section4_15Oct08_Exam

section4_15Oct08_Exam - AEM 4150 review section 15 October...

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AEM 4150 review section 15 October, 2008 Question 1 You have estimated the following market demand and supply equations for sweet onions at the retail level Qd = 50 - 0.50 P + 0.10 AD Qs = 15 + 0.25 P - 0.5 FP, where: Qd = quantity demanded, P = price, AD = advertising expenditures, Qs = quantity supplied, and FP = price for sweet onions paid to farmers. All other demand and supply shifters have been lumped into the intercept terms of the two equations. 1. Use these two equations to predict the retail price of sweet onions, retail demand, and total revenue in 2006, given the following 2006 values for the demand and supply shifters in these equations: AD = 50; FP = 10 2. Retailers are debating whether or not to increase advertising in 2006 from its current level of 50 to 60. What would happen to price, demand, and total revenue if retailers increased advertising to 60? Would you recommend to sweet onion retailers to increase advertising in this way? Why? Hint: Compute total revenue minus advertising costs for AD=50 vs. AD=60. 3. Assume that AD = 50, as in question 1. The government has now passed a law requiring sweet onion dealers to pay farmers a minimum price of 15 instead of 10. What will
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