Grand Canyon Economics Chapter 2 and 3 Problems

Chapter 2

Technical Questions

(3.) The demand curve is given by

QD=500?5PX+0.5I + 10PY?2PZ

where

QD= quantity demanded of goodX

PX= price of goodX

I= consumer income, in thousands

PY= price of goodY

PZ= price of goodZ

a. Based on the demand curve above, isX a normal or an inferior good?

b. Based on the demand curve above, what is the relationship between goodXand goodY?

c. Based on the demand curve above, what is the relationship between goodXand goodZ?

d. What is the equation of the demand curve if consumer incomes are $30,000, the price of goodYis $10, and the price of goodZis $20?

e. Graph the demand curve that you found in (d), showing intercepts and slope.

f. If the price of goodXis $15, what is the quantity demanded? Show this point on your demand

curve.

g. Now suppose the price of goodYrises to $15.

Graph the new demand curve.

Technical Questions

(5.) Suppose the demand and supply curves for a product are given by

QD=500?2P

QS= ?100+3P

a. Graph the supply and demand curves.

b. Find the equilibrium price and quantity.

c. If the current price of the product is $100,

what is the quantity supplied and the quantity

demanded? How would you describe this situation,

and what would you expect to happen in

this market?

d. If the current price of the product is $150,

what is the quantity supplied and the quantity

demanded? How would you describe this situation,

and what would you expect to happen in

this market?

e. Suppose that demand changes toQD = 600 – 2P.

Find the new equilibrium price and quantity,

and show this on your graph.

Chapter 2

Application Question

(2.) Using data sources from business publications

and the Internet, discuss significant trends in both

demand and supply in the copper industry that have

influenced the price of copper since September

2011. What are the implications of these trends for

managerial decision making in the copper industry?

Chapter 3

Technical Question

(1.)For each of the following cases, calculate thearc

price elasticity of demand, and state whether demand

is elastic, inelastic, or unit elastic.

a. When the price of milk increases from $2.25 to

$2.50 per gallon, the quantity demanded falls

from 100 gallons to 90 gallons.

b. When the price of paperback books falls from

$7.00 to $6.50, the quantity demanded rises

from 100 to 150.

c. When the rent on apartments rises from $500

to $550, the quantity demanded decreases from

1,000 to 950.

Chapter 3

Application Question

In March 2010, Mc Donald’s Corp. announced a policy to increase summer sales by selling all soft drinks, no matter the size, for $1.00. The policy would run for 150 days starting after Memorial Day. The $1.00 drink prices were a discount from the suggested price of $1.39 for a large soda. Some franchisees worried that discounting drinks, whose sales compensate for discounts on other products, could hurt overall profits, especially if customers bought other items from the Dollar Menu. McDonald’s managers expected this promotion would draw customers from other fastfood chains and from convenience stores such as 7-Eleven. Additional customers would also help McDonald’s push its new beverage lineup that included smoothies and frappes. Discounted drinks did cut into McDonald’s coffee sales in previous years as some customers chose the drinks rather than pricier espresso beverages. Other chains with new drink offerings, such as Burger King and Taco Bell, could face pressure from the $1.00 drinks at McDonald’s.47

a. Given the change in price for a large soda from $1.39 to $1.00, how much would quantity demanded have to increase for McDonald’s revenues to increase? (Use the arc elasticity formula for any percentage change calculations.)

b. What is the sign of the implied cross-price elasticity with drinks from McDonald’s competitors?

c. What are the other benefits and costs to McDonald’s of this discount drink policy?