Problem
1: (This problem is worth a total of 20 points.) The Haas Corporation’s
executive vice president circulates a memo to the firm’s top management
in which he argues for an increase in the price of the firm’s product.
He says that such a price increase will increase the firm’s sales
revenue.
1. The firm’s marketing manager responses with a memo to
the firm’s top management pointing out that the price elasticity of
demand for the firm’s product is equal to -1.82 and the income
elasticity is equal to 0.85. What portion of this information is
relevant and why? (10 points)
2. Should the Haas Corporation go ahead with the price increase and why? (10 points)
Problem
2: (This problem is worth a total of 40 points.) Imported oil is
assumed to be a close substitute for oil produced domestically in the
U.S. Also the U.S. is a “price-taker” in the world oil market (This
means that the world price of oil acts like a price ceiling in the U.S.
market and is the price that prevails in the U.S. petroleum market.) The
current world price of oil is $65 per barrel and is the prevailing
price in the U.S. market. The elasticity of supply for domestically
produced oil is 0.60 and the price elasticity of demand for oil in the
U.S. is XXXXXXXXXXThe U.S. domestic demand function for oil is Qd = 26.151 –
0.076P where Qd is U.S. domestic demand measured as millions of barrels
per day and P is the price for a barrel of oil. The domestic supply
function for oil is Qs = XXXXXXXXXX13P where Qs is the level of oil
supplied by domestic producers and is measured as millions of barrels
per day.
1. Find the U.S. domestic demand for oil, the amount of
oil produced domestically and the amount of oil imported if the world
price of oil is $75 per barrel. (15 points)
2.
Suppose the world price of oil remains at $75 per barrel and the U.S.
imposes an import fee of $15 for each barrel of oil imported. Find the
following after the import tariff is implemented: U.S. domestic oil
demand; U.S. domestic oil supply; and oil imports by the U.S. Also
calculate the total dollar value of revenues collected from the import
tariff. (25 points)
Problem
3: (This problem is worth 40 points.) Assume the demand for good X is
10,000 units and has a price elasticity equal to -1.5 while the income
elasticity of good X is 1.2 and the cross-price elasticity of related
good Z is 1.3. The price of good X is $5 per unit. If the price of good X
increases by 10 percent, find the following:
1. Change in quantity demanded (5 points)
2. New quantity demanded (5 points)
3. New price (5 points)
4. New expenditure for good X (5 points)
5.
Assume the price of good X is $5 and the quantity of good X demanded is
10,000 units If the price of good Z decreases by 10 percent and
consumer’s income increases by 15 percent, find the quantity of good X
that will be demanded assuming the price of good X remains at $5 as well
as the total expenditures for good X in this situation accounting for
both the change in the price of the related good Z and the change in
consumers’ income. What is the relationship between goods X and Z? (20
points)
Problem 4: (This problem is worth 30 points) The demand product for a product is given by
Qx = 1,000 – 2Px + 0.02Pz where Pz = $400.
1.
What is the own price elasticity of demand when Px = $154? What happens
to the firm’s revenue if it decides to charge some price below $154?
(10 points)
2. What is the own price
elasticity of demand when Px = $354? What happens to the firm’s revenue
if it decides to charge a price above $354? (10 points)
3.
What is the cross-price elasticity of demand between good X and Good Z
when Px = $154? What is the relationship between goods X and Z? (10
points)
Problem
5: (This problem is worth 20 points.) The Executive Director of the
Tulsa Metro Transit Authority (MTA) circulates a memo to the Tulsa City
Council in which he argues for an increase in the price the MTA charges
for riding MTA buses. He states in the memo that the MTA has been
experiencing revenue short falls and increasing the price for riding the
MTA buses will help resolve this problem.
1. The president of
the Tulsa Consumer’s Union hears about the proposed increase in bus
fares. He submits a letter to each member of the Tulsa City Council as
well as the Mayor of Tulsa arguing that the best way to address the
revenue shortfall is to lower bus fares. The president of the Consumer’s
Union states that his recommendation is correct because the income
elasticity for riding the bus is 1.80 and the price elasticity of demand
for riding the bus in Tulsa is XXXXXXXXXXThe Executive Director of the MTA
agrees that the income elasticity for riding the bus is 1.80, but says
the correct price elasticity of demand is equal to XXXXXXXXXXWhich
information is relevant and why? (10 points)
2.
Suppose the City Council conducts an extensive review and finds that
the information provided by the Executive Director of the MTA is more
accurate. What action should the City Council take on bus fares and why?
(10 points)