Chapter 3:
Exercise Questions
1.
Suppose the monthly demand for soda by a consumer is given by
P
Q
8
10

=
.
a.
If the price of soda is $1 per can, how many sodas will the consumer purchase
in a typical month?
b.
What is the elasticity of demand for soda?
2.
The following estimates have been obtained for the market demand for cereal:
M
A
P
Q
ln
3
.
1
ln
75
.
0
ln
68
.
0
01
.
9
ln

+

=
, where
Q
is the quantity of cereal,
P
is the price of cereal,
A
is the level of advertising, and M is income. Based on this
information, determine the effect on the consumption of cereal of
a.
A 5 percent reduction in the price of cereal.
b.
A 4 percent increase in income.
c.
A 20 percent reduction in cereal advertising.
3.
As the manager of a local hotel chain, you have hired an econometrician to
estimate the demand for one of your hotels (
H
). The estimation has resulted in the
following demand function:
M
P
P
P
P
Q
OH
SE
C
H
H
01
.
8
.
0
25
.
2
5
.
1
000
,
2
+
+



=
,
where
H
P
is the price of a room at your hotel,
C
P
is the price of concerts in your
area,
SE
P
is the price of sporting events in your area,
OH
P
is the average room
price at other hotels in
your area, and
M
is the average income in the United
States. What would be the impact on your firm of
a.
A $500 increase in income?
b.
A $10 reduction in the price charged by other hotels?
c.
A $7 increase in the price of tickets to local sporting events?
d.
A $5 increase in the price of concert tickets, accompanied by an $8 increase in
income?
4.
The demand for company X’s product is given by
y
x
x
P
P
Q
4
3
12
+

=
. Suppose
good X sells for $3.00 per unit and good Y sells for $1.50 per unit.
a.
Calculate the crossprice elasticity of demand between goods X and Y at the
given prices.
b.
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 Spring '10
 SPIESS
 Management, Supply And Demand

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