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section1_11Sept08_Exam

# section1_11Sept08_Exam - the price by 5 in 2006 Question 2...

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AEM 4150 section 1 11 September, 2008 Question 1 You have been hired to do some consulting for John Deer. Specifically, they want you to advise them on how they should price their lawn tractors. You have been given the following data to make your analysis: Year Units Sold Price Per Unit 2004 11,000 \$7,500 2005 13,000 \$7,000 Answer the following questions. (a) Compute the own price elasticity of demand for this lawn tractor. (use the arc elasticity formula) (b) Based on your estimated own price elasticity of demand, would you recommend that John Deer lowers the price of his lawn tractor? To illustrate your answer calculate how the total revenue would change compared to the year 2005 if John Deer dropped
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Unformatted text preview: the price by 5% in 2006? Question 2 The following supply function was estimated for milk: Q s = 80P – 30F – 50W + 150T Where: Q s = quantity supplied (3,600 cwt. Average), P = milk price (\$15.00/cwt.), F = feed cost (\$60/ton average), W = average hourly wage paid for labor (\$7.20/hour average), and T = index of technology (average is 4). a) Compute the own price elasticity of supply. b) Compute the elasticity of supply with respect to feed cost. c) Compute the elasticity of supply with respect to technology. d) Compute the elasticity of supply with respect to wage rate. e) Based on the elasticity of supply with respect to wages, what would happen to supply if the average wage increased from \$7.20 to \$7.56 per hour?...
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