Module 1 - Case

SUPPLY AND DEMAND

Assignment Overview

Before beginning this assignment, make sure you have gone

carefully through all of the required readings for this
module.  It is very important to carefully absorb the general
concepts as well as the numerical examples in the
background readings.  For this assignment, you will have to
answer some purely conceptual questions, as well as some
numerical problems.  For conceptual questions, make sure
to thoroughly explain your answers and to cite specific
readings from the required background materials to explain
your answers.  For numerical problems, make sure to show
all of your work and explain how you arrived at your answers
(partial credit can be given if you get the final answer wrong
but do some of the steps correctly).

Case Assignment

Part A: Conceptual questions

1. Suppose you own a pet shop.  Your sales are decent but a marketing
consultant tells you that you could increase your sales and be able to
charge a higher price if you spend some money on local television ads.  If
the consultant is right, will advertising lead to an increase in quantity
demanded?  Or a shift in the demand curve?  Both?  Neither?  Explain
your answer and make sure to cite at least one of the required readings in
your answer.
2. You are the owner of a furniture factory.  You normally produce 100
pieces of furniture a day because that is how much you can produce
given the amount of qualified workers in your town and the amount of
reasonably priced wood that you can purchase locally.  Then one day you
get an order from a large national retail chain who wants to purchase 200
pieces of furniture a day from you.  You are hesitant, as you will have to
pay higher wages to get some qualified workers to move to your town. 
You also will need to pay higher prices for wood because you will no
longer be able to rely solely on local suppliers and will have to spend
 more on shipping wood from other towns.  But you drive a hard bargain
and the retail chain agrees to pay one and a half times your normal price. 
Does this situation describe a change in quantity supplied?  A shift in the
supply curve?  Both?  Neither? Explain your answer and make sure to
cite at least one of the required readings in your answer.
3. Suppose marijuana has just been legalized in your state.  Nobody in your
home town wants to start a marijuana business, as this would be too
much of a stigma.  But being an MBA student, you know a good business
opportunity when you see one and decide to take a stab.  Shortly after
starting up your business, you gain a loyal following of customers and
start raking in some steep profits.  However, the local government
decides that they want a cut of your profits and starts charging a 20%
sales tax on marijuana.  Do you think this would lead to a 20% or greater
loss in sales?  Do you think marijuana in this situation would be facing
inelastic or elastic demand?  Explain your reasoning, and make sure to
cite at least one of the required readings regarding elasticity.

Part B Quantitative Problem

Suppose the demand function for a new smartphone can be

expressed as QD =  1000 – 1.5P with QD being quantity
demanded and P being price.  The supply function can be
expressed as QS = 50 + 2P

Fill out the following table using the above equations:

Price Quantity Quantity Supplied Surplus Amount

Demanded or Shortage
Amount

200      

220      

240      

260      

280      

300      

320      

340      
 Now answer the following questions:

1. What is the equilibrium price?  You can compute this either using
Microsoft Excel, or by using algebra from the equations above and solving
for a price where quantity supplied equals quantity demanded. Show your
work by either showing the algebra steps or by showing how you used
Excel to calculate.
2. Suppose the supply function changes to 100 + 2P.  What is the new
equilibrium? Show your work by either showing the algebra steps or by
showing how you used Excel to calculate.
Assignment Expectations
 Answer the assignment questions directly.
 Stay focused on the precise assignment questions. Do not go off on
tangents or devote a lot of space to summarizing general background
materials.
 For computational problems, make sure to show your work and explain
your steps.

For short answer/short essay questions, make sure to

reference your sources of information with both a
bibliography and in-text citations. See the Student Guide to
Writing a High-Quality Academic Paper, including pages 11-14
on in-text citations. Another resource is the “Writing Style
Guide,” which is found under “My Resources” in the TLC
Portal.