1.Which concept--the business profit concept or the economic profit concept--provides the more appropriate basis for evaluating business operations? Why?ANSWERThe economic profit concept provides the most appropriate basis for evaluating the operations of a business since it allows for a risk-adjusted normal rate of return on all capital devoted to the enterprise. Even when business profits are substantial, economic profits can sometimes be negative given the effects of risk, inflation, and other factors. Substantial business profits are no guarantee to the growth, or even maintenance, of capital investment. In actual practice, investors adjust reported accounting data to account for additional factors that must be considered.2.Distinguish between a supply function and a supply curve.书上P54.P563. The Energy Department estimates that domestic demand for natural gas will grow by more than 40% between now and 2025. Distinguish between a demand function and a demand curve. What is the difference between a change in the quantity demanded and a shift in the demand curve?ANSWERA demand function is a statement of the relation between the demand for a product and all variables (factors) that affect demand. The demand curve, on the other hand, is an expression of the relation between price and the quantity demanded, holding constant the effect of all other demand influencing variables. Movement along a demand curve describes the relation between price changes and the quantity demanded. Shifts in a demand curve or changes in demand indicate the effect on demand of changes in one or more of the nonprice variables in the demand function.4. Describe the difference between direct demand and derived demand.ANSWERDirect demand is consumption demand for goods and services. Direct demand is demand by consumers based on the satisfaction or utility derived from consumption. Derived demand is indirect in the sense that it represents demand by producers based on the usefulness of inputs in the production of goods and services for final consumption. Derived demand arises when it becomes profitable for a firm to use a given input in the production of some other valuable product.5. Market demand is influenced by price, the price of substitutes and complements, product quality, advertising, income, and related factors. Explain why companies often find price changes to be the most important determinant of short-term changes in sales.ANSWERFor consumer and industrial products, market demand is influenced by price, the price of substitutes and complements, product quality, advertising, income, and a host of related factors. Among such factors, companies often find price changes to be the most important determinant of short-term changes in market demand. Price changes are easily discovered, and both customers and competitors typically respond to them quickly. For example, when McDonald=s cuts the price of a jumbo order of fries, price-sensitive customers immediately recognize the change and the quantity demanded rises accordingly. On the other hand, when there is a slight change in the quality of potatoes used, or a modest change in cooking style, consumers and competitors may be slow to react. Similarly, while income is an important determinant of demand, changes in income affect all competitors, and the effect on any single competitor is thereby muted.6. Is the price elasticity of demand typically greater if computed for an industry or for single firm in the industry? Why?ANSWERThe price elasticity of demand for a firm will typically be greater than that for the industry as a whole. Unless the firm is the industry, as in the case of monopoly, it will face a demand curve that is flatter than that faced by the industry as a whole. This stems from the fact that demand for the industry's product faces competition from goods that consumers view as alternatives as opposed to close substitutes. The firm, on the other hand, faces competition from substitute products produced by others in the industry, as well as competition from goods in general, for a place in the consumer's overall market basket.7.Is the cross-price elasticity concept useful for identifying the boundaries of an industry or market?ANSWERYes, the cross-price elasticity concept provides a practical means for identifying the boundaries of an industry or market. By definition, a direct relation between the price of one product and the demand for a second product holds for all substitutes. A price increase for a given product increases demand for substitutes; a price decrease for a given product will decrease demand for substitutes. This means that if the cross-price elasticity of demand is a very small negative number, say εPX = -5, a strong substitute good relation exists, and the products involved directly compete for a share of the consumer's dollar. If the cross-price elasticity of demand is a large negative number, say εPX = -0.05, a weak substitute good relation exists, and demand for the products involved is only slightly related. The cross-price elasticity is always positive for substitutes; the price of one good and thedemand for the other always move in the same direction. Cross-price elasticity is negative for complements; price and quantity move in opposite directions for complementary goods and services. Finally, cross-price elasticity is zero, or nearly zero, for unrelated goods where variations in the price of one good have no effect on demand for the second.The point to keep in mind is that the cross-price elasticity concept is an economic measure of the similarity or dissimilarity between products. If the cross-price elasticity of demand is near zero, then even products that are similar in physical terms cannot be regarded as substitutes. The demand for apparel, cosmetics, sporting goods, and a wide variety of services is such that many products that are genuinely comparable in physical terms cannot be regarded as economic substitutes. Similarly, identical products offered at different times or places are not economic substitutes. A Coca-Cola and a brat at the ball park are not offered at the same time and place as those sold at the grocery store, and price differentials reflect that fact.。