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ECO 550 Week 2 Chapter 3 and Chapter 4 Problems

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Chapter 3: Problems 3, 4, and 7

3. The Olde Yogurt Factory has reduced the price of its popular Mmmm Sundae from $2.25 to $1.75. As a result, the firm’s daily sales of these sundaes have increased from 1,500/day to 1,800/day. Compute the arc price elasticity of demand over this price and consumption quantity range.

4. The subway fare in your town has just been increased from a current level of 50 cents to $1.00 per ride. As a result, the transit authority notes a decline in rider-ship of 30 percent.

a. Compute the price elasticity of demand for subway rides.

b. If the transit authority reduces the fare back to 50 cents, what impact would you expect on the ridership? Why?

7. In an attempt to increase revenues and profits, a firm is considering a 4 percent increase in price and an 11 percent increase in advertising. If the price elasticity of demand is −1.5 and the advertising elasticity of demand is +0.6, would you expect an increase or decrease in total revenues?

Chapter 4: Problems 5, 6, and 7

5. General Cereals is using a regression model to estimate the demand for Tweetie Sweeties, a whistle-shaped, sugar-coated breakfast cereal for children. The following (multiplicative exponential) demand function is being used:

6. The demand for haddock has been estimated as log + b log P + c log I + d log Pm

where of haddock sold in New England per pound of haddock

measure of personal income in the New England region

index of the price of meat and poultry

a. Determine the price elasticity of demand.

b. Determine the income elasticity of demand.

c. Determine the cross price elasticity of demand.

d. How would you characterize the demand for haddock? Apparently the Haddock is plentiful since it a white fish. New England has lots of ocean access to fish.

e....

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