Chapter 3- Technical Questions

Chapter 3- Technical Questions

1. For each of the following cases, calculate the arc price elasticity of demand, and state whether demand is elastic, inelastic, or unit elastic.
2. When the price of milk increases from $2.25 to $2.50 per gallon, the quantity demanded falls from 100 gallons to 90 gallons.
3. When the price of paperback books falls from $7.00 to $6.50, the quantity demanded rises from 100 to 150.
4. When the rent on apartments rises from $500 to $550, the quantity demanded decreases from 1,000 to 950.

 

3. For each of the following cases, what is the expected impact on the total revenue of the firm? Explain your reasoning.
4. Price elasticity of demand is known to be 0-5, and the firm raises price by 10 percent.
5. Price elasticity of demand is known to be – 2.5, and the firm lowers price by 5 percent.
6. Price elasticity of demand is known to be -1.0, and the firm raises price by 1 percent.
7. Price elasticity of demand is known to be 0, and the firm raises price by 50 percent.

 

 

Chapter 3 – Application Questions

1. In March 2010, McDonald’s Corp. announced a policy to increase summer sales by selling all soft drinks, no matter the size, for $1.00. The policy would run for 150 days starting after Memorial Day. The $1.00 drink prices were a discount from the suggested price of $1.39 for a large soda. Some franchisees worried that discounting drinks, whose sales compensate for discounts on other products, could hurt overall profits, especially if customers bought other items from the Dollar Menu. McDonald’s managers expected this promotion would draw customers from other fast-food chains and from convenience stores such as 7-Eleven. Additional customers would also help McDonald’s push its new beverage lineup that included smoothies and frappes. Discounted drinks did cut into McDonald’s coffee sales in previous years as some customers chose the drinks rather than pricier espresso beverages. Other chains with new drink offerings, such as Burger King and Taco Bell, could face pressure from the $1.00 drinks as McDonald’s.
2. Given the change in the price for a large sodas from $1.39 to $1.00, how much would quantity demanded have to increase? (Use the arc elasticity formula for any percentage change calculations.)
3. What is the sign of the implied cross-price elasticity with drinks from McDonald’s competitors?
4. What are the other benefits and costs to McDonald’s of this discount drink policy?

 

 

3.Based on the elasticity data in Table 3.7 discuss why public health officials generally advocate the use of cigarette taxes to reduce teenage smoking, while state and local governments often use these taxes to raise revenue to fund their services.

 

 

Chapter 4 Technical Questions

 

1. In each of the following examples, describe how the information given about consumer demand helped managers develop the appropriate strategies to increase profitability and how this information was obtained.
2. The following figure plots the average farm prices of potatoes in the United States for the years 1989 to 1988 versus the annual per capita consumption. Each point represents the price and quantity data for a given year. Explain whether simply drawing the line that approximates the data points would give the demand curve for potatoes.

Chapter 4 Applications Questions

4.How does the empirical analysis of automobile demand presented in this chapter illustrate the fact that not only do consumers consider the monetary price of purchasing an automobile, but also they are sensitive to other costs (or the “full price”) of the purchase?