E

K L
PROBLEMS & 4
APPLICATIONS
KELOMPOK 4
1.Farida Dwi Aryati (483895)
2.Felisitas Nindi Astaningrum (483899)
3.Erlangga Mohamad (484058)
4.Gilangtriatama Ardinanto (484013)
5.Eko Prasetyo saputro (484046)
CHAPTER 2
LEARNING OBJECTIVES
PROBLEM:
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
 Edit Master as Coca-Cola and Pepsi.
text styles  Fourth level
Suppose that, due to the successful lobbying efforts of sugar producers in the United
 Second
States, levelis going to levy a $0.50 per poundtariff
Congress Fifthon
level
all imported raw sugar—
 Third input
the primary level 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? (LO1, LO3, LO5)

Question No. 12
 SOLUTION
Cost of production will increase as congress is going to
levy a $0.50 per pound tariff on imported raw sugar which
is the primary input for my product.
As the production cost goes up, my company is less willing
to produce more.
Therefore, supply of my product will decrease & the
price will increase.
In addition, Coke & Pepsi will launch ads to persuade that
my product is inferior to them.
Hence this events impact supply curve of my product will
shift to the left as shown below. Price
S1

S0

Quantity
PROBLEM:
You are an assistant to a senator who chairs an ad hoc committee on reforming taxes
on telecommunication services. Based on your research, AT&T has spent over $15
million on related paperwork and compliance costs.
 Edit Master Moreover, depending on the
text styles  Fourth level
locale, telecom taxes can amount to as much as 25 percent of a consumer’s phone bill.
 Second
These level
high tax  Fifth
rates on telecom services have become level
quite controversial, due to the
fact that the deregulation of the telecom industry has led to a highly competitive
Third level
market. Your best estimates indicate that, based on current tax rates, the monthly
market demand for telecommunication services is given by Qd = 300 − 4P and the
market supply (including taxes) is Qs = 3P − 120 (both in millions), where P is the
monthly price of telecommunication services. The senator is considering tax reform
that would dramatically cut tax rates, leading to a supply function under the new tax
policy of Qs = 3.2P − 120. How much money per unit would a typical consumer save
each month as a result of the proposed legislation? (LO2, LO3)
Question No. 16
SOLUTION
The monthly market demand = Qd = 300 – 4P
The monthly market supply = QS = 3P – 120
For equilibrium point :
Qd = QS
300 – 4P =3P – 120
7P = 420
P = $ 60

When the tax rates are reduced, then

300 – 4P = 3.2P − 120
7.2P = 420
P = $ 58.3
So saving of the subscriber = $ 60 – $58.3 = $ 1.7
PROBLEM:
From California to New York, legislative bodies across the United States are
considering eliminating or reducing the surcharges that banks impose on
noncustomers,
 Edit Master textwho make $12 million in withdrawals from other banks’ ATM
styles  Fourth level
machines. On average, noncustomers earn a wage of $24 per hour and pay ATM fees
Second
of $3.00 perlevel  Fifth
transaction. It is estimated that banks levelbe willing to maintain
would
services for 5 million transactions at $1.25 per transaction, while noncustomers would
 Third level
attempt to conduct 19 million transactions at that price. Estimates suggest that, for
every 1 million gap between the desired and available transactions, a typical consumer
will have to spend an extra minute traveling to another machine to withdraw cash.
Based on this information, use a graph to carefully illustrate the impact of legislation
that would place a $1.25 cap on the fees banks can charge for noncustomer
transactions. (LO3, LO4)

Question No. 18
 On average, noncustomers earn a
wage of $24 per hour and pay ATM
fees of $3.00 per transaction. This
means:
• Equilibrium price,
Pe=$3.00/transaction
• Opportunity cost = $24/hour
 Cap on the fees banks can charge for
non customer transactions = $1.25.
This implies:
• Ceiling price,C = $1.25/transaction
 This estimated that banks would be
willing to maintain services for 5
million transactions at $1.25 per
transaction, while non customers
would attempt to conduct 19 million
transactions at that price. This implies:
• Shortage in transaction volumes = 19
M - 5 M = 14 M
For every 1 million gap between the
desired and available transactions, a
typical consumer will have to spend an
extra minute traveling to another
machine to withdraw cash. This implies:
• Time lost in 14 M of shortage
transaction = 14 M x 1 minute / M =
14 minutes = 14/60 hour
• Opportunity cost of 14 minutes =
$24/hour x 14/60 hour = $5.6
What would be the non pecuniary cost
of legislation that would place a $1.25
cap on the fees banks can charge for
non customer transactions?
• The non pecuniary cost of legislation =
opportunity cost = $ 5.6 per
transaction
SOLUTION What would be the full economic price
of this legislation?
• Full economic price of this legislation =
Ceiling price + opportunity cost =
$1.25 + $5.6 = $6.85/transaction
CHAPTER 3
LEARNING OBJECTIVES
PROBLEM:
For the first time in two years, Big G (the cereal division of General Mills) raised cereal
prices by 4 percent. If, as a result of this price increase, the volume of all cereal sold by
Big G dropped by 5 percent, what can you infer about the own price elasticity of
 Edit Master text styles Fourth level
demand for Big G cereal? Can you predict whether revenues on sales of its Lucky
 Second
Charms brand level
increased or decreased? Explain  Fifth level
 Third level

Question No. 13
 • To determine the own price elasticity
of demand for Big G Cereal, we can
use the equation:
Where,
represents the change in the
quantity demanded,
represents the change in price,
E is the own price of elasticity of
demand.
SOLUTION
With the given = -5 and = 4
 
=
= -1.2
The own price elasticity of demand is
-1.2. Therefore, the demand is elastic
because the absolute is greater than 1.
Since the demand is elastic, it follows that
when there is a price increase, there will be
a decrease in the quantity demanded and
when there is a price decrease, there will
be an increase in the quantity demanded.
 SOLUTION
• Since Lucky Charms is one particular brand
of cereal for which even more substitutes
exist, we would expect the demand for
Lucky Charms to be even more elastic than
the demand for Big G cereal.
• Thus, since the demand for Lucky Charms
is elastic, one would predict that the
increase in price of Lucky Charms resulted
in a reduction revenues on sales of Lucky
Charms.
PROBLEM:
You are a division manager at Toyota. If your marketing department estimates that the
semiannual demand for the Highlander is Q = 150,000 – 1.5P, what price should you
charge in order to maximize revenues from salesof the Highlander? (LO1, LO2, LO4,
 Edit Master text styles Fourth level
LO5)
 Second level  Fifth level
 Third level

Question No. 15
 SOLUTION
To maximize revenue, Toyota must charge the price
that can make it’s demand unit elastic.
Using the own price elasticity of demand formula,
EQ, P = (-1.5)(P / (150,000 – 1.5P)) = -1
= (-1.5)*((p)/(150,000-1.5p)) = -1 (Divide -1 by
-1.5)
= (p)/(150,000-1.5p) = (-1.5)/(-1)
= p/(150,000-1.5p) = 2/3
Multiply both sides by the denominator we get:
P = 2/3(150,000-1.5p) Or P= 100,000-p
2P = 100,000
P = 50,000

Solving this equation for P implies that the revenue

maximizing price is P = $50,000.
THANK YOU