BUSECO1 - A

Problem Set 2
Members:
Calanza, Trisha Fate Q.
Hamdan, Johanna B.
Mating, Al-Jazi Raye Q.
Ong, Princes Rheyn L.

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?
- The demand for good X will, which is a normal good, will decrease as consumer incomes
decrease.
b. How will the demand for good Y change if consumer incomes increase?
- The demand for good Y, which is an inferior good, will decrease as consumer incomes
increase.
c. How will the demand for good X change if the price of good Y increases?
- The demand for good X, which is a substitute of good Y, will increase as the price of good
Y increases.
d. Is good Y a lower-quality product than good X? Explain.
- Yes, good Y is a lower quality product than good X. Good Y is an inferior good
hahahatdog

2. G.R. Dry Foods Distributors specializes in the wholesale distribution of dry goods, such as
rice and dry beans. The firm's manager is concerned about an article he read in this morning's
Wall Street Journal indicating that the incomes of individuals in the lowest income bracket are
expected to increase by 10 percent over the next year. While the manager is pleased to see this
group of individuals doing well, he is concerned about the impact this will have on G.R. Dry
Foods. What do you think is likely to happen to the price of the products G.R. Dry Foods sells?
Why?

3. You are the manager of a firm that produces and markets a generic type of soft drink in a
competitive market. In addition to the large number of generic products in your market, you also
compete against major brands such as Coca-Cola and Pepsi. Suppose that, due to the successful
lobbying efforts of sugar producers in the United States, Congress is going to levy a $0.50 per
pound tariff on all imported raw sugar-the primary input for your product. In addition, Coke and
Pepsi plan to launch an aggressive advertising campaign designed to persuade consumers that
their branded products are superior to generic soft drinks. How will these events impact the
equilibrium price and quantity of generic soft drinks?

4. Revenue at a major smartphone manufacturer was $2.3 billion for the nine months ending
March 2, up 85 percent over revenues for the same period last year. Management attributes the
increase in revenues to a 108 percent increase in shipments, despite a 21 percent drop in the
average blended selling price of its line of phones. Given this information, is it surprising that the
company's revenue increased when it decreased the average selling price of its phones? Explain.

- No, it is not surprising that the smartphone manufacturer has increased revenues. When
price decreases, quantity demand will increase which will result in higher revenue.

5. The demand curve for a product is given by Qxd = 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?
d
Q x =1200−3 P x −0.1 PZ
d
Q x =1200−3 ( 140 )−0.1 ( 300 )
d
Q x =750
P
EQ P =−b ×
x
Q x

140
EQ P =−3 ×
x x
750
EQ P =−0.56x x

The own price elasticity of demand when P x =$ 140 is−0.56 .Since demand is < 1, it is
inelastic which means that consumers are not very responsive to price changes. If the firm will
charge a price below $140, the revenue will increase.

b. What is the own price elasticity of demand when Px = $240? Is demand elastic or inelastic
at this price? What would happen to the firm's revenue if it decided to charge a price above
$240?
d
Q x =1200−3 P x −0.1 PZ
d
Q x =1200−3 ( 240 )−0.1 ( 300 )
d
Q x =4 50
P
EQ P =−b ×
x x
Q
2 40
EQ P =−3 ×
x x
4 50
EQ P =−1. 6 x x
 The own price elasticity of demand when P x =$ 2 40is−1. 6.Since demand is < 1, it is
inelastic which means that consumers are not very responsive to price changes. If the firm will
charge a price below $240, the revenue will increase.

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?
d
Q x =1200−3 P x −0.1 PZ
d
Q x =1200−3 (140)−0.1(300)
d
Q x =1200−420−30
d
Q x =1200−3 ( 140 )−0.1 ( 300 )
d
Q x =750
d
% ∆ Qx Pz
EQ P = ×
% ∆ P z Q dx
x z

140
EQ P =−0.1×
x z
750
300
EQ P =−0.1×
x z
750
EQ P =−0.4 x z

Since, EQ x Pz < 0, goods X and Z are complements.

6. Suppose the cross-price elasticity of demand between goods X and Y is 4. How much would
the price of good Y have to change in order to increase the consumption of good X by 20
percent?
d
% ∆ Qx
EQ P =
% ∆ Pz x y

20
4=
%∆ P y
4 % ∆ P z=20
% ∆ Pz =5
The price of good Y must change by 5% in order to increase consumption of good X by 20%.