CHAPTER 5DEMAND ANALYSIS

MULTIPLE CHOICE
1. Point elasticity measures elasticity:
a. over a given range of a function.
b. at a spot on a function.
c. over a given range along a function.
d. before non-price effects.

2. Arc elasticity is measured:

a. over a given range of a function.
b. at a spot on a function.
c. over a given range along a function.
d. before non-price effects.

3. With elastic demand, a price increase will:

a. decrease marginal revenue.
b. decrease total revenue.
c. increase total revenue.
d. decrease marginal revenue and total revenue.

4. With unitary elasticity of demand, a price increase will:

a. be associated with zero marginal revenue.
b. decrease total revenue.
c. increase total revenue.
d. decrease marginal and total revenue.

5. With inelastic demand, a price increase produces:

a. a less than proportionate decline in quantity demanded.
b. lower total revenue.
c. lower marginal revenue.
d. lower marginal and total revenue.

6. With inelastic demand, a price increase produces:

a. higher profits.
b. lower profits.
c. lower marginal revenue.
d. lower total revenue.

7. A direct relation exists between the price of one product and the demand for:
a. complements.
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b. substitutes.
c. normal goods.
d. inferior goods.

8. The demand for a product tends to be inelastic if:

a. it is expensive.
b. a small proportion of consumer's income is spent on the good.
c. consumers are quick to respond to price changes.
d. it has many substitutes.

9. Two products are complements if the:

a. cross-price elasticity of demand is less than zero.
b. cross-price elasticity of demand equals zero.
c. cross-price elasticity of demand is greater than zero.
d. price elasticity of demand for each good is greater than zero.

10. If the income elasticity of demand for a good is greater than one, the good is:
a. a noncyclical normal good.
b. a cyclical normal good.
c. neither a normal nor an inferior good.
d. an inferior good.

11. A product that enjoys rapidly growing demand over time is likely to be:
a. a noncyclical normal good.
b. a cyclical normal good.
c. neither a normal nor an inferior good.
d. an inferior good.

12. The point advertising elasticity reveals the:

a. percentage change in demand following a change in advertising.
b. percentage change in the quantity demanded following a change in advertising.
c. percentage change in advertising following a change in the quantity demanded.
d. percentage change in advertising following a change in demand.

13. When the product demand curve is Q = 140 - 10P, and price is decreased from P1 = $10 to P2 = $9, the
arc price elasticity of demand is:
a. -0.1
b. -3
c. -4
d. -10

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14. If the point price elasticity of demand equals -2 and the marginal cost per unit is $5, the optimal price
is:
a. $5
b. $10
c. $2
d. impossible to determine without further information.

15. The concept of cross-price elasticity is used to examine the responsiveness of demand:
a. to changes in income.
b. for one product to changes in the price of another.
c. to changes in "own" price.
d. to changes in income.

16. When the cross-price elasticity PX = 3:

a. demand rises by 3% with a 1% increase in the price of X.
b. the quantity demanded rises by 3% with a 1% increase in the price of X.
c. the quantity demanded rises by 1% with a 3% increase in the price of X.
d. demand rises by 1% with a 3% increase in the price of X.

17. Goods for which I > 1 are often referred to as:

a. cyclical normal goods.
b. noncyclical normal goods.
c. being relatively unaffected by changing income.
d. inferior goods.

18. If P = -3 and MC = $0.66, the profit-maximizing price is:

a. $3
b. $0.99
c. $0.66
d. $1.98

19. In demand analysis, endogenous variables include:

a. the weather.
b. consumer incomes.
c. interest rates.
d. company advertising.

20. In demand analysis, factors within the control of the firm are called:
a. independent variables.
b. exogenous variables.
c. endogenous variables.
d. nonrandom variables.

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21. Arc elasticity:

a. gives accurate estimates of the effect on Y of very small (less than 5%) changes in X.
b. varies at different points along a function.
c. measures the effect on a dependent variable Y of a marginal change in an independent
variable X.
d. measures the effect of change in a dependent variable Y of more than a marginal amount
on an independent variable X.

22. In terms of advertising, the expected change in demand following a one-unit ($1,000) change in
advertising is:
a. A/Q
b. Q/A
c. A
d. P

23. With elastic demand:

a. a given percentage increase in price causes quantity to decrease by a larger percentage.
b. |P| > 1 and the relative change in quantity is smaller than the relative change in price.
c. a price increase raises total revenue
d. A price decrease causes total revenues to fall.

