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Chapter 3

# Chapter 3 Solution.pdf

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School
Department
Economics
Course
ECON 3411
Professor
All Professors
Semester
Fall

Description
Chapter 03Quantitative Demand AnalysisChapter 3 Answers to Questions and Problems 1a When P12 R12112 When P10 R10220 Thus the price decrease results in an 8 increase in total revenue so demand is elastic over this range of prices b When P4 R4520 When P2 R2612 Thus the price decrease results in an 8 decrease total revenue so demand is inelastic over this range of prices c Recall that total revenue is maximized at the point where demand is unitary elastic We also know that marginal revenue is zero at this point For a linear demand curve marginal revenue lies halfway between the demand curve and the vertical axis In this case marginal revenue is a line starting at a price of 14 and intersecting the quantity axis at a value of Q35 Thus marginal revenue is 0 at 35 units which corresponds to a price of 7 as shown below Price1412108642Demand0MR0123456QuantityFigure 312a At the given prices quantity demanded is 750 units Substituting the relevant information into the elasticity formulagives Since this is less than one in absolute value demand is inelastic at this price If the firm charged a lower price total312014 by McGrawHill Education This is proprietary material solely for authorized instructor use Not authorized for sale or distribution in any manner This document may not be copied scanned duplicated forwarded distributed or posted on a website in whole or part Chapter 03Quantitative Demand Analysis revenue would decreaseb At the given prices quantity demanded is 450 units Substituting the relevant information into the elasticity formulagives Since this is greater than one in absolute value demand is elastic at this price If the firm increased its price total revenue would decrease c At the given prices quantity demanded is 750 units as shown in part a Substituting the relevant information into the elasticity formula givesSince this number is negative goods X and Z arecomplements3a The own price elasticity of demand is simply the coefficient of ln P which isx 15 Since this number is more than one in absolute value demand is elastic b The crossprice elasticity of demand is simply the coefficient of ln P which is 2 ySince this number is positive goods X and Y are substitutes c The income elasticity of demand is simply the coefficient of ln M which is 05 Since this number is negative good X is an inferior good d The advertising elasticity of demand is simply the coefficient of ln A which is 1 4 a Use the own price elasticity of demand formula to write Solving we see that the quantity demanded of good X will increase by 15 percent if the price of good X decreases by 5 percentb Use the crossprice elasticity of demand formula to writeSolvingwe see that the demand for X will decrease by 32 percent if the price of good Y increases by 8 percentc Use the formula for the advertising elasticity of demand to writeSolving we see that the demand for good X will decrease by 8 percent if advertising decreases by 4 percentd Use the income elasticity of demand formula to write Solving we seethat the demand of good X will increase by 4 percent if income increases by 4 percent 5 Using the cross price elasticity formula Solving we see that the price of good Y would have to increase by 5 percent in order to increase the consumption of good X by 20 percent 322014 by McGrawHill Education This is proprietary material solely for authorized instructor use Not authorized for sale or distribution in any manner This document may not be copied scanned duplicated forwarded distributed or posted on a website in whole or part
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