Problem 1: The Haas Corporation's executive vice president circulates a memo to the firm's top management in which he argues for an increase in the price of the firm's product. He says that such a price increase will increase the firm's sales revenue.
1. The firm's marketing manager responses with a memo to the firm's top management pointing out that the price elasticity of demand for the firm's product is equal to -1.82 and the income elasticity is equal to 0.85. What portion of this information is relevant and why?
2. Should the Haas Corporation go ahead with the price increase and why?
Problem 2: Imported oil is assumed to be a close substitute for oil produced domestically in the U.S. Also the U.S. is a "price-taker" in the world oil market (This means that the world price of oil acts like a price ceiling in the U.S. market and is the price that prevails in the U.S. petroleum market.) The current world price of oil is $65 per barrel and is the prevailing price in the U.S. market. The elasticity of supply for domestically produced oil is 0.60 and the price elasticity of demand for oil in the U.S. is -0.15. The U.S. domestic demand function for oil is Qd = 26.151 - 0.076P where Qd is U.S. domestic demand measured as millions of barrels per day and P is the price for a barrel of oil. The domestic supply function for oil is Qs = 3.898 + 0.13P where Qs is the level of oil supplied by domestic producers and is measured as millions of barrels per day.
1. Find the U.S. domestic demand for oil, the amount of oil produced domestically and the amount of oil imported if the world price of oil is $75 per barrel.
2. Suppose the world price of oil remains at $75 per barrel and the U.S. imposes an import fee of $15 for each barrel of oil imported. Find the following after the import tariff is implemented: U.S. domestic oil demand; U.S. domestic oil supply; and oil imports by the U.S. Also calculate the total dollar value of revenues collected from the import tariff.
Problem 3: Assume the demand for good X is 10,000 units and has a price elasticity equal to -1.5 while the income elasticity of good X is 1.2 and the cross-price elasticity of related good Z is 1.3. The price of good X is $5 per unit. If the price of good X increases by 10 percent, find the following:
1. Change in quantity demanded
2. New quantity demanded
3. New price
4. New expenditure for good X
5. Assume the price of good X is $5 and the quantity of good X demanded is 10,000 units If the price of good Z decreases by 10 percent and consumer's income increases by 15 percent, find the quantity of good X that will be demanded assuming the price of good X remains at $5 as well as the total expenditures for good X in this situation accounting for both the change in the price of the related good Z and the change in consumers' income. What is the relationship between goods X and Z?
Problem 4: (This problem is worth 30 points) The demand product for a product is given by
Qx = 1,000 - 2Px + 0.02Pz where Pz = $400.
1. What is the own price elasticity of demand when Px = $154? What happens to the firm's revenue if it decides to charge some price below $154?
2. What is the own price elasticity of demand when Px = $354? What happens to the firm's revenue if it decides to charge a price above $354?
3. What is the cross-price elasticity of demand between good X and Good Z when Px = $154? What is the relationship between goods X and Z?
Problem 5: (This problem is worth 20 points.) The Executive Director of the Tulsa Metro Transit Authority (MTA) circulates a memo to the Tulsa City Council in which he argues for an increase in the price the MTA charges for riding MTA buses. He states in the memo that the MTA has been experiencing revenue short falls and increasing the price for riding the MTA buses will help resolve this problem.
1. The president of the Tulsa Consumer's Union hears about the proposed increase in bus fares. He submits a letter to each member of the Tulsa City Council as well as the Mayor of Tulsa arguing that the best way to address the revenue shortfall is to lower bus fares. The president of the Consumer's Union states that his recommendation is correct because the income elasticity for riding the bus is 1.80 and the price elasticity of demand for riding the bus in Tulsa is -1.25. The Executive Director of the MTA agrees that the income elasticity for riding the bus is 1.80, but says the correct price elasticity of demand is equal to -0.75. Which information is relevant and why?
2. Suppose the City Council conducts an extensive review and finds that the information provided by the Executive Director of the MTA is more accurate. What action should the City Council take on bus fares and why?