24. When marginal cost is greater than zero, the profit-maximizing point price elasticity of demand must
be:
a. greater than zero but less than one.
b. equal to one.
c. greater than one.
d. equal to zero.

25. When the product demand curve is P = $5 - $0.05Q, and Q = 40, the point price elasticity of demand
is:
a. -2/3
b. -3/2
c. -8/3
d. -3/8

PROBLEM
1. Elasticity. The demand for mini cassette players can be characterized by the following point
elasticities: price elasticity = -2, cross-price elasticity with AA Alkaline batteries = -1.5, and income
elasticity = 3. Indicate whether each of the following statements is true or false, and explain your
answer.
A. A price increase for cassette players will decrease both the number of units demanded and
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the total revenue of sellers.

B.

The cross-price elasticity indicates that a 2% reduction in the price of cassette players will
cause a 3% increase in battery demand.

C.

Demand for cassette players is price elastic and they are cyclical normal goods.

D. Falling battery prices will definitely increase revenues received by sellers of both cassette
players and batteries.
E.

A 3% price reduction in cassette players would be necessary to overcome the effects of a 2%

decline in income.

2. Elasticity. The demand for Penn's Oil motor oil can be characterized by the following point elasticities:
price elasticity = -2.5, cross-price elasticity with Value Lean motor oil = 1.5, and income elasticity =
0.75. Indicate whether each of the following statements is true or false, and explain your answer.
A. A price increase for Penn's Oil will decrease both the number of units demanded and the
total revenue of sellers.
B.

The cross-price elasticity indicates that a 2% increase in the price of Value Lean will cause a
3% increase in Penn's Oil demand.

C.

Demand for Penn's Oil is price elastic and the motor oil is a cyclical, normal good.

D. Falling Value Lean prices will definitely increase revenues received by manufacturers of
both brands of oil.
E.

A 0.9% price reduction for Penn's Oil would be necessary to overcome the effects of a 3%
decline in income.

3. Demand Analysis. The Crank Yankers DVD (season two) has been a hot seller during recent weeks.
An analysis of weekly demand shows:
Q = 3,000 - 90P
where Q is DVD sales and P is price.
A. How many DVDs could be sold at a $20 price?
B.

Calculate the point price elasticity of demand at a price of $20.

4. Demand Analysis. The South Park DVD (season three) has been a slow seller during recent months.
An analysis of monthly demand shows:
Q = 5,000 - 160P
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where Q is DVD sales and P is price.

A. How many DVDs could be sold at a $25 price?
B.

Calculate the point price elasticity of demand at a price of $25.

5. Demand Analysis. The CSI DVD (season four) has been a hot seller during recent weeks. An analysis
of weekly demand shows:
Q = 15,000 - 500P,
where Q is DVD sales and P is price.
A. How many DVDs could be sold at a $20 price?
B.

Calculate the point price elasticity of demand at a price of $20.

6. Demand Analysis. KRDY-FM is contemplating a T-shirt advertising promotion. Monthly sales data
from T-shirt shops marketing the "Listen to KRDY-FM" design indicate that:
Q = 15,000 - 800P,
where Q is T-shirt sales and P is price.
A. How many T-shirts could KRDY-FM sell at $15 each?
B.

What price would KRDY-FM have to charge to sell 5,000 T-shirts?

C.

At what price would T-shirt sales equal zero?

D. How many T-shirts could be given away?

E.

Calculate the point price elasticity of demand at a price of $15.

7. Demand Analysis. The San Diego Zoo is contemplating a stuffed panda bear advertising promotion.
Annualized sales data from local shops marketing the "Can't Bear it When You're Away" bear indicate
that:
Q = 50,000 - 1,000P
where Q is Panda bear sales and P is price.
A. How many pandas could the zoo sell at $30 each?
B.

What price would the zoo have to charge to sell 25,000 pandas?

C.

At what price would panda sales equal zero?

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D. How many bears could be given away?

E.

Calculate the point price elasticity of demand at a price of $10.

8. Demand Analysis. Robert E. Lee Grade School is contemplating a chocolate bar fund raiser. Weekly
sales data from Mrs. Grant's fifth grade class indicate that:
Q = 4,000 - 1,000P,
where Q is chocolate bar sales and P is price.
A. How many chocolate bars could be sold at $2 each?
B.

