he diagrams below depict the computer market with fixed prices (graph a) and flexible prices (graph b), where DL corresponds to a w level of demand for computers, DM corresponds to a medium level of demand for computers, and DHcorresponds to a high level f demand for computers. Suppose a firm is currently producing 900 computers per week and charging a price of $1,200 per omputer. Flexible Prices (b) Fixed Prices (a) $1,400 $1,200 B DH $1,200 DH $900 DM DM D 900 D. 700 900 1,150 Computers per week Computers per week Suppose there is a negative demand shock, and demand unexpectedly falls from a medium level of demand to a low level of emand. Assuming fixed prices, what will happen to the firm's inventory of computers? O The firm's inventories will not change. O The firm's inventories will increase by 250 computers per week. O The firm's inventories will increase by 200 computers per week. O The firm's inventories will decrease by 150 computers per week. Now suppose prices are flexible. How will the firm respond to a negative demand shock if demand unexpectedly falls from a edium level of demand to a low level of demand? O The firm will continue to produce 900 computers per week and charge a price of $900. O The firm will cut production to 700 computers per week and charge a price of $1,200. O The firm will cut production to 700 computers per week and charge a price of $900. O The firm will continue to produce 900 computers per week and charge a price of $1,200. Price
he diagrams below depict the computer market with fixed prices (graph a) and flexible prices (graph b), where DL corresponds to a w level of demand for computers, DM corresponds to a medium level of demand for computers, and DHcorresponds to a high level f demand for computers. Suppose a firm is currently producing 900 computers per week and charging a price of $1,200 per omputer. Flexible Prices (b) Fixed Prices (a) $1,400 $1,200 B DH $1,200 DH $900 DM DM D 900 D. 700 900 1,150 Computers per week Computers per week Suppose there is a negative demand shock, and demand unexpectedly falls from a medium level of demand to a low level of emand. Assuming fixed prices, what will happen to the firm's inventory of computers? O The firm's inventories will not change. O The firm's inventories will increase by 250 computers per week. O The firm's inventories will increase by 200 computers per week. O The firm's inventories will decrease by 150 computers per week. Now suppose prices are flexible. How will the firm respond to a negative demand shock if demand unexpectedly falls from a edium level of demand to a low level of demand? O The firm will continue to produce 900 computers per week and charge a price of $900. O The firm will cut production to 700 computers per week and charge a price of $1,200. O The firm will cut production to 700 computers per week and charge a price of $900. O The firm will continue to produce 900 computers per week and charge a price of $1,200. Price
Chapter6: Elasticity
Section: Chapter Questions
Problem 12QP
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Transcribed Image Text:The diagrams below depict the computer market with fixed prices (graph a) and flexible prices (graph b), where DL corresponds to a
low level of demand for computers, DM Corresponds to a medium level of demand for computers, and DH corresponds to a high level
of demand for computers. Suppose a firm is currently producing 900 computers per week and charging a price of $1,200 per
computer.
Flexible Prices (b)
Fixed Prices (a)
$1,400
C'
$1,200
B
DH
B'
$1,200
DH
$900
DM
DM
DL
900
DL
700
900
1,150
Computers per week
Computers per week
of demand to
of
a. Suppose there is a negative demand shock, and demand unexpectedly falls from a medium
demand. Assuming fixed prices, what will happen to the firm's inventory of computers?
O The firm's inventories will not change.
O The firm's inventories will increase by 250 computers per week.
O The firm's inventories will increase by 200 computers per week.
O The firm's inventories will decrease by 150 computers per week.
b. Now suppose prices are flexible. How will the firm respond to a negative demand shock if demand unexpectedly falls from a
medium level of demand to a low level of demand?
O The firm will continue to produce 900 computers per week and charge a price of $900.
O The firm will cut production to 700 computers per week and charge a price of $1,200.
O The firm will cut production to 700 computers per week and charge a price of $900.
O The firm will continue to produce 900 computers per week and charge a price of $1,200.
Price
Price
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