentage change in quantity demanded of a good

D. a relatively small change in price results in a relatively big change in quantity demanded

4. Suppose that the Board of Directors of the local symphony proposes that the admission price to hear the orchestra be raised as a means of raising additional funds to support music programs. Its members are implicitly assuming that the price elasticity of demand for a ticket is:

A. less than unity

B. greater than unity

C. unity

D. it really says nothing about price elasticity

5. The determinants of the price elasticity of demand of a particular commodity include all of the following except:

A. the availability of substitutes for the commodity

B. the time period involved

C. the ease with which resources can be shifted to and from the production of this commodity to other uses

D. the degree of specificity with which the commodity is defined

6. The fact that the expenditure on food as a percentage of income has declined as income has increased indicates that food:

A. is an inferior good

B. is a luxury good

C. has an income elasticity of demand less than unity

D. is a normal good with an elastic demand

E. there is not enough information to be able to determine what type of good food is

7. A tax will be borne completely by suppliers if:

A. the demand curve is perfectly inelastic while the supply curve is upward sloping

B. the demand curve is downward sloping while the supply curve is perfectly inelastic

C. the supply curve is perfectly elastic and the demand curve is negatively slope

D. price elasticities of both supply and demand equal one

E. both the demand and supply curves are perfectly inelastic

8. The quantity of a good demanded rises from 90 units to 110 units when the price falls from $1.20 to $.80 per unit. The price elasticity of demand for this product approximates:

A. .5

B. 1.0

C. 2.0

D. 4.0

9. A downhill ski area is experiencing a decline in the number of lift tickets sold, falling revenues, and inadequate profits. The average price of a lift ticket is $20 and there are 2,500 tickets sold daily on average. The estimated price elasticity of demand is 1.5 and the lifts are currently operating at an average of 75 percent of capacity. Which of the following methods is most likely to increase the ski area's revenues and profits.

A. a 10 percent increase in the average price of a lift ticket.

B. an aggresive advertising campaign.

C. a 10 percent increase in the average price of a lift ticket combined with an aggresive advertising campaign.

D. a 10 percent decrease in the average price of a lift ticket.

10. Consumers will bear more of the burden of a tax the:

A. more elastic supply is.

B. more elastic demand is.

C. the more inelastic supply is.

D. consumers always bear the burden of the tax since they pay the final price.

E. none of the above.

11. An income elasticity of demand equal to 2 for a particular product means that:

A. demand curves for the product slope upward.

B. the product is an inferior good.

C. a 10 percent increase in income will yield a 20 percent increase in the quantity sold.

D. a 20 percent increase in income will result in a 10 percent increase in the quantity sold.

E. (% change in Q) / (% change in P) = 2.

12. From which of the following data might you estimate a price elasticity of supply?

A. a price hike from $7 to $13 causes sales to fall from 16,000 shirts to 8,000 shirts monthly.

B. farmers increase soybean plantings 15 percent when the price increases 5 percent.

C. Ford's production increases when Chevy sales fall because GM raises prices.

D. the output of tennis balls slumps 8 percent when the prices of racquets go up 12 percent.

E. steel production and sales rise 18 percent when national income grows 13 percent.

14. In the last 20 years real medical expenditures have more than doubled. Physicians supply medical services at a lower cost than do hospitals. Thus, it has been suggested that total medical expenditures could be decreased by increasing the supply of physicians. Which of the following findings would support this position?

A. it is found that the cross elasticity of demand between physicians and hospitals is positive and relatively large.

B. it is found that the cross elasticity of demand between physicians and hospitals is negative and relatively large in absolute value.

C. it is found that the cross elasticity of demand between physicians and hospitals is relatively large in absolute value.

D. it is found that the demand for physicians is relatively inelastic.

E. there is not enough information given above to determine the effect that an increase in the supply of physicians will have on medical expenditures.

15. You are a supplier of peanuts. Your research department estimates that the price elasticity of demand for peanuts is 2.5. By what percentage will quantity demanded rise if you lower price from $4 to $2?

A. 16.67 percent.

B. 167 percent.

C. 67 percent.

D. 50 percent.

E. none of the above.

16. A long-run demand curve, as compared to a short-run demand curve for the same commodity, is generally:

A. more elastic

B. less elastic

C. of the same elasticity

D. steeper if the curves are plotted against the same horizontal scale.

E. none of the above.

17.Anna owns the Sweet Alps Chocolate store. She charges $10 per pound for her hand made chocolate. You, the economist, have calculated the elasticity of demand for chocolate in her town to be 2.5. If she wants to increase her total revenue, what advice will you give her and why?Be able to explain your answer. (3 marks)

18.If the cross elasticity of demand between peanut butter and milk is -1.11, then are peanut butter and milk substitutes or complements?Be able to explain your answer. (2 marks)

19.A 10 percent increase in income brings about a 15 percent decrease in the demand for a good. What is the income elasticity of demand and is the good a normal good or an inferior good?Be able to explain your answer. (2 marks)

20.If the price of a good increases by 8% and the quantity demanded decreases by 12%, what is the price elasticity of demand?Is it elastic, inelastic or unitary elastic? (2 marks)

21.Discount stores sell relatively elastic goods.Ceteris paribus, explain why selling at a relatively low price is profitable for them? (2 marks)

22. According to the Nash equilibrium model, large companies will seek out the best market outcome for themselves but must do so while considering the potential moves of their competitors.

What is the likely outcome of the following scenario given that both companies will seek to maximize their overall profitability? Explain the reason for your answer. (3 marks)

a.American Airlines

b.Air Canada (outcomes are in italics)

Raise FareMaintain Fair

$140

$140

$160

$80

$80

$160

$100

$100

Raise Fare

Maintain Fare

Criteria for Success

An answer must be given for each question by either circling the correct multiple choice answer or providing a written response with an appropriate level of detail.

Thinking/Inquiry/Application

30 marks