ECO 550 Check Your Understanding – Week 2

Chapter 3: Problems 3, 4, and 7

3. The Olde Yogurt Factory has reduced the price of its popular Mmmm Sundae from $2.25 to $1.75. As a result, the firm’s daily sales of these sundaes have increased from 1,500/day to 1,800/day. Compute the arc price elasticity of demand over this price and consumption quantity range.


4. The subway fare in your town has just been increased from a current level of 50 cents to $1.00 per ride. As a result, the transit authority notes a decline in ridership of 30 percent.

a. Compute the price elasticity of demand for subway rides.

b. If the transit authority reduces the fare back to 50 cents, what impact would you expect on the ridership? Why?



7. In an attempt to increase revenues and profits, a firm is considering a 4 percent increase in price and an 11 percent increase in advertising. If the price elasticity of demand is −1.5 and the advertising elasticity of demand is +0.6, would you expect an increase or decrease in total revenues?



Chapter 4: Problems 5, 6, and 7

5. General Cereals is using a regression model to estimate the demand for Tweetie Sweeties, a whistle-shaped, sugar-coated breakfast cereal for children. The following (multiplicative exponential) demand function is being used:

QD = 6,280P^-2.15 A^1.05 N^3.70

Where QD = quantity demanded, in 10 oz boxes

            P = price per box, in dollars

            A = advertising expenditures on daytime television, in dollars

            N = proportion of the population under 12 years old

a. Determine the point price elasticity of demand for Tweetie Sweeties.

b. Determine the point advertising elasticity of demand.

c. What interpretation would you give to the exponent of N?



6. The demand for haddock has been estimated as:

              Log Q = a + b log (P) + c I log (I) + d log (Pm)

Where Q = Quantity of haddock sold in New England

P = price per pound of haddock

I = a measure of personal income in the New England region

Pm = an index of the price of meat and poultry

If b = -2.174, c = .461, and d = 1.909,

    1. Determine the price elasticity of demand.

    1. Determine the income elasticity of demand.

    1. Determine the cross elasticity of demand.

    1. How would you characterize the demand for haddock?

    1. Suppose disposable income in expected to increase by 5 percent next year.

Assuming all other factors remains constant, forecast the percentage change in the quantity of haddock demanded next year.



7. An estimate of the demand function for household furniture produced the following results:

                                F = 0.0036Y ^1.08R^0.16 P^ 0.48            R^2=0.996

Where F = furniture expenditures per household

             Y = disposable personal income per household

             R = value of private residential construction per household

             P = ratio of the furniture price index to the consumer price index

 a. Determine the point price and income elasticities for household furniture.

 b. What interpretation would you give to the exponent for R? Why do you suppose R was included in the equation as a variable?

c. If you were a supplier to the furniture manufacturer, would you have preferred to see the analysis performed in physical sales units rather than dollars of revenue? How would this change alter the interpretation of the price coefficient, presently estimated as -0.48?