Managerial Economics Chapter 6: Simple Pricing

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jobrous
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142824
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Managerial Economics Chapter 6: Simple Pricing
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2012-03-21 23:52:26
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Mba economics
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Exam 2 info.
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  1. The slope of a demand curve measures______________
    The change in the number of units of a good demanded when its price changes.
  2. What can cause the slope of a demand curve to change?
    Price measures, quantity measures, and time periods over which the demand for a product is measured.
  3. Price elasticity of demand (e) definition.
    Percentage change in quantity demandeddivided by percentage change in price

    e = % change in Q / % change in P
  4. Price inelastic (definition)
    Buyers do not respond much to a change in price.

    Percentage change in the quantity of x demanded is smaller than the percentage change in the price of x.

    (0< /e/ <1)

    IF price is lowered, price-inelastic consumers buy more units, but not enough to offset price discount, resulting in a decrease in sales revenue.
  5. Price - elastic (definition)
    The percentage change of the quantity of x demanded is greater than the percentage change in the price of x.

    (/e/ > 1)
  6. If /e/ > 1, a typical consumer will purchase ____ units of x when the price falls, and she will end up spending _________ money on X than before.
    More, more.

    When /e/ > 1, % change in Q is greater than % change in P. The units purchased by a price-elastic consumer will increase more than enough to offset discount, resulting in an increase in sales revenue after the discount.
  7. If 0 < /e/ < 1, then a typical consumer will purchase _______ units of X when the price of X falls, but she will end up spending ________ money on X.
    More; less
  8. If sales revenue increased after you sold more units as a result of a discount, the price elasticity of the demand for your product is ___________ in absolute values.
    Greater than 1.
  9. IF sales revenue remained unchanged after you sold more units as a result of a discount, the price elasticity of the demand for your product is __________
    Equal to 1.

    (Units purchased by consumers increase just enough to offset price discount.)

    • % change Q = % change P
    • so
    • /e/ = % change in Q / % change in P = 1
  10. IF sales revenue decreased after you sold more units as a result of a discount, the price elasticity of the demand for your product is
    _____.
    Less than 1.

    "% change Q" < "% change P"

    or

    /e/ < 1
  11. After a bar increased the price of beer by 10%, the amount of beer purchased decreased by 5%. Based on this data, total revenues would _____ because demand is
    ________.
    Increase; inelastic
  12. A decision to incrrease prices should be based on assumption that demand is
    _________.
    Price-inelastic.
  13. IF price elasticity of the demand for a product is estimated to be -1.5, you should _____
    the price and sell ________ to increase sales revenue.
    Lower; more.
  14. How is marginal revenue (MR) related to price (P) and price elasticity of demand /e/ ?
    Marginal Revenue = Price * [1- 1/ /e/].

    So if you're given price and /e/, you can calculate MR.
  15. If you're given P, /e/, and marginal cost, and question asks what firm should do about price and production...
    • Use P and /e/ to calculate MR, then compare MR to MC - remember:
    • If MR > MC, lower price and sell more
    • (if /e/ > 1)
    • IF MR < MC, raise price and sell less.
  16. Profit margin per dollar (formula)
    Profit margin = P - MC divided by P
  17. Other things being equal, the price elasticity of demand for a good tends to be more ___________ the fewer the available substitutes.
    price-inelastic
  18. IF buyers perceive there to be few close substitutes for an item, it would likely make it less________.
    • Price-elastic.
    • (or more price-inelastic)
  19. What are some factors that affect the price elasticity of demand for a product?
    • The number of substitutes.
    • The amount of time consumers have to adapt to price changes.
    • The percentage of the consumer's budget spent on the product.
  20. Income elasticity of demand (ei) (equation)
  21. If demand rises when income rises, a good is considered to be _____
    Normal.
  22. If ei is less than 1, _______.
    then % change in Q demanded increases less than % change in income.
  23. If ei is greater than 1, _______.
    then % change in Q demanded increases more than % change in income.
  24. If income elasticity of demand (ei) for x is estimated to be 2.5, the quantity of x purchased will_________as income increases, adn the share of income spent on x will
    ______.
    Increase; increase.
  25. If ei is postive, then x is a ____ good.
    Normal.
  26. If ei > 1, demand for x is __________.
    Income-elastic.
  27. If income elasticity of the demand for x is 1.5, and income elasticity of the demand for y is 2.0, and an economic boom is forecasted, one should invest more in ________.
    Y stocks.
  28. If the cross price elasticity of demand is negative between 2 goods, they are ____.
    Complements.
  29. Complement (definition)
    A good whose demand increases when the price of another good decreases. Examples include a parking lot and shopping mall or a hamburger and a hamburger bun.
  30. IF the cross price elasticity of demand is positive between 2 goods, they are _____.
    Substitutes.
  31. Substitute (definition)
    A good whose demand increases when price of another good increases. Two brands of cola soft drinks are substitutes.
  32. Cross-price elasticity of demand (definition)
    The cross-price elasticity of demand for Good A with respect to the price of Good B measures the percentage change in demand of Good A caused by a percentage change in the price of Good B.
  33. Midpoint formula to determine price elasticity:


    e = % change Q / % change P

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