ECON 325 – Business Economics

Subject: Economics    / General Economics
Business Economics
Homework IV ***Note: You must show work to get credit. Your score is also based on your
explanation. You must finish Problem 1 and Problem 2. Problem 3 is optional.
Problem 1
I. Your firm’s research department has estimated the elasticity of demand for toys
to be -0.7. As the manager of the firm, determine the impact of an 8 percent
increase in toy prices on your total revenues. Explain why. II. You are the manager of Lewis Donuts. Almost all of your donut sales are
derived from the drive-through window. You know from experience that coffee
is a complement for your donuts. The morning newspaper says that a major
storm has just destroyed 50 percent of this year’s coffee bean crop.
Q: Will this affect how much flour you order? Will it affect how many
employees you schedule? What will happen to the price of donuts? Explain. Problem 2
The city council of a small college town decides to regulate rents in order to reduce
student living expenses. Suppose the average annual market-clearing rent for a
two-bedroom apartment had been $700 per month and that rents were expected to
increase to $900 within a year. The city council limits rents to their current
$700-per-month level. a. Draw a supply and demand graph to illustrate what will happen to the rental price
of an apartment after the imposition of rent controls. b. Do you think this policy will benefit all students? Why or why not? Problem 3 (Optional)
Extra Credit (5 pts – Optional) Economics is fun!
Adam Smith and John Maynard Keynes both drive up to a gas station. Before looking
1/2 Business Economics
Homework IV at the price, each places an order. Adam Smith says, “I’d like 10 gallons of gas.” John
Maynard Keynes says, “I’d like $10 of gas.”
1) What is Adam Smith’s price elasticity of demand? Explain why.
2) What is John Maynard Keynes’s price elasticity of demand? Explain why. 2/2