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Q1F09answers - October 21, 2009 Quiz 1 True-False...

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October 21, 2009 Quiz 1 True-False Questions: 1. In competitive equilbrium, if positive amounts of a good are sold by sellers with high costs and also by sellers with low costs, then the sellers with high costs will be getting higher prices for what they sell than the sellers with low costs. Answer: False The fundamental assumption used in defining a competitive equilibrium is that everyone trades at the same price. As your experiments demonstrated, that assumption is not very accurate, but it’s a good simplification in that it leads to a simple model that produces reasonably good predictions. Read page 8 of Bergstrom-Miller. 2. In a competitive equilibrium, the Buyer Value of any buyer who buys a unit of the good is greater than or equal to the Seller Cost of any seller who sells a unit of the good. Answer: True In a competitive equilibrium, everyone is assumed to trade at the same price. Buyers will only buy if their Buyer Values are greater than or equal to this price, and sellers will only sell if the Seller Costs are less than or equal to this price. Therefore, the Buyer Value of any buyer will be greater than or equal to the price, which is greater than or equal to the Seller Cost of any seller. 3. If the demand curve is a downward-sloping, straight line, then the price elasticity of demand is constant all along the demand curve. Answer: False The formula for the price elasticity of demand is p p q q E d Δ = This can be rewritten as q p p q E d = . The fraction p q is the inverse of the slope of the demand curve. For a linear demand, it is constant. However the ratio q p falls as you move down the demand curve. Thus, the price elasticity of demand for a linear demand curve is higher for high prices than for low prices. Elasticity is not slope!
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4. If the demand curve is elastic, a shift out in the supply curve (more supplied at every price) will increase the total revenue of suppliers. Answer: True q q p p R R Δ + , where R is total revenue ( pq ), p is price, and q is quantity. If supply shifts out, the equilibrium point is moving along the demand curve. Equilibrium quantity is increasing, and equilibrium price is decreasing. Which effect dominates? Is the percentage increase in quantity greater than the percentage decrease in price? If so, the approximation tells us that total revenue is increasing. OK, let’s look at the formula for price elasticity: p p q q E d = An elastic demand curve means that this price elasticity is a number less than -1. For this number to be less than -1, the percentage increase in quantity must be greater than the percentage decrease in price. The quantity effect dominates and quantity is increasing, so total revenue is increasing, too.
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5. The facts that the price of a good is higher in the winter than in the summer and that more of the good is sold in the winter than in the summer are best explained by a shift in the demand curve for the good. Answer:
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This note was uploaded on 03/20/2010 for the course ECON 1 taught by Professor Bergstrom during the Spring '07 term at UCSB.

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Q1F09answers - October 21, 2009 Quiz 1 True-False...

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