Question 1

Suppose a firm faces a demand curve with price elasticity of demand $$E_d \u003e 1. If $$the firm lowers its price, what will happen to its total revenue?

Accepted Answer

Total revenue will increase because the percentage increase in quantity demanded is greater than the percentage decrease in price.

Question 2

If the price elasticity of demand is $$E_d = 1$$, what happens to total revenue when the firm increases its price?

Accepted Answer

Total revenue remains unchanged because the percentage change in price equals the percentage change in quantity demanded.

Question 3

For a product with inelastic demand ($$E_d \u003c 1$$), what is the effect on total revenue if the firm raises its price?

Accepted Answer

Total revenue increases because the percentage increase in price is greater than the percentage decrease in quantity demanded.

Question 4

If a firm faces elastic demand and lowers its price, what is the likely effect on its profits, assuming costs remain constant?

Accepted Answer

Profits will increase because total revenue rises more than costs.

Question 5

If a firm faces inelastic demand and raises its price, what is the likely effect on its profits, assuming costs do not change?

Accepted Answer

Profits will increase because total revenue increases and costs remain constant.

Question 6

When demand is unitary elastic ($$E_d = 1$$), what happens to a firm's profits if it increases its price, assuming costs remain unchanged?

Accepted Answer

Profits remain unchanged because total revenue does not change.

Question 7

If a firm faces elastic demand and increases its price, what is the likely effect on its total costs?

Accepted Answer

Total costs will decrease because the firm produces less.

Question 8

If a firm faces inelastic demand and lowers its price, what is the likely effect on its total costs?

Accepted Answer

Total costs will increase because the firm produces more.

Question 9

If a firm faces unitary elastic demand and changes its price, what is the effect on total costs if the firm increases output?

Accepted Answer

Total costs will increase because more output is produced.

Question 10

Which of the following best describes the relationship between price elasticity of demand and total revenue?

Accepted Answer

When demand is unitary elastic, total revenue does not change with price.

Microeconomics Midterm Study Guide: Core Concepts, Demand & Supply, Elasticity, and Market Efficiency

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