PROBLEM SESSION #3
Q.1A study sponsored by the American Medical Association suggests that the absolute value of the own price elasticity for surgical procedures is smaller than that for the own price elasticity for office visits. Explain why this would be expected. (3 lines)
Q.2Stuart owns two bottles of an old vintage wine in his cellar. One day, he invited you to his house to drink one of the two bottles. After a few glasses, he remarks “ My friend, you must feel special that I am sharing this rare bottle of wine with you. What you do not know is that I have been taking Economics classes at VIU and I learned last week that by drinking one of the two bottles, I can enjoy the wine and simultaneously increase the value of the remaining one”. Is he right? Explain (3 lines)
Q.3T/F and why: If the demand for gold is inelastic, and the price of gold falls, the producers of gold should experience a reduction in their profits over time. (2 lines)
Q.4The demand for a product is given by where
a.What is the own price elasticity when. What will happen to the firm’s revenue if it decides to charge a price below $154?
b.What is the cross price elasticity of demand between good X and good when? Are they substitutes or complements?
Q.5You asked your intern to estimate the demand equation for your company product which is considered inferior by all your customers. Using data on your quantity sold (Qx), your price (Px), average income levels in your market region (I) and the price of a complement (Py), your intern produce this function.
Qx = 2897 + 0.9Px+1.1I +2 Py
Do you detect any problems in her estimation? (2 lines)
MANIPULATING THE NUMBERS:
Q.11You manage a firm that sells a leading brand of alkaline batteries. You boss wants you to develop a pricing strategy (reduce price, increase price or maintain price) because your competitors drop their prices which resulted in a loss of revenue for your firm. Your intern collected data on the quantity sold of your product, the price (Px) you charge, the price (Py) of a related product, your advertising budget and average incomes of your consumers. She presents you with the following elasticities:
Px = -2.11
Cross price Py = 1.28
Advertising = 0.88
Income = 0.12
- What pricing strategy would you employ if you wish to increase quantity sold by 20%? Explain and show your work ( 2 lines)
- What is the relationship between your product X and product Y? Explain (2 lines)
- The manufacturers of product Y have reduced their prices by 10%. What pricing strategy should you adopt so that you maintain the same quantity sold as before the price drop in product Y? Explain and show your work (4 lines)
- Should you be concerned if macroeconomic forecasts predict a recession? Why or why not? Explain. (2 lines)
REGRESSION ANALYSIS EXERCISE
USING EXCEL TO RUN REGRESSION ANALYSIS
You are the manager of a car dealership and you noticed an increase in the demand for a particular model of your products. In developing a strategy to generate additional revenue, you collect data on the prices (in $) you charge customers (Px) for that model, the related quantity of bought per year (Qx), the prices of a related product Y (Py) and the amount you spend on advertising the model. The information is contained in the worksheet Data file.xls
Run two regressions (linear model and the log-linear model) That is
(i)Qx on Px, Py and Adv. (save the regression output for discussion in class)
(ii)lnQx on lnPx, lnPy and lnAdv. (save the regression output for discussion in class)