# 2024 – 1 The following situation will be used to answer questions 1 through 5 Adapted

Problem Set 2 – 2024

1) The following situation will be used to answer questions 1 through 5. (Adapted from chapter 3 problem 4)

Monthly demand and supply for a computer support service catering to small businesses can be represented by these equations:

Qd = 3000 – 10P

Qs = -1000 + 10 P

where Qd is the number of businesses demanding the services, Qs is the number of businesses that suppliers are willing to service, and P is the monthly fee, in dollars.

At what average monthly fee would demand equal zero?

3,000

300

-1000

100

2) Refer to the situation in question 1.

At what average monthly fee would supply equal zero?

3,000

300

-1000

100

3) Refer to the situation described in equation 1. What is the equilibrium price?

100

200

1000

4000

4) Refer to the situation in question 1. What is the equilibrium output level?

0

10

1000

3000

5) Refer to the situation in question 1.

Suppose demand increases and leads to a new demand curve:

Qd = 3500 – 10P

What will be the new equilibrium price and quantity?

P=0, Q=3500

P=200, Q=1500

P=225, 1250

P=350, 0

6) The following situation applies to questions 6 through 9. (Adapted from chapter 3 problem 6)

Joy’s Frozen Yogurt shops have enjoyed rapid growth in northeastern states in recent years. From the analysis of Joy’s various outlets, it was found that the demand curve follows this pattern:

Q = 200 – 300P + 120I + 65T – 250Ac + 400 Aj where

Q = number of cups served per week,

P = average price paid for each cup,

I = per capita income in the given market (thousands),

T = average outdoor temperature,

Ac = competition’s monthly advertising expenditures (thousands) and

Aj = Joy’s own monthly advertising expenditures (thousands)

One of the outlets has the following conditions: P=1.50, I=10, T=60, Ac=15, Aj=10.

Estimate the number of cups served per week by this outlet.

200

235

4800

5100

7) Refer to the previous question. Which of the following represents the demand curve for this market?

*Qd* = 200 – 300*P*

*Qd* = 4800 – 300*P*

*Qd* = 5100 – 300*P*

*Qd* = 5550 – 300*P*

* *

*8) *Refer to question 6. What will be the effect of a $5 thousand increase in the competitor’s advertising expenditure?

Quantity demanded would increase by $5000.

Quantity demanded would decrease by $5000.

Quantity demanded would increase by $1250.

Quantity demanded would decrease by $1250.

9) Refer to question 6 and question 8. What would Joy’s expenditure need to be to counteract the effect of the competitor’s increase in advertising that was described in question 8?

Increase advertising expenditure by $0.400 (in thousands).

Increase advertising expenditure by $1.250 (in thousands).

Increase advertising expenditure by $3.125 (in thousands).

Increase advertising expenditure by $5.000 (in thousands).

10) The Teenager Company makes and sells skateboards at an average price of $70 each. During the past year, they sold 4,000 of these skateboards. The company believes that the price elasticity for this product is about -2.5. Which of the following would be the best option for the company? (Question is based on Chapter 4 question 6.)

Raise the price and plan to increase the quantity supplied.

Lower the price and plan to increase the quantity supplied.

Raise the price and plan to decrease the quantity supplied.

Lower the price and plan to decrease the quantity supplied.

11) Refer to the situation described in question 10. What was total revenue for the past year, in dollars? (Enter as a whole number without the dollar sign.)

280,000

12) Refer to the situation described in question 10. Given the price elasticity of -2.5, and the proposed price of $63, what should be the quantity supplied? (Round to the nearest whole number)

3000

13) Refer to the situation described in question 10. What would total annual revenue be at the proposed price of $63? (Enter as a whole number without the dollar sign.)

189,000

14) If the company’s belief is correct, would total revenue increase, decrease, or remain the same as a result of the $63 price cut?

Increase

Decrease

Remain the same

15) Questions 15 through 17 refer to the following scenario. A local supermarket lowers the price of its vanilla ice cream from $3.50 per half gallon to $3. Vanilla ice cream unit sales increase by 20 percent. The store manager notices that the unit sales of chocolate syrup increase by 10 percent.

What is the price elasticity of vanilla ice cream? Round to the nearest tenth and drop the minus sign when submitting your answer.

1.4

16) How would you measure the effect of the ice cream price on chocolate syrup sales?

Since chocolate syrup and ice cream are complements, one would measure this effect using the price elasticity of demand for syrup.

Since chocolate syrup and ice cream are substitutes, one would measure this effect using the price elasticity of demand for syrup.

Since chocolate syrup and ice cream are complements, one would measure this effect using the cross elasticity.

Since chocolate syrup and ice cream are substitutes, one would measure this effect using the cross elasticity.

17) Refer to question 15. Overall, do you think that the new pricing policy was beneficial for the supermarket?

No, revenues for both ice cream and syrup fall.

Yes, revenues for both ice cream and syrup rise.

Yes, while revenues for syrup fall, the increase in ice cream revenue more than offsets the decrease in syrup revenue.

No, revenues for syrup fall and the increase in ice cream revenue is not enough to make up for the syrup decrease.

18) Questions 18 through 21 refer to the following: The demand curve for a product is given as Q = 2000 – 20P. How many units will be sold at $10?

1800

19) At what price would 1500 units be sold?

25

20) What will be the total revenue at a price of $70? (Enter as a whole number without the dollar sign.)

1400

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