Question

1. The estimated demand for a good is Q=25-5p+0.32m+12pr
   where Q is the quantity demanded of the good, P is the price of the good, M is income, and P_R is the price of related good R. If the price of the good falls by $4, the quantity demanded will ________ by ________ units.
   1. increase 5 units
   2. increase 20 units.
   3. increase 50 units
   4. increase 48 units
   5. decrease 12 units
2. A theoretical restriction on the short-run cubic cost equation, TVC = aQ + bQ + cQ², is
   1. a > 0, b > 0, c > 0
   2. a > 0, b < 0, c > 0
   3. a > 0, b > 0, c < 0
   4. a > 0, b < 0, c < 0

Answer 1

1. b. increase 20 units.
(We can see that as p changes by 1 unit so Q changes by -5 units. So, if p decreases by 4 units then Q changes by (-5)*(-4) = 20 units.)

2. b. a > 0, b < 0, c > 0
(Constants a and c are positive while b is negative.)