Essay about Help for Questions for Critical Thinking 2

2314 Words Jul 22nd, 2015 10 Pages
Questions for Critical Thinking 2: SOLUTIONS
Salvatore’s Chapter 4:

a. Discussion Questions: 8 and 11.

8. {5 points]
If the price increases by 10 percent, by how much does the quantity of household ( a) natural gas and ( b) electricity change in the short run and in the long run? ( Hint: Use the price- elasticity values in Table 4- 3.)

In general, . Using the numbers we have

Short-run
Long-run
Gas

Electricity

11. [5 points]
Suppose that the cross- price elasticity of demand between McIntosh and Golden Delicious apples is 0.8, between apples and apple juice is 0.5, between apples and cheese is 0.4, and between apples and beer is 0.1. What can you say about the relationship between each set of commodities?

NOTE: Change
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(d) By how much should CFC change its advertising if it wants its sales to be 30 percent higher than this year?

a. = 4
b. Recall the elasticity of a demand Q with respect to a variable z is given by .
So

.

c. Recall since , we can rewrite this as . With this we just sum the percentage change in sales coming form the different sources in part c, using our elasticity results from part b. So we have

., which implies the level of sales is 4 million *1.175 = 4.9 million

d. If CFC is only changing advertsing and wants to increase sales by 30%, we once again use , except now we substitute in 30% for the percentage change in sales, substitute in our elasticity estimate of 0.5, and then solve for the percentage change in advertising. That is,

OR

Since A was 2, a 60% increase would mean A = 3.2.

Froeb et al.’s Chapter 6:

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

6- 1 Elasticity of T- shirt Sales [5 points] 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. What is the demand elasticity? If his marginal cost is $ 4 per shirt, what is his desired markup and what is his initial actual markup? Was raising the price profitable?

Using the elasticity estimator we have

Desired markup = ½ = 50%

Actual markup = (8.50-4.00)/8.50=4.5/8.5 = 53%

At price of $8.50, revenue = $8.50*5000 = $42500
At price of $9.50, revenue = $9.50*4000 = $38000
The cost

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