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After a careful statistical analysis, the Chidester Company concludes the

demand function for its product is Q = 500 – 3P + 2Pr + 0.1I

where Q is the quantity demanded of its product, P is the price of its product,

Pr is the price of its rival’s product, and I is per capita disposable income (in

dollars). At present, P = $10, Pr = $20 and I = $6,000.

a. What is the price elasticity of demand for the firm’s product?

b. What is the income elasticity of demand for the firm’s product?

c. What is the cross-price elasticity of demand between its product and its

rival’s product? d. What is the implicit assumption regarding the population in the market?

 

 
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According to S. Sackrin of the U.S. Department of Agriculture, the price elasticity

of demand for cigarettes is between -0.3 and -0.4, and the income

elasticity of demand is about 0.5. a. Suppose the federal government, influenced by findings that link cigarettes and cancer, were to impose a tax on cigarettes that increased their

price by 15%. What effect would this have on cigarette consumption?

b. Suppose a brokerage house advised you to buy cigarette stocks because

if incomes were to rise by 50% in the next decade, cigarette sales would

be likely to spurt enormously. What would be your reaction to this

advice?

 

 

 
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The McCauley Company hires a marketing consultant to estimate the demand

function for its product. The consultant concludes that this demand function is

Q = 100P -3.1I 2.3A0.1 where Q is the quantity demanded per capita per month, P is the product’s

price (in dollars), I is per capita disposable income (in dollars), and A is the firm’s advertising expenditures (in thousands of dollars). a. What is the price elasticity of demand? b. Will price increases result in increases or decreases in the amount spent on McCauley’s product?

c. What is the income elasticity of demand?

d. What is the advertising elasticity of demand?

e. If the population in the market increases by 10%, what is the effect on

the quantity demanded if P, I, and A are held constant?

 

 
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The Schmidt Corporation estimates that its demand function is

Q = 400 – 3P + 4I + 0.6A where Q is the quantity demanded per month, P is the product’s price (in dollars), I is per capita disposable income (in thousands of dollars), and A is the

firm’s advertising expenditures (in thousands of dollars per month). Population

is assumed to be constant. a. During the next decade, per capita disposable income is expected to

increase by $5,000. What effect will this have on the firm’s sales?

b. If Schmidt wants to raise its price enough to offset the effect of the

increase in per capita disposable income, by how much must it raise its

price? c. If Schmidt raises its price by this amount, will it increase or decrease the

price elasticity of demand? Explain. Make sure your answers reflect the

fact that elasticity is a negative number.

 

 
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