ECON201PS1 - WELLESLEY COLLEGE DEPARTMENT OF ECONOMICS...

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WELLESLEY COLLEGE DEPARTMENT OF ECONOMICS ECONOMICS 201-03 JOHNSON Problem Set #1 (due IN LECTURE on Friday, September 12 th ) 1. Consider the following information about the effects of advertising expenditures on sales of beer. You can either spend your advertising budget on TV, Radio, or Internet advertising, and the effects of those expenditures in terms of beer sales are given in the table. Assume you have a budget of $1 million to spend on advertising and that you can choose from among these three sources (TV, Radio, Internet). Total Spent New Beer Sales Generated (in barrels per year) TV Radio Internet $0 0 0 0 $100K 4750 950 5000 $200K 9000 1800 6000 $300K 12750 2550 6500 $400K 16000 3200 6750 $500K 18750 3750 6950 $600K 21000 4200 7050 $700K 22750 4550 7100 $800K 24000 4800 7130 $900K 24750 4950 7150 $1 Million 25000 5000 7155 How would you allocate your $1 million media budget to maximize sales? Be specific. Do the activities of TV, Radio, and Internet advertising exhibit diminishing returns? Why or why not? Explain. 2. You are given the following data on P* and Q* for gasoline both before and after an increase in the gasoline tax on producers in the local market for gasoline: Before the Tax Increase: P* = $3/gallon ; Q* = 20 gallons After the Tax Increase: P** = $4/gallon : Q** = 15 gallons a. Calculate (using the point elasticity form with the "Before" data as your original) the price elasticity of demand for gasoline in this local market.
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b. Using this elasticity value, fit the given data into a linear demand function. c. Using this elasticity value, fit the given data instead into a demand function of the constant elasticity form. 3. The demand and supply for automobiles is given by: Q D = 0.1P -1.2 I 3 Q S = 6400Pw -0.5 Where P is measured in $/car, I is income, and w is the hourly wage of automobile workers. a. Give values for the following: i. Price elasticity of demand for automobiles ii. Income elasticity of demand for automobiles iii. Price elasticity of supply for automobiles iv. Wage elasticity of supply for automobiles b. If, initially, I = $20,000 and w = $25/hour, calculate equilibrium in the automobile market. c.
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ECON201PS1 - WELLESLEY COLLEGE DEPARTMENT OF ECONOMICS...

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