What price would have to be charged to sell 2,500 chocolate bars?

C.

At what price would sales equal zero?

D. How many chocolate bars could be given away?

E.

Calculate the point price elasticity of demand at a price of $2.

9. Demand Analysis. Aspen, Colorado is engaging in a bumper-sticker advertising campaign. Monthly

sales data from ski shops selling the "Don't Worry-Be Happy (in Aspen)" bumper-stickers indicate
that:
Q = 6,000 - 2,000P
where Q is bumper-sticker sales and P is price.
A. How many bumper-stickers could Aspen sell at $2 each?
B.

What price would Aspen have to charge to sell 5,000 bumper-stickers?

C.

At what price would bumper-sticker sales equal zero?

D. How many bumper-stickers could be given away?

E.

Calculate the point price elasticity of demand at a price of $1.

10. Optimal Price. Last week, Discount Food Stores, Inc. reduced the average price on the 22 ounce size
of Dishwashing Liquid by 1%. In response, sales jumped by 8%.
A. Calculate the point price elasticity of demand for Dishwashing Liquid.
B.

Calculate the optimal price for Dishwashing Liquid if marginal cost is 70 per unit.
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11. Optimal Price. Last week, Wally's Burgers, Inc. reduced the average price on the 1/2-pound Papa
burger by 1%. In response, sales jumped by 2%.
A. Calculate the point price elasticity of demand for Papa burgers.
B.

Calculate the optimal price for Papa burgers if marginal cost is $1 per unit.

12. Optimal Price. Last month, Forest Lumber, Inc. reduced the average price on the eight-foot pine 24s
by 1%. In response, sales jumped by 4%.
A. Calculate the point price elasticity of demand for eight-foot 24s.
B.

Calculate the optimal price for eight-foot 24s if marginal cost is $1.50 per unit.

13. Optimal Price. Last month, Rick's Bike Shop, Inc. increased the price on the 24 ounce can of bearing
grease by 1%. In response, sales dropped by 4%.
A. Calculate the point price elasticity of demand for bearing grease.
B.

Calculate the optimal price for bearing grease if marginal cost is $4.50 per unit.

14. Arc Price Elasticity. Assume that amazon.com dropped the price on a men's Seiko watch (SGF719)
from $120 to $60, and sales jumped from 50 to 100 units per day.
A. Calculate the implied arc price elasticity of demand.
B.

Is a further price decrease warranted? Why or why not?

15. Arc Price Elasticity. Assume that amazon.com cut the price on a 1.10ct Princess Cut Diamond
Solitaire engagement ring from $4,500 to $2,500, and sales rose from 50 to 75 units per week.
A. Calculate the implied arc price elasticity of demand.
B.

Is a further price decrease warranted? Why or why not?

16. Arc Income Elasticity. Glenco Motors sells an average of 20 Toyota Camry XLE four-door sedans
per month. Evanston Toyota sells twice as many. Based upon data obtained in the financing process,
Glenco customers earn an average household income of $100,000 per year, while Evanston customers
earn $125,000 per year.

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A. Calculate the implied arc income elasticity of demand.

B.

How would you characterize demand for these Toyota Camrys?

17. Cross-Price Elasticity. During the past year, the average price of lots along Lake Michigan in Carol
Beach rose from $2,500 to $3,000 per foot of lakefront. At the same time, sales of new homes located
off the Lake rose from 40 to 70 units.
A. Calculate the implied cross-price elasticity of demand.
B.

Are lakefront lots and new homes complements or substitutes? Why?

18. Elasticity Analysis. Bloomington's, Inc. is a retailer of distinctive clothing. At the end of the
company's fiscal year, you have been asked to evaluate sales of traditional wool suits and classic
blazers using the following data:

Number of
Suits Sold,
Q
400
500
700
900
1,000
600
500
700
800
900
700
500

Month
July
August
September
October
November
December
January
February
March
April
May
June

Suit
Advertising
Expenditures
A
$50,000
50,000
55,000
55,000
65,000
65,000
60,000
60,000
60,000
63,000
57,000
57,000

Suit
Price
P
$700
650
650
650
700
700
800
700
650
600
600
750

Blazer
Price
PB
$350
350
350
450
450
350
350
350
300
300
300
300

In particular, you have been asked to estimate relevant demand elasticities. Remember that in order to
estimate the required elasticities, you should only consider months when the other important factors
considered above have not changed. Note also that by restricting your analysis to consecutive months,
changes in any additional factors not explicitly included in the analysis are less likely to affect
estimated elasticities. Finally, the average arc elasticity of demand for each factor is simply the
average of monthly elasticities calculated over the past year.
A. Indicate whether there was a change or no change in each respective variable for each
month-pair during the past year.

