Pages 69-75

1. The X-Corporation produces a good (called X) that is a normal good. Its competitor, Y-
Corp., makes a substitute good that it markets under the name “Y”. Good Y is an inferior
good.

(a) How will the demand for good X change if consumer incomes decrease? Since X is a
normal good, decrease in income will lead to a decrease in the demand for X (the
demand curve for X will shift to the left).

(b) How will the demand for good Y change if consumer incomes increase? Since Y is an
inferior good, an increase in income will lead to a decrease in the demand for good Y
(the demand curve for Y will shift to the left).

(c) How will the demand for good X change if the price of good Y increases? Since
goods X and Y are substitutes, an increase in the price of good Y will lead to an

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increase in the demand for good X (the demand curve for X will shift to the right).

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(d) Is good Y a lower-quality product than good X? Explain. No. The term inferior
good does not mean inferior quality, it simply means that income and consumption

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are inversely related.
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3. Suppose the supply functions for product X is given by Qx =−30+2 Px −4 P z .
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(a) How much of product X is produced when Px = $600 and Pz = $60?

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Qsx =−30+2 ( 600 )−4 ( 60 ) = -30 + 1,200 – 240 = 930 units

(b) How much of product X is produced when Px = $80 and Pz = $60?
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Qx =−30+2 ( 80 )−4 ( 60 ) = -30 + 160 – 240 = -110 units (quality supplied is 0)
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(c) Suppose Px = $60. Determine the supply function and inverse supply function for
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good X. Graph the inverse supply function.

QXS = - 30 + 2Px - 4(60) = - 270 + 2Px. The supply function is QXS = - 270 + 2Px
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The inverse supply equation is Px = 135 + 0.5QXS

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 Inverse Supply Function
250

200

150

Price
100

50

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0 20 40 60 80 100 120 140 160 180 200

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Quantity

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6. Suppose demand and supply are given by Q =60−P∧Q =P−20
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a. What are the equilibrium quantity and price in this market? Equating quantity
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supplied and quantity demanded yields the equation 60 - P = P - 20. Solving for P
yields the equilibrium price of $40 per unit. Plugging this into the demand equation
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yields the equilibrium quantity of 20 units (since quantity demanded at the

equilibrium price is Qd = 60 - (40) = 20).
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b. Determine the quantity demanded, the quantity supplied, and the magnitude of the
surplus if a price floor of $50 is imposed in this market. A price floor of $50 is effective
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since it is above the equilibrium price of $40. As a result, quantity demanded will
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fall to 10 units (Qd = 60 - 50), while quantity supplied will increase to 30 units (Qs =
50 - 20). That is, firms produce 30 units but consumers are willing and able to
purchase only 10 units. Therefore, at a price floor of $50, 10 units will be
exchanged. Since Qd < Qs there is a surplus amounting to 30 - 10 = 20 units.
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c. Determine the quantity demanded, the quantity supplied, and the magnitude of the
shortage if a price ceiling of $32 is imposed in the market. Also, determine the full
economic price paid by consumers. A price ceiling of $32 per unit is effective since it
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is below the equilibrium price of $40 per unit. As a result, quantity demanded will
increase to 28 units (Qd = 60 - 32 = 28), while quantity supplied will decrease to 12
units (Qs = 32 - 20 = 12). That is, while firms are willing to produce only 12 units
consumers want to buy 28 units at the ceiling price. Therefore, at the price ceiling
of $32, only 12 units will be available to purchase. Since Qd > Qs, there is a shortage
amounting to 28 - 12 = 16 units. Since only 12 units are available at a price of $32,

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 the full economic price is the price such that quantity demanded equals the 12
available units: 12 = 60 – PF. Solving yields the full economic price of $48.

0
8. a. Suppose the demand is D and supply is S . If a price ceiling of $6 is impose, what
are the resulting
shortage and full economic price?

At price of $6
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Q −Q =4−1=3
Full economic price $12
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b. Suppose demand is D and supply is S . If a price floor of $12 is imposed, what is
the resulting surplus? What is the cost to the government of purchasing any and all unsold

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units?

