# BUSI 620 BUSI620 Module 2 Critical Thinking Set 2 (Liberty University)

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BUSI620 Module 2 Critical Thinking Set 2 (Liberty University)

Salvatore’s Chapter 4: Discussion Questions: 8 and 10.

Problems: 3(a) and (b), 7, 9, and 14.

Discussion Question 8: If the price increase by 10 percent by how much does the quantity of household

a) natural gas and

b) electricity change in the short run and the long run? (Hint: use the price-elasticity values).

Discussion Question 10: Agricultural commodities are known to have a price-inelastic demand and to be necessities. How can this information allow us to explain why the income of farmers falls

a) After a good harvest?

b) In relation to the incomes in other sectors of the economy?

Problem 3: Starting with the estimated demand function for Chevrolets given in Problem 2, assume that the average value of the independent variables changes to N=225 million, I=12,000, PF=10,000, PG=100 cents, A=250,000 and PI=0.

a) Find the equation of the new demand curve for Chevrolets.

b) Plot this new demand curve, D’C, and, on the same graph, plot the demand curve for Chevrolets, DC, found in Problem 2(d).

Problem 7: The total operating revenues of a public transportation authority are \$100 million while its total operating costs are \$120 million. The price of a ride is \$1, and the price elasticity of demand for public transportation has been estimated to be -0.4. By law, the public transportation authority must take steps to eliminate its pricing deficit.

a) What pricing policy should the transportation authorty adopt? Why? (b)

b) What price per ride must the public transportation authority charge to eliminate the deficit if it cannot reduce costs?

Problem 9: A researcher estimated that the price elasticity of demand for automobiles in the United States is -1.2, while the income elasticity of demand is 3.0. Next year, U.S. auto makers intent to increase the average price of automobiles by 5 percent, and they expect consumers’ disposable income to rise by 3 percent.

a) If sales of domestically produced automobiles do expect U.S auto makers to sell next year?

b) By how much should domestic auto makers increase sales by 5 percent next year?

Problem 14: Suppose that a firm maximizes its total profits and has a marginal cost of production of \$8 and price elasticity of (-) 3. Find the price at which the firm sells the product.

Froeb et al.’s Chapter 6:

Individual problems: 6-1, 6-3, and 6-5.

Individual problem 6-1: George has been selling 5,000 T-shirts per month for \$8.50. When he increased the price to \$9.50 he sold only 4,000 T-shirts.

a) What is the demand elasticity?

b) If his marginal cost is \$4 per shirt, what is his desired markup and what is his initial actual markup?

c) Was raising the price profitable?

Individual problem 6-3: To conduct an experiment, AMC increases movies tickets from \$9 to \$10 and measured the change in ticket sales. Using the data over the following month, they concluded that the increase was profitable. However, over the subsequent months, they changed their monds and discontinued the experiment. How did the timing affect their conclusion about profitability of increasing prices?

Individual problem 6-5: An end-of-aisle price promotions changes the price elasticity of a good from -2 to -3. If the normal price \$10,what should be the promotional price be?

Salvatore’s Chapter 5:

Problems: 8, 15(b) and (c), and appendix problem 2 (p. 215).

Problem 8: In a study published in 1980, B.B. Gibson estimated the following price and income elasticities of demand for six types of public goods.

a) Do these public goods conform to the law of demand? For which public goods is demand price elastic?

b) What types of good are these public goods?

c) If the price or cost of college and university education increased by 10% and, at the same time, incomes also increased by 10%, what would be the change in the demand for college and university education?

Problem 15: Starting with the data from Problem 6 and the data of the price of a related commodity for the years 1986 to 2005 given below, we estimated the regression for the quantity demanded of a commodity (which we now relabel Qx), on the price of the commodity (which we now label Px), consumer income (which we now label Y), and the price of the related commodity (Pz), and we obtained the following results

b) Evaluate the above regression results

c) What type of commodity is Z? Can you be sure?

Appendix problem 2:

a) Estimate the regression in Problem 5 based on Table 5-6 using Excel’s regression function in the Data Analysis menu.

b) Using the coefficients found in the regression estimate, enter a formula based in cells C6 through J6 to forecast the sales when quality control goes from \$2 million to \$9 million a year.

c) Graph both the actual data and the forecast using the graphing tools. Does the forecast vary much from the actual data

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