Econ 532

SS 2008

Deiter

Take-home exam (64 pts.)                                            Name ____________________________

 

Thought for the Day:     “Good news – this is an Econ test, not a Stat test!”

 

Instructions:      Even though this is a take-home exam, students are expected to do their own work, obviously.  You are NOT to consult with other students and should be forewarned that similar ‘wrong’ answers may be regarded as evidence of plagiarism.  Inquiries seeking clarification or guidance should be directed to your instructor.  Each specific question is worth 4 points (note D4 is 1 question = 4 pts. with 4 subparts).

 

A.                 Assume KC’s Inc. is selling Qx and Qy (quantities) of 2 products X and Y at prices Px and Py respectively.  Also, Ex (the firm’s own price elasticity of demand for x) = -.4 and Ec (the cross price elasticity of demand for the firm’s product y with respect to Px) = -.5.

 

A1.      Write a general mathematical equation that shows the calculation of KC’s TR as a function of Qx, Qy, Px, and Py.

 

 

A2.      What is KC’s current TR if Px = 2.00, Qx = 1,000, Py = 4.00, and Qy = 2,000?

 

 

      A3.      Are products X and Y most likely substitutes or complements and explain why?

 

 

A4.      Assume KC’s lowers its Px by 20%.  Calculate KC’s expected new or revised quantity and dollar sales of both X and Y, and dollar sales of X and Y combined.

 

 

A5.      In class, we noted a firm would decrease its TR if it decreased the price of a product whose demand is inelastic (e.g. X above).  Based on this example, explain why a firm’s TR might actually increase when it lowers the price it charges for a product whose demand is inelastic.

 

 

B.                 Refer to the previously distributed graphs (A, B, C) of U.S. government debt.  Each of the graphs is based on the same data.

 

B1.       Using data points for 1980 and 2000, calculate and interpret the meaning of the slope between these 2 points in graph B and graph C.

 

 

B2.       Visually, the slope of the curve in graph C appears to be smaller or flatter than the slope of the curve in graph B.  Does your answer in B1 confirm this?  Explain why or why not.

 

 

B3.       If you wanted to persuade someone with a graph that U.S. government debt has been increasing too rapidly, what graph construction advice would you offer?

 

 

C.                 Marginal Analyses

 

C1.      Explain with ‘economics’ why we often see high-rise office buildings (vs. one-story or two-story buildings) in downtown major metropolitan areas.

 

 

C2.      Avis is looking to buy a different car.  He has narrowed his choices down to car A (used luxury car with 20,000 miles on it, PA = $25,000) and car B (new smaller car, PB = $20,000).  Assume a 5-year planning period with r = 8%.  Assume further that car B will save him 500 gallons of gasoline per year ($4.00 per gallon assume) with these benefits accruing at the end of each of the next 5 years and assuming that there are no other annual operating cost differences between the two cars.  At the end of the 5th year, Avis will sell or trade in whatever car he buys today.  What is the present value of the future gasoline savings associated with car B?

 

C3.      Which car do you recommend Avis buy today (in C2 above) and what does your recommendation depend on?

 

 

C4.      Identify or explain ways by which you or another consumer in central Iowa currently would be able to save $30 per month for their household based on some ‘marginal’ analysis.  Be specific with respect to assumptions about current spending (Q’s and P’s) and suggested changes.  Note, you need not necessarily come up with one suggestion, it may be multiple suggestions in order to accumulate $30 worth of savings.

 

D.                 Demand analysis for store-brand cereal.  Assume HiV is a grocery store that sells its own store brand (S) of cheerios (= Qs at Ps = $4.00).  The store also sells a competing Kellogg’s (K) brand (= QK at PK = $6.00).

 

 

D1.      Assume Wendy has established a monthly budget constraint for purchasing different combinations of Qs and QK of $48.  Derive the equation of Wendy’s budget constraint and draw it in a graph (put QS on horizontal axis).

 

 

D2.      If Wendy regards S and K to be perfect substitutes, explain her likely purchasing behavior if she is willing to substitute 2S for 1K (given PS = 4.00, PK = 6.00) and show with a graph.

 

 

D3.      Show in a separate graph how Wendy’s budget constraint in D1 above would change if HiV for a month offers to give her 1S free for each 1S she buys.

 

 

D4.      Assume the HiV store has estimated the monthly demand for its S cheerios to be QS = 1000 – 200 PS + 50 PK.

 

a)      What quantity of S will HiV likely sell at prices given in D above,

b)      calculate and interpret/explain the cross price elasticity of demand for S with respect to PK at PS = 4.00, and PK = 6.00,

c)      what PS should HiV charge to maximize dollars worth of sales of S if PK = 6.00, and

d)      calculate mathematically and explain graphically how HiV’s demand curve for its S product would change if Kellogg lowers PK to $5.00.