Suppose you notice that when a particular firm raised the price of its product, its total revenue also increased. What does this imply about the price elasticity of demand for this firm’s product and wha factors may be influencing the elasticity?
Ans: It signifies that absolute value of price elasticity of demand is less than 1 and demand is inelastic.
With inelastic demand, a X% increase in price decreases quantity demanded by less than X%, so total revenue increases.
Inelastic demand may be caused by following factors.
(1) Low number of substitutes makes demand inelastic.
(2) In short run, demand is more inelastic, compared to in long run.
(3) If the good in question comprises a small portion of consumer budget, and
(4) If the good in question is a necessity good.
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Which of the following compensation schemes can be explained as an attempt to solve a principal-agent problem?
A) Real estate agents are paid on a strict commission basis; if they don't sell a client's listed property they don't get paid. B) Personal injury lawyers often work on a contingency basis. If the lawyer wins the case they receive a significant share of the award; if the lawyer doesn't win the case the lawyer doesn't get paid. C) Traveling sales people, who are costly and difficult to monitor, generally receive a significant share of their compensation in the form of commissions or bonuses for meeting sales targets. D) All of the above compensation schemes attempt to solve a principal-agent problem.
Using the above table, when Jefferson's Cleaners hires three workers
A) the average product of labor is greater than the marginal product. B) the marginal product of labor is greater than the average product. C) it has already experienced diminishing marginal returns. D) Both answers A and C are correct.