Use the data from the minivan example (posted on the course website) to answer the following questions about “our” minivan manufacturer:

Instructions:  Answer all the questions in the space provided.  You may work on the problems with other class members, but please write up your own answers.  You may only consult materials that have been given to you as part of this class.  Show your work where possible.

Name:

1. (20 points) Use the data from the minivan example (posted on the course website) to answer the following questions about “our” minivan manufacturer:

 

1. (5 points) What is the cross price elasticity of demand (with respect to Chrysler) in Nashville, TN?

 

 

 

 

 

 

 

 

 

 

 

 

 

1. (7 points) Which market is more sensitive to changes in the price of the minivan that our company produces Water Mills, NY or Denver, CO?

 

 

 

 

 

 

 

 

 

 

 

 

 

1. (8 points) The luxury division of our company is considering launching a new line of minivans that will cost $40,000 on average. Why might it not be advisable (particularly from a mathematical point of view) to use our estimated own price elasticity to help with the launch of these new vans?  Be precise, use numbers where appropriate.

 

 

 

 

 

 

 

 

 

2. (10 points) Jubilant FoodWorks owns the Domino’s franchise in India. Recently rising input prices pushed them to increase the average price of their products by 11%. CEO, Ajay Kaul, said there had been no noticeable decline in demand.  Should we attribute this steadiness in demand solely to Domino’s recent brand awareness campaign in India?  Would you advise Kaul that the price elasticity of demand for Domino’s pizza is zero?
   3. (20 points) The U.S. steel industry lobbied for high taxes on imported steel. Russia, Brazil, and Japan have been producing steel on world markets at $20 per metric ton, well below what equilibrium would be in the United States with no imports. If no imported steel were permitted into the U.S., the equilibrium price would be $34 per metric ton. Show supply and demand curves for the U. S. assuming no imports; then show what the graph would look like if U.S. buyers could purchase all the steel that they wanted from world markets at $20; show the quantity of imported steel.

 

 

U.S. Market – No Imports

U.S. Market – No Import Restrictions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Summarize:     Price changed how (with no import restrictions) ?   ______________________________

 

Quantity changed how (with no import restrictions)?  ___________________________

 

4. (25 points) In most cities in America, the local government regulates (i.e., limits) taxi fares. Several years ago, cab drivers in Boston were able to raise rates by 10 percent.  Before the increase was approved, the expectation held by the average driver was that cab revenues would increase by 10 percent, too.  Their experience was disappointing: revenues only increased by five percent.

 

1. a) (12 points) What was the price elasticity of demand for cab rides in Boston?

 

 

 

 

 

 

 

 

 

 

 

1. b) (8 points) What were the cab drivers assuming it to be?

 

 

 

 

 

 

 

 

 

1. c) (5 points) Considering the transportation alternatives available to people in Boston (i.e., private cars, train, subway, bus, cabs, bikes (in decent weather), and walking (also in decent weather)), can you provide a two- or three- sentence explanation of the difference between cab driver expectations and the behavior actually exhibited by Boston residents? (Don’t say the drivers are unrealistic. . . . .it might be true, but focus on the economic forces working here.)

 

 

 

 

 

 

 

 

 

 

 

5. (25 points) Suppose that the demand function for good X is given by:

 

Q_d = 18 – 4.5P_X + .3 M + 2.3P_Y

 

where              Q_d = Quantity of X demanded,

P_X = Price of X,

M = Income(in thousands), and

P_Y= Price of related good Y.

 

 

For purposes of this problem, suppose that M = 40, P_Y  = 20, and the supply function is given by

 

Q_S = 10P_X -30.

 

1. (5 points) What are equilibrium price and quantity?

 

 

 

 

 

 

 

 

 

 

 

 

 

1. (6 points) Calculate consumer and producer surplus at the optimal price and quantity.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1. (7 points) Suppose the government imposes a $3 per unit tax on the producers of good X. What is the new equilibrium quantity and what is the price of the good paid by the consumer?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1. (7 points) Calculate the deadweight loss due to the tax.

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