Assignment:
1. Breakaway Tours, Inc., has estimated the following multiplicative demand function for packaged holiday tours in the Flushing, New York, market using quarterly data covering the past five years (20 observations):
QY = 5PY-2.5PX-0.86Y1.76A1.4
Here, QY is the quantity of tours sold, PY is average tour price, PX is average price for some other good, A is tour advertising, and Y is per capita disposable income.
a.What is the price elasticity of demand for tours? Interpret your answer. Given this elasticity, should Breakaway increase prices to increase revenue? Explain.
b.Are tours a normal good? Explain.
c.What is the relationship between Goods X and Y? How strong is this relationship? Explain each answer well.
d.Does advertising seem effective for this company? Explain.
e.What does the demand function above suggest about the relationship of each variable to each other? Does elasticity ever change if the values of PY, PX, Y, or A change? Explain.
2. Just Bikes, Inc., sells tricycles, in partially-assembled and fully assembled forms. Parents who assemble their own tricycles benefit from the lower price of $40 per tricycle. "Full-service" customers enjoy the luxury of an assembled tricycle, but pay a higher price of $60 per tricycle. Both partially and fully assembled tricycle prices are stable. The company has observed the following relation between the number of assembly workers employed per day and assembled tricycle output:
|
Number of
Workers
per day
|
Finished
Tricycles
|
|
0
|
0
|
|
1
|
8
|
|
2
|
14
|
|
3
|
18
|
|
4
|
21
|
|
5
|
23
|
a.Construct a table showing the (net) marginal revenue product derived from assembly worker employment.
b.How many assemblers would Just Bikes employ at a daily wage rate of $100? Explain your answer and show all calculations.
c.What is the highest daily wage rate Just Bikes would pay to hire three assemblers per day?
3.) Describe the difference between a diminishing marginal product of labor and a negative marginal product of labor. Why would a profit-maximizing firm always choose to operate where the marginal product of labor is decreasing (but not negative)?