17. Explain why we might expect the price elasticity of demand for nursing home care to
be more elastic than the price elasticity of demand for heart surgery. Think about the
relevant factors that determine price elasticity and apply them to each case. (I have a slide
that identifies some of these factors and we discussed some in class that you will find
helpful in thinking about this.)
Price elasticity of Demand measures the responsiveness of the quantity demanded of a
good to the changes in its own price.
18. Explain why long-run prices in a perfectly competitive market tend toward the
minimum average cost of production.
In a perfectly competitve market, price of the product is highly sensitive. If a firm
increases its products price becuase of higher production costs or with intension to gain
more profits then consumers will turn to alternative product in the market. Hence
company’s tend towards minimum average cost of production to sell maximum quantity of
products.
19 What is the difference between economic profit and accounting profit? Why should
managers focus mainly on economic profits?
Accounting Profit = Total Revenue from sales – Accounting Costs
Economic Profit = Accounting Profit (Economic / Opportunity cost -Accounting Cost)
In Economic Profit the cost of the other foregone opportunity (Opportunity cost) is
subtracted from Accounting Profit.
Managers should focus on Economic profits to determine the cost of foregone opportunity.