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Review for Mid Term

Review for Mid Term. MBA 644 Fall 2012. Prepared by Dr. Ikhlaas. Mid Semester Test. Bring with you your student ID a pen calculator And most importantly yourself!. To be held on 27th Oct D101 6.15-8.15pm. Demand and Supply. Things we covered:

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Review for Mid Term

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  1. Review for Mid Term MBA 644 Fall 2012 Prepared by Dr. Ikhlaas

  2. Mid Semester Test • Bring with you • your student ID • a pen • calculator • And most importantly yourself! To be held on 27th Oct D101 6.15-8.15pm

  3. Demand and Supply • Things we covered: • The requirements of Demand and Supply • Law of Demand / Law of Supply • The Ceteris Paribus Assumption • The Income and Substitution Effect • Shortage and Surplus • The Demand/ Supply Function • Movement and Shifts in Demand/Supply • Demand and Supply Factors

  4. Demand/Supply continued • Equilibrium and Shifts • For e.g. What could cause the market price to decrease? • If DD increases more than SS decreases, what is the likely effect on P and Q? • If SS increases more than DD decreases, what is the likely effect on P and Q?

  5. Review Which of the following leads to a movement along the demand curve for spinach but does not shift the demand curve for spinach? A) A rise in the price of spinach. B) A newly discovered health benefit from eating spinach. C) An increase in the price of broccoli, a substitute for spinach. D) An increase in income for all spinach lovers.

  6. If the price of crude oil increases, we would expect a. the price of petrol to rise due to an increase in D. b. the price of petrol to fall due to an decrease in D. c. the price of petrol to rise due to a decrease in S. d. the price of petrol to fall due to an increase in S. Review Prepared by Dr. Ikhlaas Gurrib

  7. Suppose that the incomes of buyers in a market for a normal good decline and there is also a reduction in input prices. What would we expect to occur in this market? Review Prepared by Dr. Ikhlaas Gurrib

  8. Review a. The equilibrium price would increase, but the impact on the amount sold would be ambiguous. b. The equilibrium price would decrease, but the impact on the amount sold would be ambiguous. c. Both equilibrium price and equilibrium quantity would increase. d. Equilibrium quantity would increase, but the impact on equilibrium price would be ambiguous. Prepared by Dr. Ikhlaas Gurrib

  9. Review If the U.S. Surgeon General announced that increased grapefruit juice consumption could help prevent heart attacks, what would happen to the equilibrium price and quantity of grapefruit juice? A) Price and quantity both increase. B) Price and quantity both decrease. C) Price increases but quantity decreases. D) Price decreases but quantity increases.

  10. Are you ready for this one? The demand for loans is often described as being very sensitive to interest rates. Given this characteristic, describe the effect of each of the following events on the price and quantity of housing loans. Explain your answers.

  11. Events (a) A decrease in the income of the majority of the working class population. (b) A decrease in the price of houses. (c) An expectation that the number of housing loans to be granted by banks would increase in the future. (d) A bigger proportion of those who want to build their houses locally are migrating overseas permanently.

  12. Elasticity • 4 important types: • Price Elasticity of Demand • Price Elasticity of Supply • Income Elasticity of Demand • Cross Elasticity of Demand Remember the Ceteris Paribus Assumption applies here as well!!!!

  13. Price Elasticity of Demand • If PED <1 • Inelastic • Demand is not very responsive to changes in Price. • If PED > 1 • Elastic • Demand is very responsive to changes in Price. Remember to ignore the Negative Sign before Interpreting your answer!!!!

  14. PED and PES • PES relates to the % change in Quantity supply relative to a % change in Price. • Your answer will be positive • The Law of Supply PED can be demonstrated using a Shift in the Supply Curve, while the PES can be demonstrated using a Shift in the Demand Curve.

  15. Income Elasticity of Demand • IF IED < 0, Inferior goods • If IED > 0 • Normal Goods • If IED < 1, Necessity goods • If IED > 1, Luxury goods

  16. Cross Elasticity of Demand • XED measures the responsiveness of Quantity demanded for Good A with respect to changes in Price of Good B, holding all other factors constant. • If XED < 0 • Goods are complements. • If XED > 0 • Goods are substitutes.

  17. PED and PES continued • What type of goods are Elastic v/s Inelastic? • Factors affecting PED and PES • e.g. Number of available substitutes affect PED. • e.g Ability of sellers to change the quantity of goods produced/manufactured affect PES.

  18. How can we use Elasticity? • It can help us determine what pricing/ quantity strategy to pursue to increase Total Revenue (Sales) • Understand (rather than remembering) the classical case of cigarettes for Inelastic goods. • Inelastic goods • P↑, TR ↑ • Elastic goods • P↑, TR ↓

  19. Review According to one study, the price elasticity of demand for cigarettes is 0.25. To decrease the consumption of cigarettes by 8 percent, a tax on cigarettes must raise the price of cigarettes by A) 32 percent. B) 25 percent. C) 2 percent. D) 3.1 percent.

  20. Review If a person has very little concern for his/her health, his/her demand for health care would tend to be: A. elastic. B. inelastic. C. unit elastic. D. horizontal. Prepared by Dr. Ikhlaas Gurrib

  21. Review If your demand for gasoline is inelastic, when the price of gasoline falls, which of the following occurs? A) Your demand curve for gasoline will shift leftward. B) Your demand curve for gasoline will shift rightward. C) Your total expenditure on gasoline will increase. D) Your total expenditure on gasoline will decrease.

  22. Review You are the new vice president in charge of advertising at Nandos. In your upcoming advertising campaign, you plan to degrade the fast food competitor whose product is the closest substitute for Nandos’ grilled chicken. That would be the fast food chain whose cross elasticity of demand with your tacos is equal to A) negative 2.11. B) negative 1.75. C) positive 1.55. D) positive 1.00.

  23. Review When demand is ________, a decrease in price ________ total revenue. A) elastic; decreases B) inelastic; decreases C) unit elastic; increases D) elastic; does not change

  24. Calculate and Interpret :(a) The Price Elasticity of Demand for Sport Watches(b) The Advertising Elasticity of Demand for Sport Watches(c) The Cross Elasticity of Demand for Sport Watches and Dress Watches.

  25. Concluding Remarks for Exam! • Take your time during the exam! 2 hours is plenty of time! • Do not make assumptions that are far fetched!!!! (This is going to lead to this…))) • Practice within your group as well as by yourself. • Use Demand/Supply diagram(s) when you are asked to Explain your answer!

  26. Good luck! Prepared by Dr. Ikhlaas Gurrib

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