Chaoter
3
Demand
Theory
727
to estimate dre effect of reducing the price of a conrrnodiry on dre clernancl of othe r related conr.nodiries that dre firnr sells. ,\ irigh crossprice elrsticin' oI dcrn rrrd is also used to define an industry.
5. For the analysis of demand, the
firm should first identify all the irnportant variables .that affect the demand for the product it sells. Bv using regression analysis (discussed in Chapter 4), the fimr could obtain reliable esdmates of the effect of a change in each ofthese variables on demand for the product. There is an increasing trend ofconverqing tastes around the s'orld.'Lrstes in the
Un.ited States affect tastes around the *'orld, and tastes abroad stronglv influence tastes in the United States, \\rl.rile sorne national differences s'ill surely reurain, the information revolution and crossfertiliz',rtion oI cr.rlrurcs c..rn be erpe cted to accelerate the global convergence of tastes. This has irnportant implications for
7. Since
all firms. t}le rnid1990s, the Internet has given rise to electronic commerce, u'hich is revolutionizing traditional business relationships. Ecornrlcrce refcrs to the producdon, advertising, slle, nncl distribr.rtion of products trrrcl scrvices fronr business to business and fronr business to consumers thror.rgh tl're Internet. Thc bigeest hrres oIecommerce for consunrers ire tl)c convenience of har.ing roun(ltheclock acccss to the virrual storc and the,rbilin'to cng',rge irr corrrprirtivt shopping:rt minimrl cost and effort. Through ecornmerce, sellers can sharply reduce their cost of executing sales and procuring inputs, reformulate supply chains and logisrics, and redefine custoner relationship managenlent.
If our main interest in managerial economics is the demand that a firm faces for is product, why do \r'e srudy consumer demand dreorv? (&) \Mrat is the distinction beween inferior goods and normal goods? Benveen the substirution effect and the income effect? Benveen a change in the quantiw dernlrndecl and a
(a) change in demand?
2. (a)
Discussion Questions
are we most interested in rnrnaeerial economics? thc other r)?es of denlend? (a) faces
Iiorv many ty?es of demand functions are drere? (&) In which tlpe cf demrnd \\hy? (r) \4hy do 1ve then srudl'
What are d1e most important deterrninants of the dernand function that a finn for the con.rrnodin' it sells? (/l) \\hat is nreant b1' producers' goodsi Bt' derived demand? (r) \\hy is the demand for durable goods (bodr consunrers' and
producers') less stable than the demand for nondurable goods?
@V>What v
is the advantage of using the price elasticiry rather than the slope of the curve or is inverse to measure the resoonsiveness in the ouanriw dernanded of a commodiry to a change in its price? (l') \afty and horv is the formula for arc price elasticiq'of dernancl diffcrcnt frorn rhe forrnula for point pricc clasticity of dcrnand?
i.".ra
(!
6.
(r) State the rcledonship benveen the total revcnue of a firnr and the price el'.rsticity of dernand for a price ino'ense alonq a linear derran<l curvc. (l) Explain tlre rcrson for the relationship tl'rrt vou stlted in part (a).
(a) Explain rvhy a
firm facing a negatively slopeC demand curve rvould never produce in the inelasric pordon of the demand cun'e. (l') \\''lren ri'ould the firm u'ant to operate at the point rvhere its demand cun,e is unitan'elrsdc?
5o+l
lt
j,
r/
1is disposabie incorne.. and price? (D) l\h:rt is the usefulness to the firm of the clasticio' of dcmand for variables over rvhich the firm has some control? (c) Of the clasticiw of over rvhich the firm has no conrrol? (d) \\thy is it essential for the firm to use elasciciry of all the variables included in the dernancl ftrnction?
million. che research manager for rnarkering
ar the
Cherrolet Dir. finns?
lJ.
If there hasbeen a I0 percent
inbrease in consumers'income berrveen nvoperi rvhat rvas the percentage change in the demand for foreigJn travel? For
(a) Indicate each
unit cl
products? For flour? (Hirrt: Use the inconreel'.I
operatr adoPt?
iion wh the Pri'
clurge
L
. N is population. the ir
curve for ( graPh. Pr. P6.
of Q" if tne
s8. to be directly or inversely related totie quandry demanded ofChevrolets and the reason for vour cxpectarion. Pr)
firnc. benveen apples cheesc is 0..)rn" t"" c V son of the
administrt
demand gression
a:
^
mand for
a
t2.000 rvhere Q6
P6
andMI

100/'}r
1.5.2) \\ftv are txstes converqingl around the u'orld? (l) \\rhat is the this for U.000P6
+ 2..Part
2
Demand Anatysis
7. \\Ihat crn )'ou sly rrboutthe lationship benvecn each set of comrnoditics? (r) !\/hat othcr elrsticities of dcrnanrl ilrc thcre lrcsirlcs pricc. The tot
quantit)' clernandcd per vear of Chcvrolet arrtorncrbiles price of Cherrolet atrtomobiles. is the price Chevrolets. Suppose that Gtr'l's Smith estimated rhe follorving resression equation for
for ice cr 6. N. Starting wi
assume dra
10. (.ir61. (a)
the price elasticiry of demrnd to be higher for Chewolet tomobiles or for automobiles in general? \\hv? (l) \\rould )'ou expect the pd elasticirl'ofdernand for electricir)"for residential ttse to be higher or lorver indusrial use? \\/try? (c) Would you er?ect *re price elasticity of demand for triciry to be higher er lorverin the shon run as compared u"ith the long mn?
