Economics

  1. Given the estimated market demand and supply functions for coffee as: Qd= 85.6 –10P –3Ps +Y and Qs= 96 + 5P - 2Pc, respectively, where Qd is the quantity demand, Qs is the quantity supplied, P= price of coffee, Ps= price of sugar =0.20; Y= $55,000 (note Y is income measured in thousands, so the value to use here is $55), and Pc= price of cream=$5. (20 points)

a. Find the demand function at the given values for Ps, Y, and Pc.

b. Find the supply function at given value of the price of cream (Pc). 

c. Determine the market equilibrium price and quantity, given the market demand and supply.

d. Using the market demand and supply functions and the equilibrium price and quantity in (c), graph the market equilibrium price and quantity. 

e. List the factors which affect the demand and supply sides of the market for coffee.

2. The research department of the Corn Flakes Corporation (CFC) estimated the demand of the corn flakes it sells:

Qx =1.0 -2.0Px +1.5I +0.8Py -3.0Pm +1.0A

Where Qx =Sales of CFC cornflakes, in millions of 10-ounce boxes per year; Px= the price of CFC cornflakes, in dollars per 10-once box; I= personal disposable income in millions of dollars per year; Py= price of competitive brand of cornflakes, in dollars per 10-once box; Pm= price of milk in dollars per quart; and A= advertising expenditures in thousands of dollars per year. 

Given: Px = $2, I=$4, Py= $2.50, Pm= $1, and A= $2

a. Find the sales of CFC cornflakes at the given values of the determinants of demand for cornflakes.

b. What is the price elasticity of demand for cornflakes? Is the demand for cornflakes price elastic, or inelastic? Should management increase, or lower if it desires to increase the operating revenue? 

c. What income elasticity of demand for cornflakes? Is the demand for cornflakes income elastic, or inelastic? 

d. Are cornflakes a normal, or inferior good? How do you know? 

e. What is the cross-price elasticity of demand for good X as the result of a given percentage change in the price of a competitive brand Y? Is the demand for good X cross-price elastic, or inelastic? Are good X and Y substitutes, or complementary goods? How you know?

3. Given the weekly price and quantity (Q and P) data for Cool Stuff ice cream over the past 12 weeks and the price of another ice-cream flavor (Po) as:

Q 84 82 85 83 82 84 87 81 82 79 82 78

P 8.50 9.00 8.75 9.25 9.50 9.25 8.25 10.00 10.00 10.50 9.50 10.25

Po 5.25 6.00 6.00 6.50 6.25 6.25 5.25 7.00 7.25 7.25 6.75 7.25

a. Use excel regression to estimate the weekly demand for Cool Stuff ice-cream (attach the 

output of the regression estimate (Hint: Use regression in excel to find the estimated demand 

function: Enter the data in excel, click on Data Analysis, and use the regression command). 

b. Are the coefficients on the two prices statistically significantly different from zero at the 5% 

significance level? How do you know? 

c. What the R2? d. Explain what R2 means.

4. A bottling company uses two inputs to produce bottles soft drink sludge: bottling machines (K) and workers(L). The machine costs $1000 per day (r) to run and the workers are paid $200 per day (w). At the current level of production, the marginal product of the machine is an additional 200 bottles per day (MPK), and the marginal product of labor is 50 bottles per day (MPL).

a. State the rule for determining the cos- efficient combinations of inputs (K & L) for the production of soft drinks.

b. Given r=$1000 per day, w=$200 per day, (MPK)= 200 bottles, and (MPL)= 50 bottles, is the company operating cost efficiently?

c. What must the company do to move toward cost efficient operation? Hint: use more labor or more machines and why?

5. In chapter 6, you have read the long-run average cost (AC) of operation may decrease for three reasons.

a. List and explain the three reasons why the log-run unit cost may decrease over time.

b. Give an example of the learning curve for a business operation where the average costs were reduced due to cumulative production.

c. Suppose that the global learning curve for solar power installation in the US is 93% according a rcent study, interpret what it means? 

d. How might the learning curve information help businesses in making operational decision?

e. Explain the concept of economies of scope. Suppose Conner runs two kind of rafting trips. If he spends all day on wild whitewater rafting, he can do 3 trips, or he can do 4 trips of a mellow wildlife rafting. If he does some of each, however, he can do more total trips: 2 whitewater trips and 3 wildlife trips. Conner’s time is valued at $20/ hour. Finding the value for the economies of scope of Conner’s rafting experience. What can you say about his economies of scope? i.e. does Conner reduce the average cost by making some of each trip or by making each trip separately? Show your work.