# Managerial Economics Chapter 6: Simple Pricing

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 Author: jobrous ID: 142824 Filename: Managerial Economics Chapter 6: Simple Pricing Updated: 2012-03-21 23:52:26 Tags: Mba economics Folders: Description: Exam 2 info. Show Answers:

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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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