Week Two Homework

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Chris Ferguson 2 Dec 2023 Week Two Homework Chapter 6 1. Refer to the section on “Calculating the Price Elasticity of Demand”. Review the formula for calculating price elasticity of demand and work out the following problem: A number of retail stores in San Diego form a “District”. In that district, a popular brand of lady’s handbag was selling at $400.00 per bag. In one week, the combined sale in the district was 200. The District Manager then declared a sale of 25% on the handbags. As a result, sale of the handbags increased to 550 in the following week. a. Calculate price elasticity of demand. (Use the following formula: Elasticity =(Change in quantity demanded/Average quantity)/(Change in price/Average price) E d = (550-200) = 350 = = -3.27 (550+200)/2 375 93.33% ($400*25%)-400 -100 -28.57% ($300+400)/2 350 b. What does the coefficient of elasticity indicate? Explain your answer. With the elasticity of demand having an absolute value of 3.27, it is elastic. As is typical of price elasticity of demand, the inverse relationship shows that when the price decreases, the demand increases. 2. A recent study determined the following elasticities for Volkswagen Beetles: Price elasticity of demand = 2 Income elasticity of demand = 1.5 Based on this information, answer the following questions: a. What will happen if the price of Volkswagen Beetles is reduced by 10%? The inversely proportional relationship between the price of Volkswagen Beetles and demand indicates a price decrease will result in an increase in quantity demanded. A price reduction of 10%, will result the Quantity demanded increase of 20%. b. What will happen to the price and quantity of Beetles if consumer income increases? With an increase in consumer income, customers will have more to spend. This will cause the demand for Beetles to increase and the demand curve will shift up, resulting in an increase in price and demand. Total revenue will increase as a result as well. Chapter 9 Define the following with appropriate examples. You will not receive any point if you do not provide example of each of the definitions.

Chris Ferguson 2 Dec 2023 a. Constant marginal cost - each unit costs the same to produce as the previous one and the cost never changes. If the production of a candy bar constantly costs $0.25 to make, the 1 st candy bar off the production line, the last bar off the line, and every bar in-between will have a production cost of $0.25. b. Implicit cost - a cost that does not require the outlay of money; it is measured by the value of benefits that are forgone. When employees complete annual training, the value of their time completing training is an implicit cost because they are not producing or selling the product. c. Risk aversion - the willingness to sacrifice some economic payoff in order to avoid a potential loss. In investments, it is often said big risk=big reward; making an investment to avert risk would mean investing in a low risk account (bonds or CD) rather than volatile option like stocks. d. Sunk cost - a cost that has already been incurred and is not recoverable. A sunk cost should be ignored in decisions about future actions. Marketing costs of a company aid in generating revenue, but the amount spent on marketing cannot be recovered. e. Optimal quantity - the quantity that meets demand without excess, thus generating the highest possible total profit. Chapter 10 Fill in the gap: (a). If good X is cheaper than good Y, and a consumer decides to consume more of good X and less of good Y, the effect is known as ---- effect. Income (b). If the price of a good goes down and, a consumer decides to consume more of that good, the effect is known as -------- effect. Substitution (c). If a consumer’s income goes up and the consumer consumes less of good M, good M is known as ------ good. Inferior (d). A consumer’s budget line assumes that the consumer spends ----- of their income. All

Chris Ferguson 2 Dec 2023 Chapter 11 Complete the following Table: Quantity Q Fixed Cost FC Variable Cost VC Total Cost TC = FC +VC Marginal Cost MC= ∆ TC/ ∆ Q 0 $108 0 $108 $0 1 $108 12 $120 $108 2 $108 48 $156 $36 3 $108 108 $216 $60 4 $108 192 $300 $84 5 $108 300 $408 $108 6 $108 432 $540 $132 7 $108 588 $696 $156 8 $108 768 $876 $180 9 $108 972 $1080 $204 10 $108 1200 $1308 $228

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