1.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?

Instruction: Round your response to 2 decimal places.

Own price elasticity:

Demand is:

If the firm prices below $140, revenue will:

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?

Instruction: Round your response to 1 decimal place.

Own price elasticity:

Demand is:

If the firm prices above $240, revenue will:

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?
Instruction: Round your response to 2 decimal places.

Cross-price elasticity:

Goods X and Z are:

2.Suppose the own price elasticity of demand for good X is -2, its income elasticity is 3, its advertising elasticity is 4, and the cross-price elasticity of demand between it and good Y is -6. Determine how much the consumption of this good will change if:

Instructions: Enter your answers as percentages. Include a minus (-) sign for all negative answers.

a. The price of good X decreases by 5 percent.

____percent

b. The price of good Y increases by 10 percent.

____percent

c. Advertising decreases by 2 percent.

____percent

d. Income increases by 3 percent.
____percent

3.Suppose the cross-price elasticity of demand between goods X and Y is -2. How much would the price of good Y have to change in order to change the consumption of good X by 20 percent?

____percent

4.Revenue at a major cellular telephone manufacturer was $1.9 billion for the nine months ending March 2, up 89 percent over revenues for the same period last year. Management attributes the increase in revenues to a 118 percent increase in shipments, despite a 28 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?

Yes. Own price elasticity is -4.21, which means demand is elastic and a decrease in price will decrease revenues.
No. Own price elasticity is -0.24, which means demand is elastic and a decrease in price will raise revenues.
Yes. Own price elasticity is -0.24, which means demand is inelastic and a decrease in price will decrease revenues.
No. Own price elasticity is -4.21, which means demand is elastic and a decrease in price will raise revenues.

5.For the first time in two years, Big G (the cereal division of General Mills) raised cereal prices by 5 percent. If, as a result of this price increase, the volume of all cereal sold by Big G changed by -6 percent, what can you infer about the own price elasticity of demand for Big G cereal?

It is .

Can you predict whether revenues on sales of its Lucky Charms brand increased or decreased?

Yes – it decreased.
No – you can’t tell.
Yes – it increased.

6.If Starbucks’s marketing department estimates the income elasticity of demand for its coffee to be 2.55, how will the prospect of an economic bust (expected to decrease consumers’ incomes by 3 percent over the next year) impact the quantity of coffee Starbucks expects to sell?

Instruction: Round your response to 2 decimal places.

It will change by____ percent.

7.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?

$ ____

8.Recently, Pacific Cellular ran a pricing trial in order to estimate the elasticity of demand for its services. The manager selected three states that were representative of its entire service area and increased prices by 5 percent to customers in those areas. One week later, the number of customers enrolled in Pacific’s cellular plans declined 4 percent in those states, while enrollments in states where prices were not increased remained flat. The manager used this information to estimate the own-price elasticity of demand and, based on her findings, immediately increased prices in all market areas by 5 percent in an attempt to boost the company’s 2012 annual revenues. One year later, the manager was perplexed because Pacific Cellular’s 2012 annual revenues were 10 percent lower than those in 2011—the price increase apparently led to a reduction in the company’s revenues.

Did the manager make an error?

Yes – the one-week measures show demand is inelastic, so a price increase will decrease revenues.
Yes – cell phone elasticity is likely much larger in the long-run than the short-run.
Yes – the one-week measures show demand is elastic, so a price increase will reduce revenues.
No – the cell phone market must have changed between 2011 and 2012 for this price increase to lower revenues.

9.The owner of a small chain of gasoline stations in a large Midwestern town read an article in a trade publication stating that the own-price elasticity of demand for gasoline in the United States is –0.2. Because of this highly inelastic demand in the United States, he is thinking about raising prices to increase revenues and profits.

Do you recommend this strategy based on the information he has obtained?

Yes – the elasticity of demand for his gas stations is likely lower (in absolute value) than -0.2.
Yes – since his elasticity is -0.2, a price increase will raise revenues.
No – since his elasticity is -0.2, a price increase will lower revenues.
No – the elasticity of demand for his gas stations is likely much higher (in absolute value) than -0.2.