XXXXXXXXXXpoints) Breakaway Tours, Inc., has estimated the following multiplicative demand function...

Question

XXXXXXXXXXpoints) Breakaway Tours, Inc., has estimated the following multiplicative demand function for packaged holiday tours in the Flushing, New York, market using quarterly data covering the past five years (20 observations):
Q_Y = 5P_Y^-2.5P_X^-0.86Y^1.76A^1.4
Here, Q_Y is the quantity of tours sold, P_Y is average tour price, P_X is average price for some other good, A is tour advertising, and Y is per capita disposable income.
a. (3) What is the price elasticity of demand for tours? Interpret your answer. Given this elasticity, should Breakaway increase prices to increase revenue? Explain.
b. (3) Are tours a normal good? Explain.
c. (3) What is the relationship between Goods X and Y? How strong is this relationship? Explain each answer well.
d. (3) Does advertising seem effective for this company? Explain.
e. (3) What does the demand function above suggest about the relationship of each variable to each other? Does elasticity ever change if the values of P_Y, P_X, Y, or A change? Explain.
4. (23 points) Just Bikes, Inc., sells tricycles, in partially-assembled and fully assembled forms. Parents who assemble their own tricycles benefit from the lower price of $40 per tricycle. "Full-service" customers enjoy the luxury of an assembled tricycle, but pay a higher price of $60 per tricycle. Both partially and fully assembled tricycle prices are stable. The company has observed the following relation between the number of assembly workers employed per day and assembled tricycle output:

Number of Workers per day	Finished Tricycles
0	0
1	8
2	14
3	18
4	21
5	23

a. (8) Construct a table showing the (net) marginal revenue product derived from assembly worker employment.
b. (10) How many assemblers would Just Bikes employ at a daily wage rate of $100? Explain your answer and show all calculations.
c. (5) What is the highest daily wage rate Just Bikes would pay to hire three assemblers per day?
5. (10 points) Describe the difference between a diminishing marginal product of labor and a negative marginal product of labor. Why would a profit-maximizing firm always choose to operate where the marginal product of labor is decreasing (but not negative)?

005_illhajo-aicf3zzz.doc

Robert · Accepted Answer

Make sure you show ALL your work and explain where asked
ECO-6655:  Application Problem Set #2, T4-13
        Dr. Dominic F. Minadeo
3. 
(15 points)  Breakaway Tours, Inc., has estimated the following multiplicative demand function for packaged holiday tours in the Flushing, New York, market using quarterly data covering the past five years (20 observations): 
QY = 5PY-2.5PX-0.86Y1.76A1.4
Here, QY is the quantity of tours sold, PY is average tour price, PX is average price for some other good, A is tour advertising, and Y is per capita disposable income. 
a. (3) What is the price elasticity of demand for tours? Interpret your answer. Given this elasticity, should Breakaway increase prices to increase revenue? Explain.
Answer:
The own price elasticity of demand for tours = -2.5. This means that if price of good Y increases by 1%, the quantity demanded of good Y on average will fall by 2.5%.
Given this elasticity, Breakaway should reduce the price in order to increase total revenue. The demand is elastic in this case, so one percent fall in price of good Y would cause quantity demanded of good Y to increase by more than one percent (2.5%). Since total revenue is product of price and quantity, so this 1% fall in price and the consequent rise in quantity demanded (2.5%) would cause total revenue to increase.
So Breakaway should reduce the price in order to increase total revenue
b. (3) Are tours a normal good? Explain.
Answer:
For a good to be normal good, its demand must increase with increase in the income of consumer. Here we note that if income increases by 1%, the quantity demanded for tours increases by 1.76% (as the income elasticity is 1.76). So tours are a normal good.
c.

XXXXXXXXXXpoints) Breakaway Tours, Inc., has estimated the following multiplicative demand function for packaged holiday tours in the Flushing, New York, market using quarterly data covering the past...

Solution

Answer To This Question Is Available To Download

Related Questions & Answers

Submit New Assignment