Month-Pair
July-Aug.
Aug.-Sept.

Suit
Advertising
Expentitures
A
__________
__________

Suit
Price
P
__________
__________

Blazer
Price
PB
__________
__________

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Sept-Oct.
Oct.-Nov.
Nov.-Dec.
Dec.-Jan.
Jan.-Feb.
Feb.-March
March-April
April-May
May-June

__________
__________
__________
__________
__________
__________
__________
__________
__________

__________
__________
__________
__________
__________
__________
__________
__________
__________

__________
__________
__________
__________
__________
__________
__________
__________
__________

B.

Calculate and interpret the average arc advertising elasticity of demand for suits.

C.

Calculate and interpret the average arc price elasticity of demand for suits.

D. Calculate and interpret the average arc cross-price elasticity of demand between suits and
blazers.

19. Elasticity Analysis. Almost Famous Footwear, Inc., is a retailer of bargain-priced shoes. At the end of
the company's fiscal year, you have been asked to evaluate sales of its traditional business wing-tip and
loafer dress shoes using the following data:

Month
July
August
September
October
November
December
January
February
March
April
May
June

Pairs of
Wing-Tips
Sold
Q
30,000
50,000
60,000
100,000
120,000
80,000
45,000
75,000
85,000
105,000
75,000
45,000

Wing-Tip
Advertising
Expenditures
A
$100,000
100,000
120,000
120,000
140,000
140,000
125,000
125,000
125,000
130,000
110,000
110,000

Wing-Tips
Price
P
$110
90
90
90
100
100
120
100
90
80
80
120

Loafer
Price
PL
$70
70
70
90
90
70
70
70
60
60
60
60

In particular, you have been asked to estimate relevant demand elasticities. Remember that in order to
estimate the required elasticities, you should only consider months when the other important factors
considered above have not changed. Note also that by restricting your analysis to consecutive months,
changes in any additional factors not explicitly included in the analysis are less likely to affect
estimated elasticities. Finally, the average arc elasticity of demand for each factor is simply the
average of monthly elasticities calculated over the past year.
A. Indicate whether there was a change or no change in each respective variable for each
month-pair during the past year.
Wing-Tip
Advertising
Expentitures

Wing-Tip
Price

Loafer
Price

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Month-Pair
July-Aug.
Aug.-Sept.
Sept-Oct.
Oct.-Nov.
Nov.-Dec.
Dec.-Jan.
Jan.-Feb.
Feb.-March
March-April
April-May
May-June

A
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________

P
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________

PB
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________
__________

B.

Calculate and interpret the average arc advertising elasticity of demand for wing-tips.

C.

Calculate and interpret the average arc price elasticity of demand for wing-tips.

D. Calculate and interpret the average arc cross-price elasticity of demand between wing-tips
and loafers.

20. Income Elasticity. Deluxe Carpeting, Inc., is a leading manufacturer of stain-resistant carpeting.
Demand for Deluxe products is tied to the overall pace of building and remodeling activity and,
therefore, is sensitive to changes in national income. The carpet manufacturing industry is highly
competitive, so Deluxe's demand is also very price-sensitive.
During the past year, Deluxe sold 28 million square yards (units) of carpeting at an average wholesale
price of $16 per unit. This year, GNP per capita is expected to fall from $19,000 to $17,000 as the
nation enters a steep recession. Without any price change, Deluxe expects current-year sales to fall to
20 million units.
A. Calculate the implied arc income elasticity of demand.
B.

Given the projected fall in income, the sales manager believes that current volume of 28
million units could only be maintained with a price cut of $2 per unit. On this basis, calculate
the implied arc price elasticity of demand.

C.

Holding all else equal, would a further increase in price result in higher or lower total
revenue?

