Problem 3, page 59
3. The following relations describe the supply and demand for posters.
Q D = 65,000 - 10,000P
Q S = -35,000 + 15,000P
where Q is the quantity and P is the price of a poster, in dollars.
a. Complete the following table.
price QS QD SURPLUS OR
SHORTAGE
$6.00 55,000 5,000 QS>QD, SURPLUS
$5.00 40,000 15,000 QS>QD, SURPLUS
$4.00 25,000 25,000 EQUILIBRIUM
$3.00 10,000 35,000 QD>QS,
SHORTAGE
$2.00 -5,000 45,000 QD>QS,
SHORTAGE
$1.00 -20,000 55,000 QD>QS,
SHORTAGE
b. What is the equilibrium price?
Equilibrium price = $4.00
4. The following relations describe monthly demand and supply for a computer support
service catering to small businesses.
Q D = 3,000 - 10P
Q S = -1,000 + 10P
where Q is the number of businesses that need services and P is the monthly fee, in dollars.
a. At what average monthly fee would demand equal zero?
At P = 300, demand equal zero (QD = 3,000 – 10(300) = 3,000 – 3000 = 0).
b. At what average monthly fee would supply equal zero?
At P = 100, supply equal zero (QS = - 1,000 + 10 (100) = - 1,000 + 1,000 = 0).
c. Plot the supply and demand curves.
PRICE QS QD
0 -1,000 3,000
100 0 2,000
200 1,000 1,000
300 2,000 0
400 3,000 -1,000
500 4,000 -2,000
PRICE
600
500
400
300
200
100
0
-2000 -1000 0 1000 2000 3000 4000 5000
QD
PRICE
600
500
400
300
200
100
0
-3000 -2000 -1000 0 1000 2000 3000 4000
QS
d. What is the equilibrium price/output level?
P = 200 Q = 1,000
e. Suppose demand increases and leads to a new demand curve:
Q D = 3,500 - 10P
What is the effect on supply? What are the new equilibrium P and Q?
QD increase, P decrease, QS decrease.
PRICE NEW QD
0 3,500
150 2,000
250 1,000
350 0
450 -1,000
550 -2,000
650 -3,000
f. Suppose new suppliers enter the market due to the increase in demand so the new supply
curve is Q = –500 + 10 P. What are the new equilibrium price and equilibrium quantity?
g. Show these changes on the graph.
5. The ABC marketing consulting firm found that a particular brand of tablet PCs has the
following demand curve for a certain region:
Q = 10,000 - 200P + 0.03Pop + 0.6I + 0.2A
where Q is the quantity per month, P is price ($), Pop is population, I is disposable income
per household (S), and A is advertising expenditure ($).
a. Determine the demand curve for the company in a market in which P = 300,
Pop = 1,000,000, I = 30,000, and A = 15,000.
Q = 10,000, – 200 (300) + 0.03(1,000,000) +0.6 (30,000) + 0.2 (15,000) = 10,000 – 60,000 +
30,000 + 18,000 + 3,000 = 1,000
c. Calculate the quantity demanded at prices of $200, $175, $150, and $125.
Pop + I + A = 51,000
P = 200, Q = 10,000 – 200 (200) + 51,000 = 21,000
P = 175, Q = 10,000 – 200 (175) + 51,000 = 26,000
P = 150, Q = 10,000 – 200 (150) + 51,000 = 31,000
P = 125, Q = 10,000 – 200 (125) + 51,000 = 36,000
c. Calculate the price necessary to sell 45,000 units.
Q = 45000
45,000 = 10,000 – 200P + 51,000
200P = 10,000 + 51,000 – 45,000
P = 16000/200
P = 80
10. A travel company has hired a management consulting company to analyze demand in
twenty-six regional markets for one of its major products: a guided tour to a particular
country. The consultant uses data to estimate the following equation
Q = 1,500 - 4P + 5A + 10I + 3PX
where Q = amount of the product demanded
P = price of the product in dollars
A = advertising expenditures in thousands of dollars
I = income in thousands of dollars
PX = price of some other travel products offered by a competing travel company
a. Calculate the amount demanded for this product using the following data:
P = +400
A = +20,000
I = +15,000
PX = +500
Q = 1,500 – 4 (400) + 5 (20,000) + 10 (15,000) + 3 (500) = 1,500 – 1,600 + 100,000 +
150,000 + 1,500 = 251,400
b. Suppose the competitor reduced the price of its travel product to $400 to match the price
of this firm’s product. How much would this firm have to increase its advertising in order to
counteract the drop in its competitor’s price? Would it be worth it for them to do so?
