Based on these estimates, write an equation that summarizes the demand for the firm’s product.

Based on these estimates, write an equation that summarizes the demand for the firm’s product.

You are the manager of a midsized company
Subject: Economics    / General Economics   
Question

1)You are the manager of a midsized company that assembles personal computers.

You purchase most components—such as random access memory (RAM)—in a

competitive market. Based on your marketing research, consumers earning over

$80,000 purchase 1.5 times more RAM than consumers with lower incomes.

One morning, you pick up a copy of The Wall Street Journal and read an article

indicating that input components for RAM are expected to rise in price, forcing

manufacturers to produce RAM at a higher unit cost. Based on this information,

what can you expect to happen to the price you pay for random access memory?

Would your answer change if, in addition to this change in RAM input prices,

the article indicated that consumer incomes are expected to fall over the next

two years as the economy dips into recession? Explain.

2) You are an assistant to a senator who chairs an ad hoc committee on reforming

taxes on telecommunication services. Based on your research, AT&T has spent

over $15 million on related paperwork and compliance costs. Moreover,

depending on the locale, telecom taxes can amount to as much as 25 percent of

a consumer’s phone bill. These high tax rates on telecom services have become

quite controversial, due to the fact that the deregulation of the

telecom industry has led to a highly competitive market. Your best estimates

indicate that, based on current tax rates, the monthly market demand for

telecommunication services is given by Qd 300 4P and the market

supply (including taxes) is Qs 3P 120 (both in millions), where P is the

monthly price of telecommunication services. The senator is considering tax

reform that would dramatically cut tax rates, leading to a supply function under

the new tax policy of Qs 3.2P 120. How much money per unit would a

typical consumer save each month as a result of the proposed legislation?

3)Rapel Valley in Chile is renowned for its ability to produce high-quality wine at a

fraction of the cost of many other vineyards around the world. Rapel Valley produces

over 20 million bottles of wine annually, of which 5 million are exported

to the United States. Each bottle entering the United States is subjected to a $0.50

per bottle excise tax, which generates about $2.5 million in tax revenues. Strong

La Niña weather patterns have caused unusually cold temperatures, devastating

many of the wine producers in that region of Chile. How will La Niña affect the

price of Chilean wine? Assuming La Niña does not impact the California wineproducing

region, how will La Niña impact the market for Californian wines?

4) Seventy-two percent of the members of the United Food and Commercial

Workers Local 655 voted to strike against Stop ’n Shop in the St. Louis area.

In fear of similar union responses, two of Stop ’n Shop’s larger rivals in the

St. Louis market—Dierberg’s and Schnuck’s—decided to lock out their

union employees. The actions of these supermarkets, not surprisingly, caused

Local 655 union members to picket and boycott each of the supermarkets’

locations. While the manager of Mid Towne IGA—one of many smaller

competing grocers—viewed the strike as unfortunate for both sides, he was

quick to point out that the strike provided an opportunity for his store to

increase market share. To take advantage of the strike, the manager of Mid

Towne IGA increased newspaper advertising by pointing out that Mid Towne

employed Local 655 union members and that it operated under a different

contract than “other” grocers in the area. Use a graph to describe the

expected impact of advertising on Mid Towne IGA (how the equilibrium

price and quantity change). Identify the type of advertising in which Mid Towne IGA engaged. Do you believe the impact of advertising will be permanent? Explain.

5)Answer the following questions based on the accompanying diagram.

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a. How much would the firm’s revenue change if it lowered the price from

$12 to $10? Is demand elastic or inelastic in this range?

b. How much would the firm’s revenue change if it lowered the price from

$4 to $2? Is demand elastic or inelastic in this range?

c. What price maximizes the firm’s total revenues? What is the elasticity of

demand at this point on the demand curve?

6) The demand curve for a product is given by

where Pz $300. .png">

a. What is the own price elasticity of demand when Px $140? Is demand

elastic or inelastic at this price? What would happen to the firm’s revenue

if it decided to charge a price below $140?

b. What is the own price elasticity of demand when Px $240? Is demand

elastic or inelastic at this price? What would happen to the firm’s revenue

if it decided to charge a price above $240?

c. What is the cross-price elasticity of demand between good X and good Z

when Px $140? Are goods X and Z substitutes or complements?

7) Suppose the demand function for a firm’s product is given by

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where

Px $15,

Py $6,

M $40,000, and

A $350.

a. Determine the own price elasticity of demand, and state whether demand is

elastic, inelastic, or unitary elastic.

b. Determine the cross-price elasticity of demand between good X and good

Y, and state whether these two goods are substitutes or complements.

c. Determine the income elasticity of demand, and state whether good X is a

normal or inferior good.

d. Determine the own advertising elasticity of demand.

8) Suppose the own price elasticity of demand for good X is 3, its income elasticity

is 1, its advertising elasticity is 2, and the cross-price elasticity of

demand between it and good Y is 4. Determine how much the consumption

of this good will change if:

a. The price of good X decreases by 5 percent.

b. The price of good Y increases by 8 percent.

c. Advertising decreases by 4 percent.

d. Income increases by 4 percent.

9) Suppose the cross-price elasticity of demand between goods X and Y is 4.

How much would the price of good Y have to change in order to increase the

consumption of good X by 20 percent?

10) You are the manager of a firm that receives revenues of $40,000 per year from

product X and $90,000 per year from product Y. The own price elasticity of

demand for product X is 1.5, and the cross-price elasticity of demand between

product Y and X is 1.8. How much will your firm’s total revenues (revenues

from both products) change if you increase the price of good X by 2 percent?

11) Aquant jock from your firm used a linear demand specification to estimate the

demand for its product and sent you a hard copy of the results. Unfortunately,

some entries are missing because the toner was low in her printer. Use the

information presented below to find the missing values labeled ‘1’ through ‘7’

(round your answer to the nearest hundredth). Then, answer the accompanying

questions.

a. Based on these estimates, write an equation that summarizes the demand

for the firm’s product.

b. Which regression coefficients are statistically significant at the 5 percent level?

c. Comment on how well the regression line fits the data.

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