# Quiz

## Question 1(1 point)

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Sales of shampoo by Clean-Hair, Inc. have recently decreased from 1,300 to 1,100 units in response to a price decrease from \$7 to \$5 by its main competitor. Assuming that everything else is being held constant, we can infer that:

 Instructor Explanation: The answer can be found by using the midpoints formula:

Question 1 options:
 the cross-price ARC-elasticity (midpoints formula) between the two products is -½. the cross-price ARC-elasticity (midpoints formula) between the two products is -2. the cross-price ARC-elasticity (midpoints formula) between the two products is ½. the cross-price ARC-elasticity (midpoints formula) between the two products is 2.

## Question 2(1 point)

Fast food is believed to be an inferior good. This means that:
Question 2 options:
 the income elasticity of demand for fast food is positive. fast food is really not quality food. the quantity of fast food consumed decreases as income increases. the quantity of fast food consumed increases as income increases.

## Question 3(1 point)

Let D0 and S0 be the initial demand and supply curves for gasoline. Let P* and Q* be the initial equilibrium in this market. There is an increase in incomes due to a technology boom. Which ONE of the following correctly captures the effect of this change on the market for gasoline?
Question 3 options:
 Equilibrium quantity will increase, but equilibrium price will decrease Equilibrium quantity will decrease, but equilibrium price will increase Both equilibrium quantity and price will increase Both equilibrium quantity and price will decrease

## Question 4(1 point)

In general, which of the following implies that a marginal cost curve will eventually increase as a firm produces more output?
Question 4 options:
 A production function displaying increasing returns to scale The law of equi-marginal returns Profit maximizing behavior by the firm The law of diminishing returns

## Question 5(1 point)

The general rule for profit maximization in a firm is to:
Question 5 options:
 set marginal revenue equal to marginal cost. set average cost at its minimum. reduce fixed costs by expanding output. maximize sales revenue.

## Question 6(1 point)

Over time, learning costs per unit tend to:
Question 6 options:
 fall as volume accumulates. rise as volume accumulates. first fall and then rise as volume accumulates stay constant as volume accumulates.

## Question 7(1 point)

Bob owns an auto parts firm. He uses a combination of steel and aluminum to produce his auto parts. All of the following combinations will finish the task on time. Steel costs \$15 per unit and the aluminum costs \$50 per unit. What combination of steel and aluminum should he use?
Question 7 options:
 20 units of steel and 6 units of aluminum 10 units of steel and 10 units of aluminum 12 units of steel and 8 units of aluminum 15 units of steel and 7 units of aluminum

## Question 8(1 point)

If a company has significant economies of scale in the long run – assuming a large market — the company will tend to:
Question 8 options:
 become smaller and have a rising average cost curve. become smaller and have a declining average cost curve. grow larger and have a declining average cost curve. grow larger and have raising average cost curve.

## Question 9(1 point)

You work for Starbucks and know the following elasticities:

η= 1.2 η I = 2 η xy1 = 0.4 η xy2 = -0.6

η is the price elasticity of demand for a Starbucks Tall Caramel Macchiato, ηxy1 is the cross elasticity of demand between a Starbucks Tall Caramel Macchiato and Java City’s Large Caramel Javalanche, ηxy2 is the cross elasticity of demand between a Starbucks Tall Caramel Macchiato and a Starbucks blueberry muffin, and η I is the income elasticity of a Starbucks Tall Caramel Macchiato.

a) If the manager wants to increase his sales of Tall Caramel Macchiato by 6%, in what direction and by how much does he need to change the price?

b) If the manager makes the percentage price change that you calculated in part a) will total revenue increase or decrease? How do you know?

c) Starbucks raises its price of a Tall Caramel Macchiato by 10%. The demand for Starbucks blueberry muffins will change by what percentage and in what direction?

d) Java City lowers the price of its Large Caramel Javalanche by 5%. The demand for Starbucks’ Tall Caramel Macchiato will change by what percentage and in what direction?

e) If average income increases by 3% by what percentage and in what direction will the demand for Starbucks’ Tall Caramel Macchiato change? Is a Tall Caramel Macchiato a normal good or an inferior good and how do you know?

Question 9 options: