# How much would the firm’s revenue change if it lowered the price from \$12 to \$10? Is demand elastic or inelastic in this range?

Answer the following questions based on the accompanying diagram

a.       How much would the firm’s revenue change if it lowered the price from \$12 to \$10? Is demand elastic or inelastic in this range?

b.      How much would the firm’s revenue change if it lowered the price from \$4 to \$2? Is demand elastic or inelastic in this range?

c.       What price maximizes the firm’s total revnues? What is the elasticity of demand at this point on the demand curve?

2.         Suppose the own price elasticity of demand for good X is -3, its income elasticity is 1, its advertising elasticity is 2, and the cross-price elasticity of demand between it and good Y is -4.  Determine how much the consumption of this good will change if:

a.       the price of good X decreases by 5 percent

b.      the price of good Y increases by 8 percent

c.       advertising decreases by 4 percent

d.      Income increases by 4 percent

5.         Suppose the cross-price elasticity of demand between goods X and Y is 4.  How much would the price of good Y have to change in order to increase the consumption of good X by 20 percent?

3.       Revenue at a major cellular telephone manufacturer was \$2.3 billion for the nin months ending March 2, up 85 percent over revenues for the same period last year.  Management attributes the increase in revenues to a 108 percent increase in shipments, despite a 21 percent drop in the average blended selling price of its line of phones.  Given this information, is it surprising that the company’s revenue increased when it decreased the average selling price of its phones? Explain.

4.       If Starbucks’ marketing department estimates the income elasticity of demand for its coffee to be 2.6, how will the prospect of an economic boom (expected to increase consumer’s incomes by 6 percent over the next year ) impact the quantity of coffee Starbucks expects to sell?

5.       You are a division manager at Toyota.  If your marketing department estimates that the semiannual demand for the Highlander is Q-150,000-1.5P, what price should you charge in order to maximize revenues from sales of the Highlander?

2.                  A firm’s product sells for \$4 per unit in a highly competitive market.  The firm produces output using capital (Which it rents at \$25 per hour) and labor (which is paid a wage of \$30 per hour under a contract for 20 hours of labor services).  Complete the following table and use the information to answer these questions:

a.       Identify the fixed and variable inputs

b.      What are the firms’ fixed costs

c.       What is the variable cost of producing 475 units of output

d.      How many units of the variable input should be used to maximize profits?

e.       What are the maximum profits this firm can earn?

f.        Over what range of the variable input usage do increasing marginal returns exist?

g.       Over what range of the variable input usage do decreasing marginal returns exist?

h.      Over what range of input usage do negative marginal returns exist?

 K L Q MPK APK APL VMPK 0 20 0 1 20 50 2 20 150 3 20 300 4 20 400 5 20 450 6 20 475 7 20 475 8 20 450 9 20 400 10 20 300 11 20 150

4.                  An economist estimated that the cost function of a single-product firm is: C(Q)=100+20Q+15Q^2+10Q^3

Based on this information, determine:

a.       The fixed cost of producing 10 units of output

b.      The variable cost of producing10 units of output

c.       The total cost of producing 10 units of output

d.      The average fixed cost of producing 10 units of output

e.       The average variable cost of producing 10 units of output

f.        The average total cost of producing 10 units of output

g.       The marginal cost when Q=10

7.         A manager hires labor and rents capital equipment in a very competitive market.  Currently the wage rate is \$12 per hour and capital is rented at \$8 per hour.  If the marginal product of labor is 60 units of output per hour and the marginal product of capital is 45 units of output per hour, is the firm using the cost-minimizing combination of labor and capital? If not, should the firm increase or decrease the amount of capital used in its production process?

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