Explain.
If the competitor reduced the price of its travel products to $400 to match the price of
this firm’s product, the total demand for firm's product will decrease by 3(500 - 400) =
300.
So, this firm have to increase its advertising by 300/5 = 60 in order to counteract the
drop in its competitor price.
c. What other variables might be important in helping estimate the demand for this travel
product?
Such other variables as change in tastes, popularity of the product, change in
consumer's income might be important in helping estimate the demand.
7. The ABC Company manufactures digital clock radios and sells on average 3,000 units
monthly at $25 each to retail stores. Its closest competitor produces a similar type of radio
that sells for $28.
a. If the demand for ABC’s product has an elasticity coefficient of −3, how many will it sell
per month if the price is lowered to $22?
Price elasticity = - 3
% in Price = P2 – P2 / P1 = 22 – 25/25 = - 12
Price elasticity = % change in quantity/ % in price
- 3 = % change in Q/ - 12
% change in Q = 36
% change in Q = Q2 –Q1/Q1 => 36 = Q2 – 3000/3000
108,000 = Q2 – 3000
Q2 = 108,000 + 3000 = 111,000
b. The competitor decreases its price to $24. If cross-price elasticity between the two radios
is 0.3, what will ABC’s monthly sales be?
(Q2-3000) *(-0.3/13) = -0.3/13Q2 + 900/13 Here we can multiply -0.3/13Q2 by 10/10: -
(0.3*10)/ (13*10) Q2 = -(3)/ (130) Q2
10. Given the demand equation Q = 1,500 - 200P, calculate all the numbers necessary to fill
in the following table:
P Q POINT ARC TOTAL MARGINAL
REVENUE REVENUE
$ 7.00 100
$ 6.50 200
$ 6.00 300
$ 5.50 400
$ 5.00 500
$ 4.50 600
$ 4.00 700
$ 3.50 800
$ 3.00 900
$ 2.50 1000
11. Would you expect cross-price elasticity between the following pairs of products to be
positive, negative, or zero?
a. Television sets and DVRs
Television sets and DVR’s- the cross-price elasticity is negative; the goods are
complements. An increase in the price of one good causes a decrease in the demand of
the other
b. Rye bread and whole wheat bread
Rye bread and whole wheat bread- the cross-price elasticity is positive; the goods are
substitutes. An increase in the price of one good causes a decrease in the demand of the
other.
c. Construction of residential housing and furniture
Construction of residential housing and furniture- the cross-price elasticity is negative;
the goods are complements. An increase in the price of one good causes a decrease in the
demand of the other. For example, an increase in the price of residential housing causes
a decrease in demand for residential housing. This causes a decrease in the demand for
furniture, since there are fewer residential houses to fill with furniture.
d. Breakfast cereal and men’s shirts
Breakfast cereal and men’s shirts- These two goods bear no relationship; they are
neither substitutes nor complements. Their cross-price elasticity is zero.
15. A local supermarket lowers the price of its vanilla ice cream from $3.50 per half gallon to
$3. Vanilla ice cream (unit) sales increase by 20 percent. The store manager notices that
the (unit) sales of chocolate syrup increase by 10 percent.
a. What is the price elasticity of vanilla ice cream? 1.4
b. Why have the sales of chocolate syrup increased, and how would you measure the
effect?
Since chocolate syrup and ice cream are complement, one would measure this effect
using the price elasticity of demand of syrup.
c. Overall, do you think that the new pricing policy was beneficial for the supermarket?
Yes, sales increased
17. The demand curve for product a is given as Q = 2000 - 20P.
a. How many units will be sold at $10? 1800
b. At what price would 2,000 units be sold? 0 units? 1,500? 25 for 1500
c. Write equations for total revenue and marginal revenue (in terms of Q).
d. What will be the total revenue at a price of $70? What will be the marginal revenue? 1400
e. What is the point elasticity at a price of $70?
f. If price were to decrease to $60, what would total revenue, marginal revenue, and point
elasticity be now?
g. At what price would elasticity be unitary?
If the number is equal to 1, elasticity of demand is unitary. In other words, quantity
changes at the same rate as price.
