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Unformatted text preview: Department of Agricultural and Resource Economics
University of California, Davis ARE ,._100A Problem Set 11 Winter 2010
Richard Howitt Quiz on January 22th ' 051MB. My “1410161“ “and JAIUMC :Lllc .'
company away frOm‘ old ways
that forced it into bankruptcy re ''
, organization last year. He has
. ousted several veteran execu
tives, ﬂattenedlits bureaucracy
and, according to people "who
have worked closely 'with Mr. ‘
Marchi'onne, injected an element
. of fear into its ranks ‘
. One of the more frustrating .
' ‘ problems for Mr. Marchionne has .7
been the use of hefty rebates and,
other incentives ‘to maintain
sales—an issue. that has also
, plagued General Motors Co. and
._ Ford Motor Go. over the years. 
Last July, for example, when
the U..S government offered as .
much as; $4, 500 in “cash for 
 clunkers” rebates, Chrysler’s .'
sales. chief at the time, Peter;
 = Fong, .drew up a plan to offer an:
additional discount of $4, 500 a,
from Chrysler; two people fainil
_ iar with the matter said. . ‘_;
' At the time, Chrysler’s bank:_ 3
,. ruptcy had scared away customL" FIAT CEO Mr Marchionne is having problems with marketing
and pricing at Chrysler as detailed in the WSJ article. 1. Assume that before the price reduction the demand for Chrysler 300s is: Q = 160.06 —2.73 P, where
Q is measured in 100 cars /m0nth and P is measured in $1000/car (a) If the equilibrium price is 22 ($22,000), determine the quantity,
and elasticity of demand. (b ) Determine the effect on total revenue for Chrysler caused
by Mr Fong’s $4,500 price reduction (c) Calculate what the new elasticity of demand would have been
after the price reduction ‘ (d) Should Mr Fong have been ﬁred ? 2. Now assume that the demand for Chrysler 3005 has the functional form
Q = 641 10—"6 (a) Show the equilibrium quantity of Chrysler 3005. (b) Use Excel or your graphing calculator to Show What happens to total revenue
under Mr Fong’s price reduction for this demand function (0) Calculate the elasticity of demand at the price reduction equilibrium. 3. An indifference curve for a consumer is deﬁned by the function
X Y = 48, where X and Y are the quantities of these two goods consumed and 48 is the amount of total utility along this indifference curve
(0) Determine the marginal rate of substitution MRSXY when X: 4 and Y = 12. (b) If the price of X :5310 and Y = $4, plot the income constraint and graphically find the
optimum utility that can be obtained at this income. (0) Calculate the minimum income needed to obtain a utility level of 48 (d) Show the effect on the consumer’s utility if the price of good X decreases to $7/unit. Department of Agricultural and Resource Economics
University of California, Davis ARE 1100A Problem Set 11 Winter 2010
Richard Howitt Quiz on January 22th ' OLAG‘JAG. My Dani3161; “a!“ .I_l.1U.VC :ulﬂ .'
company away from‘ 51d ways
that forced it into bankruptcy re ''
, organization last year. He has
. ousted several veteran execu
tives, ﬂattenedlits bureaucracy
and, according to people "who
have worked closely 'with Mr. ‘
Marchi'onne, injected an element
. of fear into its ranks ‘ . One of the more frustrating ‘
' problems for Mr. Marchionne has .
been the use of hefty rebates and ,
other incentives ‘to maintain
sales—an issue that has also , plagued General Motors Co. and ._ Ford Motor Go. over the years.
Last July, for example, when the U5. government offered as . much as. $4, 500 in “cash for   clunkers” rebates, Chrysler’s .' sales. chief at the time, Peter};  Fong, .drew up a plan to offer an: ~ additional discount of $4, 500 a from Chrysler; two people faniil ; iar with the matter said. . _: ' At the time; Chrysler’s banky. i ,. ruptcy had scared away customL" FIAT CEO Mr Marchionne is having problems with marketing
and pricing at Chrysler as detailed in the WSJ article. 1. Assume that before the price reduction the demand for Chrysler 3003 is: Q = 160.06 ~2.73 P, where
Q is measured in 100 cars /m0nth and P is measured in $1000/car (a) If the equilibrium price is 22 ($22,000), determine the quantity,
and elasticity of demand. I (b ) Determine the effect on total revenue for Chrysler caused
by Mr Fong’s $4,500 price reduction (6) Calculate what the new elasticity of demand would have been
after the price reduction ‘ (d) Should Mr F ong have been ﬁred ? 2. Now assume that the demand for Chrysler 3005 has the functional form
Q = 641 P‘” (a) Show the equilibrium quantity of Chrysler 3005. (b) Use Excel or your graphing calculator to Show What happens to total revenue
under Mr Fong’s price reduction for this demand function (0) Calculate the elasticity of demand at the price reduction equilibrium. 3. An indifference curve for a consumer is defined by the function
X Y = 48, where X and Y are the quantities of these two goods consumed and 48 is the amount of total utility along this indifference curve
(0) Determine the marginal rate of substitution MRSXY when X: 4 and Y = 12. (b) If the price of X :$10 and Y = $4, plot the income constraint and graphically find the
optimum utility that can be obtained at this income. (0) Calculate the minimum income needed to obtain a utility level of 48 (CD Show the effect on the consumer’s utility if the price of good X decreases to $7/unit. ...
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