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At price of $12

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s d
Surplus=Q −Q =2.5−1=1.5

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Government Cost =12*15=18
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c. Suppose demand is D and supply is S so that the equilibrium price is $10. If an
excise tax of $6 is imposed on this product, what happens to the equilibrium price paid by
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consumers? The price received by producers? The number of units sold?

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The excise tax shifts supply vertically by $6. The new supply curve is S1 and the
equilibrium price increases to $12. The price paid by consumers is $12 per unit,
while the amount received by producers is this $12 minus the per unit tax. The
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producers receive $6 per unit. After the tax, the equilibrium quantity sold is 1 unit.
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14. What price do you expect to prevail if the new screening methods are adopted? $90
How many units of blood will be used in the United States? 75 (Qd = 210 – 1.5*90)
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What is the level of consumer and producer surplus? $1,875 (Consumer (0.5)($140-
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$90)(75)) and $1,125 (Producer (0.5)($90-$60)(75))

Illustrate your findings in a graph.
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 160

140

120

100

Price Per Pint 80

60

40

20

0
20 40 60 80 100 120 140 160
Pints of Blood

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Demand Supply Column1

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16. . How much money per unit (i.e. based on equilibrium price) would a typical consumer
save each month as a result of the proposed legislation? Show calculations to support
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your answer.
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(1) The original equilibrium point is: QD = 300 - 4P and QS = 3p-120, then
300-4P=3P-120, then 7P= 420, P=60
(2) The New Equilibrium point is: QD = 300 - 4P and QS = 3.2p-120, then
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300-4P=3.2P-120, then 7.2P= 420, P=58.33

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(3). The Typical consumer save each month per units: 60-58.33 = $1.67
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19. a. How will La Nina affect the supply and price of Chilean Wine? It will cause supply
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to decrease and price to increase.

b. How will La Nina impact the market for California Wine? Equilibrium price and
quantity will increase.
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 Pages 114-121

d
2. The demand curve a product is given by Q X =1,200 -3Px −¿ 0.1Pz where Pz=$300

a. What is the own price elasticity of demand when Px = $140? Is demand elastic or
inelastic at this price? What would happen to the firm’s revenue if it decided to charge a
price below $140?
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Q X =1,200 –3(140) −¿ 0.1(300)
¿ 1,200-420-30
¿ 750

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Elasticity formula gives: EQX , P X

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Px −420

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=-3 Q x = 750 =-0.56

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Since this is less than one in absolute value, demand is inelastic at this price. If
the firm charged a lower price, total revenue would decrease.
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b. What is the own price elasticity of demand when Px = $240? Is demand elastic or
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inelastic at this price? What would happen to the firm’s revenue if it decided to charge a
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price above $240?

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QdX =1,200 –3(240) −¿ 0.1(300)

¿ 1,200-720-30
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¿ 450
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Elasticity formula gives: EQX , P X

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Px −720
=-3 Q x = 450 =-1.6
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This is greater than one in absolute value thus, demand is elastic at this price.
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If the firm increased its price, total revenue would decrease.

c. What is the cross-price elasticity of demand between good X and good Z when
Px = $140? Are goods X and Z substitutes or complements?
EQX , P X

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 Px 300
=-0.1 Q x =−0.1 750 =0.04, Since this number is positive,

goods X and Z are substitutes.

4. Suppose the own price elasticity of demand for X is -3, its income elasticity is 1, its
advertising elasticity is 2, and the cross-price elasticity of demand between it and good Y is -4.
Determine how much the consumptions of this good will change if:

a. The price of good X decreases by 5%

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∆Q x /(-5) = -3, the quantity demanded of good X will change by 15 percent

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if the price of good X decreases by 5 percent

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b. The price of good Y increases by 8%

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∆Q dx /(8) = -4, the demand for X will change by -32 percent if the price of
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good Y increases by 8 percent.

c. Advertising decreases by 4%
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d
∆Q x /(-4) = 2, the demand for good X will change by -8 percent if
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advertising decreases by 4 percent.

d. Income increases by 4%
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∆Q x /(4) = 1, the demand of good X will change by 4 percent if income

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increases by 4 percent.
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 7. A quant jock from your firm used a linear demand specifications to estimate the demand for its
products and sent you a hard copy of the results. Unfortunately, some entries are missing because
the toner was low in her printer. Use the information presented below to find the missing values
labeled ‘1’ through ‘7’ (round your answer to the nearest hundredth). Then answer the questions.

