STUDY PROBLEMS A local Wendy's franchise owner Jim wants to increase the revenue he receives by selling Frosties in July. He already knows that when he prices the dessert at $1.59, he sells 400 per day, and when he sets the price at $1.99, he sells 300 per day. What is the price elasticity of demand for the dessert? What happens to total revenue after the price increase? Are there any other factors Jim should consider? 2 . A Between 2007 and 2009, sales of the Hyundai Sonata fell 17% from 145,568 to 120,028, while incomes dropped by 4% (Cain, 2011).- Estimate the income elasticity of demand using the midpoint method. Is the good an inferior good, income elastic, or income inelastic? According to a Web posting by Amazon, if customers will buy 100,000 copies of a particular e-book at $14.99, then they would purchase 174,000 copies of that same e-book at $9.99. Use this data to estimate the price elasticity of demand. 4. Live Nation, America's largest concert promoter, hires an economist to determine how to maximize total revenue for concert events with limited seating. The economist suggests that for one currently popular artist, the price elasticity of demand is 0.5. For another artist, the price elasticity of demand is 2. Based on this information, what pricing strategies do you suggest that Live Nation adopt? 5. Assume that for a certain product the price elasticity of demand is 2 and the price elasticity of supply is 3. a. What impact will a 10% increase in price have on quantity demanded? b. What impact will a 10% increase in price have on quantity supplied? c. Explain the differences (or similarities) between your answers to a and b. 6. List and explain the factors that help determine the price elasticity of demand. List MacBook Air7. In recent decades, incomes in China have been rising at about 10% per year. Suppose you are told that Chinese consumption is changing at the following rates: a. Rice: -2% per year b. Beef: +3% per year c. Seafood: +12% per year Hihand also the general category to which the11. Taxes on products typically result in higher prices and lower sales. Based on what you have learned thus far, why might taxes on products that are price inelastic such as cigarettes or pharmaceuticals not have a major impact on sales, while taxes on products that are elastic such as cruises will have a major impact on sales. 12. Explain the relationship between total revenue and price along a linear demand curve. Use separate graphs showing demand and total revenue to demonstrate your answer. 13 Business software maker Oracle produces software that firms use to effectively manage their inventories up to the minute. This allows the companies to instantly prioritize what products need to be manufactured when sales on the product start to pick up, without having to hold excessively large product inventories. This technique reduces costs and allows retailers to quickly supply more product. Explain what impact such techniques have on the relative price elasticity of supply. When the price of pizza sold by Mario's rival fell by 10% last summer, Mario saw a 5% decline in his sales. What was the cross-price elasticity of demand between Mario and his rival? 15/in 1916, Henry Ford made the following statement to a newspaper reporter: There are many men who will pay $360 for a car who would not pay $440. We had in round numbers 500,000 buyers of cars on the $440 basis, and I figure that on the $360 basis we can increase the sales to possibly 800,000 cars for the year-less profit on each car, but more cars, more employment of labor, and in the end we get all the total profit we ought to make. a. If Ford's estimate was correct, what was the price elasticity of demand for his cars?Mario and his rival? ills sales. What was the cross-price elasticity of demand between 15. In 1916, Henry Ford made the following statement to a newspaper reporter: There are many men who will pay $360 for a car who would not pay $440. We had in round numbers 500,000 buyers of cars on the $440 basis, and I figure that on the $360 basis we can increase the sales to possibly 800,000 cars for the year-less profit on each car, but more cars, more employment of labor, and in the end we get all the total profit we ought to make.- a. If Ford's estimate was correct, what was the price elasticity of demand for his cars? b. By how much did total revenue increase?8/2/20 0:100 Explain what happens to consumer surplus when new firms enter a market. What happens to the producer surplus of existing firms? 6. What is price gouging? Explain how laws banning price gouging are similar to a price ceiling. 7. Explain how minimum wages are a form of a price floor. Use a graph in your explanation. 8. Many economists believe that an increase in the minimum wage creates minimal deadweight loss and is an effective way to help the working poor. Drawing two graphs, compare and contrast the impact of a minimum wage with a labor demand curve that is elastic versus one that is inelastic. Which of the two graphs results in the highest amount of unemployment9. Assume there are 4 people willing to pay to have their lawns cut. Their willingness to pay is as follows: Al $25 Steve $45 Bob $30 Scott $50 Also assume there are 4 landscaping services, each willing to cut only one lawn. Their willingness to accept is as follows: A-1 Lawns $25 Lawns Cheap $15 Best Yards $35 Green Greens $30 a. How many lawns will be cut? b. What will the price be? c. Who will cut the lawns? What is producer surplus? d. Who will have their lawns cut? What is consumer surplus? e. What is total surplus? 10. Using the data from Question 9, assume the government passes a price control on lawn services. How many lawns will be cut? Does total surplus increase, decrease, or10. Using the data from Question 9, assume the government passes a price control on lawn services. How many lawns will be cut? Does total surplus increase, decrease, or stay the same? a. a price floor of $20 b. a price ceiling of $20 c. a price floor of $49 d. a price ceiling of $49
