# ECO 550 Week 2 Chapter 3 and 4 problems

ECO 550 Week 2 Chapter 3(P-3,4,7) and 4(P-5,6,7)

Chapter 3: Problems 3, 4, and 7

3. The Olde Yogurt Factory has reduced the price of its popular Mmmm Sundae from $2.25 to $1.75. As a result, the firm’s daily sales of these sundaes have increased from 1,500/day to 1,800/day. Compute the arc price elasticity of demand over this price and consumption quantity range.

4. The subway fare in your town has just been increased from a current level of 50 cents to $1.00 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.

b. If the transit authority reduces the fare back to 50 cents, what impact would you expect on the ridership? Why?

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 ?1.5 and the advertising elasticity of demand is +0.6, would you expect an increase or decrease in total revenues?

Chapter 4: Problems 5, 6, and 7

5. General Cereals is using a regression model to estimate the demand for Tweetie Sweeties, a whistle-shaped, sugar-coated breakfast cereal for children. The following (multiplicative exponential) demand function is being used:

6. The demand for haddock has been estimated as log + b log P + c log I + d log Pm

where of haddock sold in New England per pound of haddock

measure of personal income in the New England region

index of the price of meat and poultry

a. Determine the price elasticity of demand.

b. Determine the income elasticity of demand.

c. Determine the cross price elasticity of demand.

d. How would you characterize the demand for haddock? Apparently the Haddock is plentiful since it a white fish. New England has lots of ocean access to fish.

e. Suppose disposable income is expected to increase by 5 percent next year.

7. An estimate of the demand function for household furniture produced the following results:

1.08 .16 -.48

Y R P

where expenditures per household

personal income per household

of private residential construction per household

of the furniture price index to the consumer price index

a. Determine the point price and income elasticities for household furniture.

b. What interpretation would you give to the exponent for R? Why do you suppose R was included in the equation as a variable?

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 ?0.48?

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