Question for Practices

Q.1 Complete the following, solving for the present value, PV:

Case Future Interest Number of Present

Value Rate Periods Value
1 10000 5% 5
2 563000 4% 20
3 5000 5.5% 3
Q.2 Suppose you want to have $0.5 million saved by the time you reach age 30 and
suppose that you are 20 years old today. If you can earn 5% on your funds, how much
would you have to invest today to reach your goal?

Q.3 You are valuing an investment that will pay you 12,000 the first year, 14,000 the
second year, 17,000 the third year, 19,000 the fourth year, 23,000 the fifth year, and
29,000 the sixth year (all payments are at the end of each year). What it the value of the
investment to you now is the appropriate annual discount rate is 11.00%?

Q.4 You are valuing an investment that will pay you $27,000 per year for the first ten
years, $35,000 per year for the next ten years, and $48,000 per year the following ten
years (all payments are at the end of each year). If the appropriate annual discount rate
is 9.00%, what is the value of the investment to you today?

Q.4 You are given market data that says when the price of pizza is $4, the quantity
demanded of pizza is 60 slices and the quantity demanded of cheese bread is 100 pieces.
When the price of pizza is $2, the quantity demanded of pizza is 80 slices and the
quantity demanded of cheese bread is 70 pieces. Can the Price-Elasticity of Demand be
calculated for either good? If so, calculate the PED.

Q.5 Suppose a firm sells 20,000 units when the price is $16, but sells 30,000 units when
the price falls to $14. Calculate the percentage change in the quantity sold over this
price range. Calculate the percentage change in the price. Find the price elasticity of
demand over this range of prices. State whether demand is elastic or inelastic over this
range. If the price were to fall another 4%, what should the firm predict will happen to
its quantity sold?
Q.6 Suppose a firm sells 70 units when the price is $6, but sells 80 units when the price
falls to $4. Calculate the firm's revenue at each of the prices. Use the total-revenue test to
determine whether demand is elastic or inelastic over this range.

Q.7 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.

Q.8 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?

Q.9 Discount stores sell relatively elastic goods. Ceteris paribus, explain why selling at
a relatively low price is profitable for them?

Q.10 A firm had sales revenue of Rs. 10, 00,000 last year. It spent Rs. 6, 00,000 on labor,
Rs. 1, 50,000 on capital and Rs. 2, 00,000 on materials. The firm's factory sits on land
owned by the firm that could be rented out for Rs.30, 000 per year. What was the firm's
accounting profit and economic profit last year?

Q.11 Assume you own and manage your own fruit stand. The financial information for

the stand is given below (all values are monthly).

Wholesale fruit cost $2000

Labour $800

Fruit stand lease $1000

Monthly revenue $5000

Answer each of the following, based on the information provided.

a. Calculate your accounting profit.

b. If your other employment opportunity is to earn $10 00 per month working at a t-

shirt stand (and you are equally happy selling fruit or t-shirts), what is your economic
profit? Should you continue selling fruit? Explain.
c. What happens to your economic profit if you enjoy selling t-shirts and would be
willing to forgo up to $250 per month to work selling t-shirts rather than fruit? Should
you continue selling fruit? Explain.

2. Assume you are currently working in a government job that pays $20,000 per year
and you have $40,000 in an account earning 10% interest. You have the opportunity to
buy a fruit orchard that produces $23,000 per year in revenue for a price of $50,000. You
have always wanted to work in the fruit industry. Should you buy the orchard? Explain

3. Assume you have an idea for a new fruit picking machine that will cost the same as
current fruit picking methods but will yield 10% more revenue because it will pick more
fruit and damage less. To develop the new machine you would have to take two years
off from your $25,000 per year job managing the fruit company. Other fruit companies
would figure out the new technology in time to use it after only one season. Should you
take the time off to develop the new machine if annual fruit revenue is $500,000?
Explain, assuming an interest rate of zero.

3. Which of the following is the difference between accounting profit and economic
profit?

a. Accounting profit considers all costs.

b. Economic profit considers only implicit costs.

c. Normal profit.

d. Equal to excess profit.

e. Zero.

5. Assume that you own your own business and your explicit costs are $10,000 per
year. You could earn $11,000 in your next-best alternative job. You r revenue is $22,000
per year. What is your accounting profit?

a. $1000.

b. $2000.

c. $11,000.
d. $12,000.

e. $22,000.