21. Income Elasticity. The Electronics Warehouse, Inc. is a leading retailer of home theater systems.
Demand for home theater systems is sensitive to changes in national income. Electronics retailing is
highly competitive, so retail demand for home theater systems is also very price-sensitive. During the
past year, the Electronics Warehouse sold 550,000 home theater systems at an average retail price of
$4,000 per unit. This year, GDP per household is expected to fall from $58,800 to $53,200 as the
nation enters a steep recession. Without any price change, the Electronics Warehouse expects
current-year sales to fall to 450,000 units.
A. Calculate the implied arc income elasticity of demand.

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B.

Given the projected fall in income, the sales manager believes that current volume of
550,000 units could only be maintained with a price cut of $500 per unit. On this basis,
calculate the implied arc price elasticity of demand.

C.

Holding all else equal, would a further increase in price result in higher or lower total
revenue?

22. Income Elasticity. CarZone, Inc., is a leading retailer of replacement car parts and accessories.
Demand for replacement car parts and accessories is tied to the overall pace of new car sales and,
therefore, is sensitive to changes in national income. The replacement car parts and accessories
industry is also very price sensitive. During the past year, CarZone sold 150,000 pairs of brake shoes
at an average wholesale price of $13 per pair. This year, per capita income is expected to fall from
$33,600 to $30,400 as the nation enters a steep recession. Without any price change, CarZone expects
current-year sales to fall to 100,000 units.
A. Calculate the implied arc income elasticity of demand.
B.

Given the projected fall in income, the sales manager believes the current volume of 150,000
units could only be maintained with a price cut of $1 per unit. On this basis, calculate the
implied arc price elasticity of demand.

C.

Holding all else equal, would a further increase in price result in higher or lower total
revenue?

23. Income Elasticity. Environmental Interiors, Inc. is a leading distributor of potted plants and their
maintenance for business environments. Demand for Environmental Interior services is tied to the
overall pace of business activity and, therefore, is sensitive to changes in national income. The
greenery service sector is highly competitive, so Environmental Interiors' demand is also very
price-sensitive. During the past year, Environmental Interiors sold 10,500 potted plants at an average
wholesale price of $25 per plant. This year, per capita income is expected to fall from $34,200 to
$30,600 as the nation enters a steep recession. Without any price change, Interior's expects
current-year sales to fall to 7,500 potted plants.
A. Calculate the implied arc income elasticity of demand.
B.

Given the projected fall in income, the sales manager believes the current volume of 10,500
plants could only be maintained with a price cut of $5 per unit. On this basis, calculate the
implied arc price elasticity of demand.

C.

Holding all else equal, would a further increase in price result in higher or lower total
revenue?

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24. Price Elasticity. Z-Best Pizza recently decided to raise its regular price on medium pizzas from $9 to
$12 following increases in the costs of labor and materials. Unfortunately, sales dropped sharply from
8,100 to 4,500 pizzas per month. In an effort to regain lost sales, Z-Best ran a coupon promotion
featuring $5 off the new regular price. Coupon printing and distribution costs totaled $100, and caused
only a modest increase in the typical advertising budget of $2,400 per month. The promotion was
judged a success as it proved highly popular with consumers. In the period prior to expiration, coupons
were used on 40% of all purchases and monthly sales rose to 7,500 pizzas.
A. Calculate the arc price elasticity implied by the initial response to Z-Best's price increase.
B.

Calculate the effective price reduction resulting from the coupon promotion.

C.

In light of this price reduction, and assuming no change in the price elasticity of demand,
calculate Z-Best's arc advertising elasticity.

D. Why might the true arc advertising elasticity differ from that calculated in Part C?

25. Price and Advertising Elasticity. EZ Auto Wash recently decided to raise its regular price on wash
and wax cycles from $5 to $7 following increases in the costs of equipment and materials.
Unfortunately, sales dropped sharply from 6,000 to 2,000 washes per month. In an effort to regain lost
sales, EZ ran a coupon promotion featuring $4 off the new regular price. Coupon printing and
distribution costs totaled $100, and caused only a modest increase in the typical advertising budget of
$1,650 per month. The promotion was judged a success as it proved highly popular with consumers. In
the period prior to expiration, coupons were used on 25% of all purchases and monthly sales rose to
3,600 washes.
A. Calculate the arc price elasticity implied by the initial response to EZ's price increase.
B.

Calculate the effective price reduction resulting from the coupon promotion.

C.

In light of this price reduction, and assuming no change in the price elasticity of demand,
calculate EZ's arc advertising elasticity.

D. Why might the true arc advertising elasticity differ from that calculated in part C?

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