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# ECO 550 Anielli Eugenia de Padua Guimaraes Week 2 - Check Your Understanding

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Date Created: 11/15/15

Week 2 Check Your Understanding Chapter 3 Problems 3 4 and 7 Chapter 4 Problems 5 6 and 7 By Anielli Eugenia de Padua Guimaraes To Dr Gil Ramos ECO 550 Managerial Economics April 24 2013 Week 2 Check Your Understanding Chapter 3 Problems 3 4 and 7 Problem 3 The Olde Yogurt Factory has reduced the price of its popular Mmmm Sundae from 225 to 175 As a result the rm s daily sales of these sundaes have increased from 1500day to 1800day Compute the arc price elasticity of demand over this price and consumption quantity range Q2 1800 Q1 1500 P2 175 P1 225 EP 1800 1500 3001500 20 or 20 Q 175 225 5225 22 or 22 P EP 091 The are price elasticity is 091 it suggests the company should consider a price increase as this will increase the revenue and decrease costs The consumption quantity varies from 1500day to 1800day so its range is 300 day Problem 4 The subway fare in your town has just been increased from a current level of 50 cents to 100 per ride As a result the transit authority notes a decline in rider ship of 30 percent a Compute the price elasticity of demand for subway rides Ed change QChange ED Q P ED 30 100 03 P 032 015 Therefore the demand for subway rides is inelastic b If the transit authority reduces the fare back to 50 cents what impact would you expect on the ridership Why If the transit authority reduces the fare back to 50 cents I would expect a small increase because it would be the price that people were used to pay However customers would have probably found an alternative way to travel because of the increase in cost We already know that by increasing the price that ridership decrease 30 so if the price goes back to original price there will be a significant change of demand Problem 7 In an attempt to increase revenues and profits a firm is considering a 4 percent increase in price and an 11 percent increase in advertising If the price elasticity of demand is 15 and the advertising elasticity of demand is 06 would you expect an increase or decrease in total revenues Q PED A EA 4 15 11o6 06 Change in advertising 11 06 66 We would expect a small total revenue increase because price and quantity increase With a 6 higher prices and 06 higher quantity revenue increases about 66 due to the change in advertising Chapter 4 Problems 5 6 and 7 Problem 5 General Cereals is using a regression model to estimate the demand for Tweetie Sweeties a whistleshaped sugarcoated breakfast cereal for children The following multiplicative exponential demand function is being used QD 6280P 215A105N 370 where QD quantity demanded in 10 oz boxes P price per box in dollars A advertising expenditures on daytime television in dollars N proportion of the population under 12 years old a Determine the point price elasticity of demand for Tweetie Sweeties According to the equation given the price elasticity is 215 which is elastic b Determine the advertising elasticity of demand According to the equation given the advertising elasticity is 105 c What interpretation would you give to the exponent of N I would say that the population elasticity for Tweetie Sweeties is 370 What means a 1 increase in the population under the age of 12 will lead to a 37 increase in the demand as well Problem 6 The demand for haddock has been estimated as logQablogPclogIdlong where Q quantity of haddock sold in New England P price per pound of haddock I a measure of personal income in the New England region Pm an index of the price of meat and poultry If b 2174 c 0461 and d 1909 a Determine the price elasticity of demand According to the equation given the price elasticity of demand for haddock is 2 174 b Determine the income elasticity of demand According to the equation given the income elasticity is 0461 c Determine the cross price elasticity of demand According to the equation given the cross price elasticity with meat and poultry is 1909 d How would you characterize the demand for haddock Haddock is elastic and it is considered a necessity and other meats are close substitutes e Suppose disposable income is expected to increase by 5 percent next year A 5 increase in income indicates 5 0461 2305 that is change in the demand of Haddock Problem 7 An estimate of the demand function for household furniture produced the following results F 00036 Y 108 R 016 P 048 r2 0996 where F furniture expenditures per household Y disposable personal income per household R value of private residential construction per household P ratio of the furniture price index to the consumer price index a Determine the point price and income elasticties for household furniture The income elasticity of furniture is 108 The price elasticity is 048 which is inelastic b What interpretation would you give to the exponent for R Why do you suppose R was included in the equation as a variable R is the value of private construction per household For a 1 increase in the private residential construction there will be a 016 increase in furniture purchases What means if families spend a big amount on their housing chances are they will spend more with furniture as well c If you were a supplier to the furniture manufacturer would you have preferred to see the analysis performed in physical sales units rather than dollars of revenue How would this change alter the interpretation of the price coefficient presently estimated as 048 If all furniture was similar then using physical units could work Furniture has different types and styles it can be elaborated using rare wood or expensive fabrics while others can be inexpensively constructed revenue is better because it allows chairs tables and Armoires to be added together in dollar values In units if the price elasticity it shows how a 1 price change can affect units sold while in revenue the price elasticity shows how a 1 real price change will increase might impact the dollar value of goods sold

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