2. a.

Surplus or
Price QS QD Shortage
$6.00 55,000 5,000 50,000
5.00 40,000 15,000 25,000
4.00 25,000 25,000 0
3.00 10,000 35,000 -25,000
2.00 0 45,000 -45,000
1.00 0 55,000 -55,000

b. Equilibrium price = $4.00 because it equates QD with QS.

3. a. Q = 1,500 – 4(400) + 25(20) +10(15) + 3(500)

= 1,650

b. Advertising would have to increase by $60,000 in order for the firm to regain the loss of 300
units resulting from its competitor’s reduction in price of $100. Without cost data, it is not
possible to determine whether it would be worthwhile for the firm to increase advertising to offset
the competitor’s move. However, one thing that this firm would probably want is to avoid is a
price war.

c. The price of substitute products such as cruise packages.

d. If time series data were collected on a quarterly basis, then seasonal factors such as summer or
winter could be introduced in the form of dummy variables.

12.

a. No, because point elasticity is -0.625.

b. Yes. Although the number of units sold would drop from 12,000 to 10,000, the combined impact
of an inelastic demand and the increase in advertising would raise total revenue from $36,000 to
$40,000. Moreover, the incremental revenue is far greater than the $100 increase in advertising
expenses.