Regression Statistics
Multiple R 0.38
R Square 0.14 (1)
Adjusted R
Square 0.87 (2)
Standard Error 20.77
Observations 150.00
Analysis of Variance
Significance
df SS MS F F

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Regression 2 10,398.87 (3) 5199.43 12.05 0.0000

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Residual 147 63,408.62 431.35

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Total
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149 (4) 73,807.49
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Coefficient P-
s Standard Error t Statistic value Lower 95% Upper 95%
Intercept 58.87 15.33(5) 3.84 0.00 28.59 89.15
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Price -1.64 0.85 -1.93 (6) 0.06 -3.31 0.00

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Income 1.11(7) 0.024 4.64 0.00 0.63 1.56

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SS Regression 10,398.87
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1. R 2= = =0.14
SS total 73,80749
2 2 n−1 150−1
2. Ŕ =1− ( 1−R ) =1−( 1−0.14 ) =0.87
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n−k 150−3
SS Regression =SS total –SS residual= 73,807.49 – 63,408.62 = 10,398.87
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3.
4. Total df =147+2=149
a^ 58.87
t a= =3.84=
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5. =15.33
σ σ
b^ −1.64
6. t b= = =−1.93
σ 0.85

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 c^ c^
7. t c = =4.64= =1.11
σ 0.24

a. Based on these estimates, write an equation that summarizes the demand for the
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firm’s product. Q X =a^ + b P x + c^ M
¿ 58.87−1.64 P x +1.11 M

b. Which regression coefficients are statistically significant at the 5 percent level?

The coefficients for the Price of X and Income are statistically significant at
the 5 percent level or better
c. Comment on how well the regression line fits the data. The R-Square is fairly
low, indicating that the model explains only 14% of the total variation in
demand for X. The adjusted R-square is significantly higher (87%),

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suggesting that the R-square is a result of an excessive number of estimated

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coefficients relative to the sample size.

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14. If Starbucks’s marketing department estimates the income elasticity of demand for its coffee
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to be 2.6, how will the prospect of an economic boom (expected to increase consumers’ incomes
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by 6 percent over the next year) impact the quantity of coffee Starbucks expects to sell?
% change in demand = Income elasticity * % change in Income
% change in demand = 2.6 * 6% = 15.6%
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Quantity of coffee Starbucks expects to sell increases by 15.6%

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17. As a newly appoint “Energy Czar, your goal is to reduce the total damn for residential
heating fuel in your state. You must choose one of the three legislative proposals designed to
accomplish this goal.
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E−¿.05∈¿
QdRHF =136.96-91.69 PRHF +43.88 PNG -11.92
P¿
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PRHF =¿ the price of residential heating fuel,

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PNG =¿ the price of natural gas,

PE =¿ the price of electricity
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IN = Income

a. A tax that would effectively increase the price of residential heating fuel by $1;

Coefficient of PRHF =¿ -91.69, a $1 increase in PRHF =¿ 91.69*1 = 91.69 units

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 b. A subsidy that would effectively reduce the price of natural gas by $3; or

Coefficient of PNG is 43.88, a $3 reduction in PNG 43:88 *-3 = -131.64 units

c. A tax that would effectively increase the price of electricity (produced by hydroelectric
facilities) by $4.

The proposal to increase the price of electricity by $4 is unlikely to have a

statistically significant impact on the demand for residential heating fuel.

The proposal to increase the price of residential heating fuel by $1 would lead to the
greatest expected reduction in the consumption of residential heating fuel.

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