\\buld you erpect
Pe=
A=
P.0001. P6 is the price of gasoline. PG.mand
sr
is
Chewolet autonrobiles: Qr.1.000N + 501 + +. irrcornc.4..isionof
thc
der. Pc
the demant
Agriculrural commodities arc kno*'n to ha'.4.
$5 and P
i.8.)
9. P.t(
rvhere Q6.
Showhc
cream gl Also sho
6o
1.e a priceinelastic clemand and to necessities.'rand
I
General Motors Corporation. Plo \d4rat is th
G. Suppose
ll
that the crossprice elasriciry of demand becween Mclntosh and Delicious apples is 0./
.0oo. Indicare rvhether you expect each independent or explanatoryr vx. in dollars popularion of the United States. is the quantiw demanded of Chevrolets per I'exr. has specified the foilorving general demand tion for Cherrolets in the United States:
Qc ..rrs
: : N:
0.4 + 40. and benveen apples and beer is 0.
7.
Horv is ecommerce revolutionizine
tie
brrsiness rvorld?
where th. For the similar I
enuer aI demand
figure . Florr can this inforrn:rtion lllorv us to ernhin rvlrl thc incorne of ers falls (a) after a good hanest? (l') In relation to the inconres in other
the economv?
3.=
8.f(Pc. in rnillions 1 = per crpitrr disposrrble income.S.1.lsticin'r"llues iu Thble 34.101)/. in dollrrs Pp : price of Ford nrtornobiles.e.i. parlor. I is the amounr of advercising for Che and P1 is credit incentives to purchase Chevrolets. 1. in doll. ber*'een apples and apple juice is 0. ar
schedule each doll
PfOb[gmS L John Smith. I : (i. is the price o[Ford mobiles.= 100.
in dollars per vear credit incentives to purchasc Chevrolets.clernanded.e. and so on). (1') find the. frorn P : 56 to P : $0. ancl (c)frxl tfieiprice elasticin'of dernrnd benveen consecutive doll':rr prices (i. (r) Find the equation of the new demand curve for Chewolets and (&) plot this ne*'demand curve. = g (i. D6.
For the dernand frinction for ice crearn given in Problem 4. Pc: 100 cents.4. I: S10.rr.'1 : 5200. td . in cents per gallon adverrising expendirures br. /: $12. By larv. r\lichlcl. (c) Derive the equiltion for the 'IR and . (a) construct a table similar to Thble l2 in the text.000. Pc : 80 cents..ing demand function:
each
Qr=12020P1
rvhere the subscript 1 refers to ice cream portions sen'ed per day in his fatl'rer's parlor.re price elasticiq' ofdenrand for public transPortation has been esdrnrted to be 0. bcnveen 1) = $6:rnd P: S5.000.000. Pr : 54 for the dern. 8p rvould be the same if the denrand cun'e for ice cream s. N: 200 nrillion.1. Pp: $10. : l. the total rer'enue.1'= $5 and P = 54. $auu Strrting rvith dre cstiuratcd clcrlancl function firr (ihcvrolcts grven in [)roblern 2. sx). and P1 is the dollar price. and (r/) plot it. In his course in rnanagerial econornics.ere cun'ilincar but tlngent to the linelr denrrnd cun c 3t Pr = S. hrs just ccrnre back frorn college.point price elasticih'of dernancl at each dollar price. Ilichael then sets out to (a) derive the demand schedule for ice cream and plot it.c. and P. rnd t1. thc son of the orvner.000. (r) Dcrive the cqu:rtion for the clcnranrl cun'c for Chcr'r'olets.LIR schedules for the parlor. l : 5250. u>.htorrn. (l. (D) Find dre value of Q6if the averase value of P6: 59.000.rncl the price elastici$ of dernand (Ip) for rcc crearn graphicall)'at. found in Problem 2(d). and the marginal revenue schedules of the Ice Cream Parlor.Chapter
3
Demand
Theory
129
Pc
: I : Pr :
real price of gasoline. the total revenue. Pp= 58.
a public transportation:rr. Cl'revrolet.rtion.e)
Indicate the change in the number of Chevrolets purchased peryear (Q6) for unit change in the independent or explanatory variables.rthoriq.rrlor in Smit.rthorit\' charge to elirnin:rte the deficit if it c:rnnot rednce costs?
The total operating revenues of
\ 9o r
I
. assunle that the average value of the independent vlriables changes to N : 225 million. plot the demand cun'e for Chevrolets. and unitarv elastic.. in percentrge poirtts belorv the rate of interes! on borro*'ins in the absence of incentives
(. Also shorv graphicalll' that at Py = $4. inelastic. and he decides to applv rvhat he has learned to estimate rhe demand for ice cream in his fathcr's parlor during his surnrner vac'.hile its total operxting costs rrre S120 nrillion. The price of a ride is S1. Di. i\licheel estimxtes the follou. and on the same graph. shorving the quantirv. fcl !\trat is the relacionsl'rip benveen D6 and Dy' ? \\that explains this relationshipi Thc Ice Crcam Parlor is the onlf ice creirnr p'. Shorv hos'r\{ichrel rvould gct his results. and iiP.000..') \\hat price per ride must the public transportation . Shorv irou. rvhcre he majors in brrsiness administration. Nlichael has just snrdied demand analysis. (a) \\4rat pricing policy should the transportarion authorin' adopt? \\rhv? (1.) Plot the
demand. the incentives are phased out).ilichael could havc for.000. and the rnarginal revenue scheclules from part (a) in e figure similar to Figure l5 in the text and indicate on it thc range over rvhich demand is elastic. Llsins regression anall'sis..  : Q*:. the public transportation audroriw must take steps to eliminate its operating deficit.. are $100 rrrillion l.rnd function giycn in Probleni 4.
rminurn will fall by 2 percent. (d) By how nruch should CFC change its advertising ifit rvants its sales to be 30 percenr higher dran rhis veari
is reduced
5
o.q1 remains unchanged./ The coefficient of income in otlier variables isthe quxntio dernancled of a com10.51
+ 0.
The coefficient of the price of gasoline in the
resressic. autornakers intend to increase the average price of autornobiles br' 5 percent. (/') \4/hat rvould be the income elasticirv of dcmand if sales increased from 80. and thel expect consurners' disposable incorne to rise lrr' 3 percent.000 to $11.000 units and income rose from $10.rsoline (in doll'rrrs) and othervarirbles is 14. hos' nrtnv lutornobiles do vou expect U. (a) Calculate the sales ofCFC cornflakes this year.OP. and .y
+
1. (r) estirnatc dre levcl of sales lrcxr year if CFC rcduces P1.2.Eyy = l..1: 54. rvish to rncrease sales by 5 percent next year?
10. in dollars per quart I : advertising expendirurcs ofCFC cornflakes. in dollars per I 0ounce box P. (l) \Vhrt would be the crossprice elasticiw of demand benveen automobiles and grsoline if sales of autornobiles declined from 8 to 6 with an increase in the gasoline pricc from $l to $1.v l0 percent.000 and salcs of 80. = 2. Pr = $2. Next vear. b.0.20 per gallon?
I
l. price of CFC corrrflakes.producecl autornobiles are 8 rnillion this velr. in millions of l0ounce boxes perl'ear Px: th. Ncrt t'c. E r = l. (a) If the sales this year are 1.rl
8
4tr{A )iA
. in trillions of dollars per year Py : price of competitive brand of cornflakes. Itr: $1. A researcher esdmated th:rt the price elasticin'of demand for automobiles in the United States is . (rf If s:rles of domesdcallr. the firm rvould like to incre:rse the p{ce of the steel it sells by 6 percent.Part
2
Demand Anatysis
/ .rsticin' r. U. rvhere X refers to steel and f to alun'rinunr.8P)
3. in dollars per 10ourrce box 1 = personal disposable income.7 \9'/
<<' /\)
n
\
a regression of '8/ \. Integrating Problem
T'he research department of the Corn Flakes Corporation (CFC) cstimated the following regression for the demand of the cornflakes it sellsr
Q. and P.000
units.000? Whatqpe of good is this commodirl'? 9.S.1. increases advercising by 20 percent.200 tons of the steel. s'hile thc irrconre el.\r
+ i.rr.
Px: $2.0

2. The
rnanage ment of the Mini .5.rn
of the quantit)'de
nranded of autonrobiles (in rrrilliorrs of units) on the price of g'.\'till Steel Cornpau' cstirnated thc follorving ehsdciries for a special qpe of steel: Er.1'= sales of CFC cornflakes. andA = $2.0P.0rl
Q.S. horv lnrny tolls can the firm expect to sell next 1'ear? (&) Bv rvhat percentase nrust the firm changc tlre price of steel to keep its sales at 1. Py
bv 10 percent.:
rvhere
1. / rises by 5 percent. (rz) Crlculate the crossprice elrsticin'of demrnd ber\r'ecn autornobiles nnd grsolinc at tlrc gasolirrc price of $l pcr grllon and salcs of autonrobiles of 8 (rnillion unim). iutonrikers to sell next verr? (l) Bv horv much should domestic automakers increase the price of autonrobiles if dre1.50..f de nr'rntl is i. in hundreds of thousands of dollars per )'ear
Tlrisl'ear. incorne. and
dciq'of dernand for tliis cornnrodin'at incornc of
S10. (l) calculate the elasdciry ofsales s'ith rcspecr to crch variable in drc dernand frrnction.000 to 90.11 : price of milk.200 tons ncxt 1'ear?
t2. The managernent forecasted that income *'ill rise by 4 percent next year and that dre price of alr. (a) Cirlculatc thc incorne elrrsrnodiq'on price.