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Questions for Critical Thinking 2

Salvatore Chapter 4:

Discussion Questions: 8 and 11.

Problems: 3(a) and (b), 7, 9, and 15.

Discussion Question 8: If the price increase by 10 percent by how much does the quantity of household (a)natural gas and (b) electricity change in the short run and the long run? (Hint: use the price-elasticity values).

Discussion Question 11: Suppose that the cross-price elasticity of demand beween McIntosh and Golden Delicius apples is .08. etween apples and apple juice is 0.5, between apples and cheese is 0.4, and between apples and beer is 0.1. What can you say about the relationship between each set of commodities?

Problem 3: Starting with the estimated demand function for Chevrolets given in Problem 2, assume that the average value of the independent variables changes to N=225 million, I=12,000, PF=10,000, PG=100 cents, A=250,000 and PI=0. (a) Find the equation of the new demand curve for Chevrolets. (b) Plot this new demand curve, D’C, and, on the same graph, plot the demand curve for Chevrolets, DC, found in Problem 2(d).

Problem 7: The total operating revenues of a public transportation authority are $100 million while its total operating costs are $120 million. The price of a ride is $1, and the price elasticity of demand for public transportation has been estimated to be -0.4. By law, the public transportation authority must take steps to eliminate its pricing deficit.

a) What pricing policy should the transportation authorty adopt? Why? (b)

b) What price per ride must the public transportation authority charge to eliminate the deficit if it cannot reduce costs?

Problem 9: A researcher estimated that the price elasticity of demand for automobiles in the United States is -1.2, while the income elasticity of demand is 3.0. Next year, U.S. auto makers intent to increase the average price of automobiles by 5 percent, and they expect consumers’ disposable income to rise by 3 percent.

a) If sales of domestically produced automobiles do expect U.S auto makers to sell next year?

b) By how much should domestic auto makers increase sales by 5 percent next year?

Problem 15: Suppose that a firm maximizes its total profits and has a marginal cost of production of $8 and price elasticity of (-) 3. Find the price at which the firm sells the product.

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