1. Suppose Q_x^d= 10,000 2 P_x+ 3 P_y 4.5M,

where P_x= $100, P_y= $50, and M (income) = $2,000.

(a) What is the own price elasticity of demand? Please show your calculations.

(b) What is the cross price elasticity between good X and good Y? Please show your

calculations.

(c) What is the income elasticity of demand? Please show your calculations.

2. The management of Local Cinema has estimated the monthly demand for tickets to be

ln Q_X= 22,328 0.41 ln P_X+ 0.5 ln M 0.33 ln A + 100 ln P_DVD,

where Q = quantity of tickets demanded,

P = price per ticket, M = income,

A = advertising outlay, and

P_DVD= price of a DVD rental.

It is known that P = $5.50, M = $9,000, A = $900, and P_DVD= $3.00.

(a) If price of the good rises by 10 percent, how much will the quantity fall by? Please show your

calculations.

(b) If income rises by 10 percent how much will quantity demanded change by? Will this be an

increase or decrease? Please show your calculations.

(c) Should this firm increase the advertising budget? Please explain.

3.

(a) If the cross-price elasticity between ketchup and hamburgers is 2.5, a 2 percent increase in the price of ketchup will lead to how much of a change in quantity demanded of hamburgers? Is this an increase or decrease? Please give an explanation.

(b)If the income elasticity for lobster is 0.4, a 40 percent increase in income will lead to how much of a change in quantity demanded of lobster? Is this an increase or decrease in quantity demanded? Please explain.

4. Revenue at a major smartphone manufacturer was $2.3 billion for the nine months ending March 2, up 85 percent over revenues for the same period last year. Management attributes the increase in revenues to a 108 percent increase in shipments (you may assume that a change in shipments is a change in quantity demanded), despite a 21 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? Please explain.

5. Since the demand for gasoline is inelastic, it is considered to be a necessary good. Does this mean that the owner of a single gas station in a city can increase the price of gasoline and expect to earn higher revenues? Is there a difference between the price elasticity of demand for gasoline and the price elasticity of demand for gasoline from one gas station? You may assume that the other gas stations do not raise their prices. Please give an explanation.