Question 1:

Part A: Village microbrew raised its price from $10 to $12 a case. As a result, sales dropped from 10,500 to 8,100 units. Based on your estimate of the demand elasticity (assume constant elasticity), what percent change in quantity sold would you predict if price were cut from $10 to $9? [Answer may vary based on your approach. Pick the one closest to your answer.]

-15% to -10%

-5% to 0 %

+10% to +15%

+0% to +5%

Part B: Suppose a product has a price elasticity of demand of -0.9. Provide an estimate of the percentage change in sales revenue arising from a 10% increase in the product's price.

1%

2%

10%

8%

Part C: Suppose the demand for Netflix is given by q N = a - b N p N + b H p H where q N is the number of Netflix subscriptions, p N the price of a Netflix plan, and p H the price of a Hulu plan. Suppose the parametes of the model are as follows: a=500, b N = 10, b H = 5, and p N = p H = 50

What is the price elasticity of demand for Netflix?

- 3

- 1

- 1.5

- 2

Part D. Suppose the demand for Netflix is given by q N = a - b N p N + b H p H where q N is the number of Netflix subscriptions, p N the price of a Netflix plan, and p H the price of a Hulu plan. Suppose the parametes of the model are as follows: a=500, b N = 10, b H = 5, and p N = p H = 50 What is the cross price elasticity between Netflix demand and Hulu prices?

3

2

1.5

1

Part E. Suppose the market has the following demand function: q = p-. What is the price elasticity of demand?

-

-

-q--1

-p--1

Part F. You observe prices and income in a 2 good market and want to estimate the following demand system: q1 = a - b1 p1 + b2p2 + cy + e1 , where p1 and p2 are the prices for good 1 and good 2, respectively, q1 is the quantity demanded for good 1, y is income, e1 is the error term (unobserved in the data), and a, b1, b2, and c are constants in the model, to be estimated. What best describes the endogeneity problem in identifying the parameter b1?

p1 is correlated with p2

p1 is correlated with e1

p1 is correlated with y

all of the above

Part G:

\fD1 P1 Po Da