THE ECONOMIC ENVIRONMENT OF BUSINESS
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| Spring 2017 |
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Graduate (S) Business Administration 509 THE ECONOMIC ENVIRONMENT OF BUSINESS |
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| | HOME | SYLLABUS | CALENDAR | ASSIGNMENTS | ABOUT PROF. GIN | |
The homework should be written on 8 1/2 by 11 or A4 paper. When calculations are required, you must show all work unless the answer is obvious. The homework is due on Thursday, February 9.
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1. Suppose that statistical analysis shows that the demand function for Brazilian coffee in the U.S. is as follows:
QD = 7.5 - 3 P + 0.8 I + 2 PI - 0.6 PS + 0.12 A
where QD = quantity demanded of your company's coffee in the U.S., in millions of pounds per year
P = price of your coffee, in dollars per pound
I = disposable personal income, in trillions of dollars per year
PI = price of imported Indonesian coffee, in dollars per pound
PS = price of sugar, in dollars per pound
A = advertising for Brazilian's coffee, in millions of dollars per year
The values for the variables above are I = $2.5, PI = $1.80, PS = $0.50, and A = $10. The supply function for Brazilian coffee is as follows:
QS = 14 + 2 P - 8 W - 1.5 PEU - 2 PE
where QS = quantity supplied of your company's coffee in the U.S., in millions of pounds per year
P = price of your coffee, in dollars per pound
W = wage of coffee workers in Brazil, in dollars per hour
PEU = price of coffee in the European Union, in dollars per pound
PE = expected price of Brazilian coffee next year, in dollars per pound
The values for the variables above are W = $0.75, PEU = $3.60, and PE = $4.30.
a. Find the equilibrium price and quantity.
b. If the current price is $4.25 a pound, what disequilibrium situation would exist? How large is the disequilibrium, and what would happen in this market to eliminate the disequilibrium?
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2. Use supply and demand analysis to determine the effect on the market for each event below. Illustrate each situation graphically and discuss your reasoning. Indicate explicitly what happens to price and quantity in each case.
a. It was reported this week that home prices increased strongly on an annual basis in November, the latest month for which data is available. How would that affect the market for apartments?
b. A developer can build houses or an office building on a piece of land. How would an increase in the price of houses affect the market for office buildings?
c. Suppose that incomes in general are falling due to businesses trying to cut labor costs. At the same time, car dealers expect the price of used economy cars to be lower in the future. How would these two events affect the market for used economy cars right now?
d. Use the following article to analyze what is happening in the market for jeans:
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3. Use the information that follows to calculate the appropriate elasticities of demand.
a. When the price of DVDs is increased from $10 to $14, the number of DVDs bought decreased from 30 to 20. What is the consumer's price elasticity of demand in this case? How did the consumer's total spending on DVDs change as a result of this?
b. When the price of product A decreased from $2 to $1, the consumer bought 28 units of product B instead of 20. What is the consumer's cross-price elasticity of demand for these two products? What does the calculated elasticity imply about the relationship between product A and product B for this consumer?
c. When a consumer's income increased from $54,000 to $66,000, they ate at a certain restaurant 36 time a year instead of 28. What is the income elasticity of demand in this case? Based on this calculated elasticity, what type of good is eating at this restaurant as far as this consumer is concerned?
d. Suppose the demand for DVDs is estimated to be:
QD = 60 - 3 P
What is the point price elasticity of demand if the price of DVDs is $12? What is the interpretation of the estimated elasticity?