6. Assume that you own your own business and your explicit costs are $10,000 per
year. You could earn $11,000 in your next best alternative job. You r revenue is $22,000
per year. What is your economic profit?

a. $1000.

b. $2000.

c. $11,000.

d. $12,000.

e.$22,000.

Objective Questions:

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.

13. 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.

14. If the elasticity of demand for college textbooks is -0.1, and the price of textbooks increases
by 20%, how much will the quantity demanded change, and in what direction? *
a. The quantity demanded increases by 2%
b. The quantity demanded decreases by 20%
c. The quantity demanded decreases by 2%
 d. The quantity demanded remains the same

15. If the elasticity of demand for spring break packages to Cancun is -5, and if you notice that
this year in Cancun the quantity of packages demanded increased by 10%, then what happened to
the price of Cancun vacation packages? *
a. The price fell by 10 percent
b. The price fell by 2 percent
c. The price increased by 2 percent
d. The price remained the same

16. In your college town, real estate developers are building thousands of new student-friendly
apartments close to campus. If you want to pay the lowest rent possible, should you hope that
demand for apartments is elastic or inelastic? *
a. Elastic
b. Inelastic
17. In your college town, the local government decrees that thousands of apartments close to
campus are uninhabitable and must be torn down next semester. If you want to pay the lowest
rent possible, should you hope that demand for apartments is elastic or inelastic? *
a. Elastic
b. Inelastic
18. The long-run elasticity of oil demand has been estimated at -0.5. If the price of oil rises by
10%, how much will the quantity of oil demanded fall? *
a. 5%
b. 0.5%
c. 2%
d. 20%
19. The long-run elasticity of oil demand has been estimated at -0.5. Does a 10% rise in oil
prices increase or decrease total revenues to the oil producers? *
a. Increase
b. Decrease
20. In the United States, the long-run elasticity of oil demand has been estimated at -0.5. Some
policymakers and environmental scientists would like to see the United States cut back on its use
of oil in the long run. We can use this elasticity estimate to get a rough measure of how high the
price of oil would have to permanently rise in order to get people to make big cuts in oil
consumption. How much would the price of oil have to permanently rise in order to cut oil
consumption by 50%? *
a. 5%
b. 25%
 c. 50%
d. 100%
21. France has the largest long-run elasticity of oil demand (–0.6) of any of the large, rich
countries, according to Cooper’s estimates. Does this mean that France is better at responding to
long-run price changes than other rich countries, or does it mean France is worse at responding?
*
a. Better at responding
b. Worse at responding
22. The elasticity of demand is 0.2. Is the demand curve relatively steep or flat? Will a fall in
price raise total revenue or lower it? Note: we present the elasticity in terms of its absolute value.
*
a. Relatively steep; raise total revenue
b. Relatively flat; raise total revenue
c. Relatively steep; lower total revenue
d. Relatively flat; lower total revenue
23. The elasticity of demand is 2.0. Is the demand curve relatively steep or flat? Will a fall in
price raise total revenue or lower it? Note: we present the elasticity in terms of its absolute value.
*
a. Relatively steep; raise total revenue
b. Relatively flat; raise total revenue
c. Relatively steep; lower total revenue
d. Relatively flat; lower total revenue
24. The elasticity of demand is 1.1. Is the demand curve relatively steep or flat? Will a fall in
price raise total revenue or lower it? Note: we present the elasticity in terms of its absolute value.
*
a. Relatively steep; raise total revenue
b. Relatively flat; raise total revenue
c. Relatively steep; lower total revenue
d. Relatively flat; lower total revenue
25. The elasticity of demand is 0.9. Is the demand curve relatively steep or flat? Will a fall in
price raise total revenue or lower it? Note: we present the elasticity in terms of its absolute value.
*
a. Relatively steep; raise total revenue
b. Relatively flat; raise total revenue
c. Relatively steep; lower total revenue
d. Relatively flat; lower total revenue
26. Henry Ford famously mass-produced cars at the beginning of the twentieth century, starting
Ford Motor Company. He made millions because mass production made cars cheap to make, and
he passed some of the savings to the consumer in the form of a low price. Cars became a
common sight in the United States thereafter. Keeping total revenue and its relationship with
price in mind, do you expect the demand for cars to be elastic or inelastic given the story of
Henry Ford? *
a. Elastic
b. Inelastic