1.) The basic formula for the price elasticity of demand is:
a) percentage change in quantity demanded/percentage change in price.
b) percentage change in price/percentage change in quantity demanded.
c) absolute decline in price/absolute increase in quantity demanded.
d) absolute decline in quantity demanded/absolute increase in price.
2.
Marginal cost can be defined as the change in:
a) total fixed cost resulting from the production of an additional unit of output.
b) average total cost resulting from the production of an additional unit of output.
c) total cost resulting from the production of an additional unit of output.
d) average variable cost resulting from the production of an additional unit of output.
The Correct Answer and Explanation is :
- Correct Answer: a) percentage change in quantity demanded/percentage change in price.
Explanation:
Price elasticity of demand (PED) is a measure that shows how much the quantity demanded of a good or service changes in response to a change in its price. The formula for PED is calculated as the percentage change in quantity demanded divided by the percentage change in price. This is an important concept in economics because it helps businesses and policymakers understand how sensitive consumers are to price changes.
If the demand is elastic (PED > 1), it means that consumers are highly responsive to price changes. A small change in price will result in a large change in the quantity demanded. If the demand is inelastic (PED < 1), consumers are less responsive to price changes, meaning the quantity demanded changes less in relation to the price change. If PED = 1, it is called unitary elasticity, where the percentage change in price leads to an equal percentage change in quantity demanded.
For example, if the price of a product increases by 10% and the quantity demanded decreases by 20%, the PED would be calculated as:
[
PED = \frac{-20\%}{10\%} = -2
]
This means the demand is elastic, and consumers significantly reduce their consumption in response to the price increase.
- Correct Answer: c) total cost resulting from the production of an additional unit of output.
Explanation:
Marginal cost (MC) refers to the additional cost incurred from producing one more unit of output. It is a crucial concept in economics because it helps businesses decide how much to produce and at what cost. Understanding marginal cost is essential for firms when setting prices or determining production levels, as producing additional units impacts total cost, which can influence profit margins.
The formula for marginal cost is:
[
MC = \frac{\Delta TC}{\Delta Q}
]
Where:
- ( \Delta TC ) represents the change in total cost,
- ( \Delta Q ) represents the change in output quantity.
Marginal cost reflects the change in total cost when output is increased by one unit. For example, if a company’s total cost increases from $100 to $120 when producing one more unit, the marginal cost is $20.
It is important to note that marginal cost typically decreases at first with increasing production due to economies of scale, but can eventually increase as the firm experiences diminishing returns to scale.
I’ll generate an image that explains these concepts visually.
Here is a diagram that explains the concepts of price elasticity of demand and marginal cost. It includes the graphs illustrating elastic, inelastic, and unitary demand curves, as well as the change in total cost when producing an additional unit of output. Let me know if you need any further clarifications!
