Question in ECO quiz 1

prateek.jain1284
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Question in ECO quiz 1

Postby prateek.jain1284 » Thu Oct 18, 2012 11:07 am

1. A marketing survey shows that gate receipts would increase if the price of tickets to a summer rock concert increased, even though the number of tickets sold would fall. What does this imply about the price elasticity of demand for concert tickets?

Demand is elastic or inelastic??

2. Fred divides his purchases between beer and pizzas. Suppose Fred's budget constraint is graphed with beer on the horizontal axis and pizzas on the vertical axis. If the price of beer is $1.50 per pint, the price of pizzas is $2 each, and Fred's income is $30 per week, then the budget constrain has a slope equal to:

-1.33 or -.75

3. Refer to the figure below. Consider the isoquant for an output level of 300 units. The firm's amount of capital is fixed at 100 units in the short run. The user cost of capital is $200 per day, and the wage rate is is $80 per day per worker. The short run total cost of producing 300 units is equal to:(Please use figure from !20 of quiz 1)

4. During the 1990’s, the price of VCR’s fell about 30%, and quantity sold decreased by the same amount. The demand for VCR’s must

a. Be inelastic
b. Be elastic
c. Have shifted to the left

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pankaj
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Re: Question in ECO quiz 1

Postby pankaj » Fri Oct 19, 2012 6:42 pm

Ans 1: The demand is inelastic.
The general rule is that non-essentials goods (appliances, cars, rock concert etc.) show elasticity of demand whereas most necessities (medicine, food, basic clothing etc.) show inelasticity of demand (that is, sell quantity do not change much with changes in price).

Ans 2: The slope of the budget constraints is
= -Price of specific goods on X axis/ Price of specific goods on Y axis
= -1.5/2.0
= -0.75
Ans 3: The correct answer is $16,000 per day.
The only economic cost to the firm in the short run is labor (capital has no alternative use in the short run - hence a zero opportunity cost). So to calculate the short run total cost of producing 300 units we need to calculate the total labor cost. This is calculated as follows:
200 workers x $80 per day per worker = $16,000 per day

Ans 4: The demand for VCR’s must have shifted to the left.

Hope this helps!

prateek.jain1284
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Re: Question in ECO quiz 1

Postby prateek.jain1284 » Fri Oct 19, 2012 8:24 pm

1. In question 1 quantity is changing w.r.t. change in price, then how come price is inelastic. Inelastic means quantity is not changing w.r.t. change in price but here its the reverse is happening. Plz explain

2. budget constraint is a line between quantities of two items with a decreasing slope. Slope always is Change in y axis / change in x axis but you explained the reverse. Can you give any reference of schweser or cfa books to support your explanation

For question 4

Shift in demand curve happens when price of related items change and movement happens when price of item changes. Here though demand curve is upward sloping but certainly change in price cannot cause the shift.
Plz explain

pankaj
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Re: Question in ECO quiz 1

Postby pankaj » Sun Oct 21, 2012 3:29 pm

Ans 1) Yes the demand is elastic. If you look at the explanation, its showing that demand in this case should be elastic.

Ans 2) Budget Constraint
M = x Px + y Py
M = total income
Px =price of X
Py = price of Y
X and Y are the quantity
When you solve the above equation to get the slope i.e. change in Y divided by change in X, your resultant will be - price of x divided by price of y.
For exam simply remember, when change in price of X and Y is not given, but only the price of two goods are given in the question having a budget constraint, calculate slope as - Price of specific goods on X axis/ Price of specific goods on Y axis.

Fourth question will be answered shortly

Hope this helps

prateek.jain1284
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Re: Question in ECO quiz 1

Postby prateek.jain1284 » Mon Oct 22, 2012 12:55 pm

Then why your answer for question 1 in your first post is "Inelastic". ??

Waiting for reply of question 4

content.pristine
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Re: Question in ECO quiz 1

Postby content.pristine » Thu Oct 25, 2012 12:22 pm

Q4 -> when prices have fallen, you would expect that the quantity demanded would have increased. However, it was shown that this decreased. This means that the VCR is no longer in demand. Think about this same scenario few years ago. When DVD players became popular, the prices of VCR's would have fallen. Still, there were few sales. Due to the popularity of DVD players, the demand curve of VCRs shifted to the left.

Hope this helps!
8-)

prateek.jain1284
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Re: Question in ECO quiz 1

Postby prateek.jain1284 » Thu Oct 25, 2012 6:41 pm

change in price is causing quantity to change, so why not demand is elastic can be an option? it can be a case of giffen good

content.pristine
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Re: Question in ECO quiz 1

Postby content.pristine » Fri Oct 26, 2012 12:35 pm

The thing to understand here is that the change in demand for VCRs is due to the DVD players. Just the change in price is not the only concern. Hence, this represents a shift in curve, not movement along a curve. VCR's are not Giffen Goods.


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