Economics 301-2 PROBLEM SET #1 Allen
DUE: Thursday, January 26, beginning of class
Reading: Chapters 1, 2 in Browning and Zupan.
Problems on demand and supply.
1. . [Copyright c 1997 by Bruce T. Allen] You are Vice-President - Materials Purchasing for the manufacturer of a product which uses copper, but no aluminum. Another big user of copper is the industry which produces high-tension electrical cable, where copper
competes with aluminum. You have just read that increasing costs of electricity are threatening to increase the price of aluminum substantially. Using demand and supply analysis, predict the effect on your company.
2. Suppose that the market for four-person apartments in East Lansing has the demand curve:
QD= 6600 - 2P, and that the supply of apartments can be represented by the function
QS = 5000 +2P, where Q is the number of apartments and P is the monthly rent.
a. What is the equilibrium price? The equilibrium quantity?
b. What will happen if a legal maximum of $300 is set on rents? Indicate the kind of result, and figure it exactly.
c. What will happen to demand, supply, and the equilibrium price and quantity if (other things equal)
(1) The law freezing rents is repealed?
(2) East Lansing enforces quality standards requiring one bathroom for every two persons?
(3) Dorm rents increase?
(4) Tuition levels increase substantially?
(5) Companies located in the Lansing area discover the attractions of a major university and are permitted to convert apartment-zoned properties to office space?
3. Two and a half years ago, the Wall Street Journal (9/3/96, copy attached) described the depressed state of the market for natural gas. In reading the paragraph on inventories
(bottom of col. 2), you should keep in mind the date (seasonal) of the article.
a. Tell exactly how weather has affected the supply.
b. Tell exactly how weather has affected the demand.
c. Draw a graph showing both of these effects. Your graph should contain a clear
indication of the effect that can be predicted from the changes you indicated.
In words, explain what can’t be predicted, and why.
4. Problem 2.8 on p. 43 of Browning and Zupan
More problems on the other side of this page. Do them, too!
Problems dealing with elasticities of demand:
For review: pp. 557-58 contain proofs of some of the elasticity formulas. If these help understanding, great; if they confuse, disregard them. DO NOT waste time memorizing elasticity formulas. On any test requiring an elasticity computation, you’ll be given enough formulas that (you pick which!) one or more should do the job.
5. Beer prices were on the rise--up over 3%, since the previous January, according to the Wall Street Journal (9/10/96, relevant passage attached). The Journal commented that raising beer prices was a chancy business, and recalled that a 1991 price increase produced a 2% decrease in beer consumption.
a. Using the 1991 data from the article (as supplemented by the instructor),
determine the own price elasticity of demand for beer that they imply.
b. Did this "hit" in beer consumption reduce or increase sales revenue? What does the computed value of elasticity imply?
6. In quarterly or annual tabulations of corporate earnings, the Wall Street Journal classifies companies or industries as "consumer cyclical." Give an example of such a product or industry, and explain the connection between the companies' classification and income elasticity of demand.
7. The Wall Street Journal article (9/24/93) on the last page of this quiz describes Sterling Winthrop's 1993 decision to cut price of large bottles of Bayer branded asprin. Bayer and some other branded asprins sell at a price premium above the prices for private-label and generic asprin. Enough customers believe that the branded product is superior to its unbranded equivalents to sustain its higher price in the market.
a. What principle involving price elasticity allowed this price gap to continue? Explain the principle and its relevance here.
b. What principle involving price elasticity must have suggested to Sterling Winthrop management that the price reduction should be concentrated on bottles containing over 200 tablets? Explain the principle and its relevance to this decision.
c. Define cross price elasticity of demand. What do you think the cross-elasticities most important to Bayer (final three paragraphs) are? Explain.
8. B & J, Ltd., is the sole importer of Auld Heathbogg, a lower-quality brand of Scotch whiskey. The daughter of the company’s president has joined the market research staff (both were glad for the help) for a summer internship. She has been going over the company’s sales records, available public data, and her notes from Economics 301, and has estimated the following demand function for the company’s product.
(Here Q = number of cases sold.)
Q = 8,925 - 2,830P + 0.025A +10,000POP, where
P =price per fifth, A= company advertising expenditure on Auld Heathbogg, and POP is the fraction of the U. S. population over 21 years of age.
a. Assuming that the company has spent $1,000,000 advertising Auld Heathbogg, and that POP = 0.7, write the equation for the demand curve.
b. Compute the quantity demanded if the price is $10.00 per fifth.
c. Compute the point price elasticity of demand at this price.
d. What is the point promotional (or advertising) elasticity under these conditions?
Problem 1: Addendum for Web users
P0 = $2.95 Price increase = 25 cents
Set Q0 arbitrarily at 100. Remaining numbers are in the problem