ECO204_2008_Test_1 - ECO 204, 2008-2009, Test 1 (Version A)...

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Unformatted text preview: ECO 204, 2008-2009, Test 1 (Version A) This test is copyright material and may not be used for commercial purposes without prior permission University of Toronto, Department of Economics, ECO 204, 20082009. Ajaz Hussain PLEASE FILL OUT THE INFORMATION BELOW Please write your name as it appears in ROSI: LAST NAME: FIRST NAME: MIDDLE NAME: UT ID #: (FOR PROCTOR) ID CHECK ________ PLEASE CIRCLE THE SECTION YOU'RE REGISTERED IN: M 122 M 46 T 122 T 46 W 68 EX 310 EX 320 PLEASE CIRCLE YOUR EXAM ROOM: EX 100 SIGNATURE: SCORES 1. (10) 2. (35) 3. (20) 4. (15) 5. (20) _________________________________________________________________________ Total: _____ (100) This test consists of 5 questions. For your convenience, there is a worksheet at the end of this test. Keep your answers brief. Good luck! 1 ECO 204, 2008-2009, Test 1 (Version A) This test is copyright material and may not be used for commercial purposes without prior permission Question 1 (10 points) In a marketing survey, consumers indicate they have an increasing marginal rate of substitution between Q1 and Q2. The survey also indicates that these consumers have convex preferences over Q1 and Q2. What can be said about the nature of Q1 and Q2? Give a brief explanation using a diagram to illustrate your answer. 2 ECO 204, 2008-2009, Test 1 (Version A) This test is copyright material and may not be used for commercial purposes without prior permission Question 2 (35 points) In lecture 3 we used the indifference curves in Figure 1 to explain why in the 1990s as income levels rose in India, sales of consumer products first increased and then ultimately flattened: Figure 1: Preferences of Indian Consumers in 1990s (a) (5 points) Graph the income consumption curve in Figure 1. 3 ECO 204, 2008-2009, Test 1 (Version A) This test is copyright material and may not be used for commercial purposes without prior permission (b) (5 points) Graph the Engel curve (relationship between Y and Q) for Food below. Please remember to label the axes. Is food a normal or an inferior good? (c) (5 points) Graph the Engel curve (relationship between Y and Q) for Consumer Products below. Please remember to label the axes. Are consumer products a normal or inferior good? 4 ECO 204, 2008-2009, Test 1 (Version A) This test is copyright material and may not be used for commercial purposes without prior permission (d) (5 points) Graph the price consumption curve in Figure 2 below for the case where food prices are decreasing: Figure 2 (e) (5 points) Graph the demand curve for food below. Please remember to label the axes. 5 ECO 204, 2008-2009, Test 1 (Version A) This test is copyright material and may not be used for commercial purposes without prior permission (f) (10 points) Based on your answers above, indicate whether (the absolute value of) the price elasticity of food is larger than, equal to, or smaller than 1. Explain your reasoning showing all steps. 6 ECO 204, 2008-2009, Test 1 (Version A) This test is copyright material and may not be used for commercial purposes without prior permission Question 3 (20 points) In lectures we discussed two cases "Fuji & Kodak Camera Film" and "Goodyear & Firestone Tires" where we used consumer theory to analyze companies with declining sales. The following article is about weaker than expected sales of Apple iPhones in Japan. Please read the article and answer the questions following the article. Apple's Latest iPhone Sees Slow Japan Sales Wall Street Journal: September 15, 2008 Two months after its launch, the latest version of Apple Inc.'s iPhone is showing strong sales around the world -- except in Japan. Demand has dropped from launch levels in July when Taichiro Nakamura bought his iPhone at a Tokyo store. Apple's partnership with Japan's third-largest mobile operator, Softbank Corp., to sell the iPhone 3G certainly created a buzz. Like elsewhere, Japanese consumers lined up at stores in advance of the phone's release on July 11, and many locations sold out almost immediately. But now analysts estimate that demand in Japan has fallen to a third of what it was initially and analysts are now expecting fewer iPhone sales. There is no supply shortage: The device is readily available in Apple and Softbank stores and other outlets. Major electronics retailer Yodobashi Camera's megastore in the western city of Osaka, for example, recently had more than 100 of them stacked up in open view. A spokesman for Softbank, which has 19.5 million wireless subscribers, said the iPhone continues to be popular, but declined to provide details. A spokesman for Apple Japan declined to comment. Sales have been slowed by the iPhone's relatively high price and the fact that Japan is already home to some of the world's most advanced cellphones. The iPhone's limited success so far shows how tough it continues to be for foreign manufacturers to crack the Japanese cellphone market. More than 10 domestic handset manufacturers compete for a slice of Japan's cellphone market, one of the world's largest with annual sales of 50 million phones. Nokia Corp., the industry leader in global shipments, has less than 1% share in Japan. Instead, Sharp Corp. leads the Japanese market, with about 25% of shipments. The global market is more than one billion phones. Still, expectations had been high that if anyone could break into such an insular market, Apple would with the iPhone 3G because of its strong brand name and popularity of its iPod players and Macintosh computers. The original iPhone wasn't sold in Japan. 7 ECO 204, 2008-2009, Test 1 (Version A) This test is copyright material and may not be used for commercial purposes without prior permission According to market-research firm MM Research Institute, Apple sold about 200,000 phones in Japan in the first two months. Since then, however, demand has been falling steadily, and analysts now widely believe sales are unlikely to reach a total of 500,000 units. That is half the one million units that they previously thought Apple could sell. One big challenge is that Japanese users already have access to some of the most advanced mobile-phone technologies in the world. Models currently sold by Japanese cellphone makers typically contain a high-end color display, digital TV-viewing capability, satellite navigation service, music player and digital camera. Many models also include chips that let owners use their phones as debit cards or train passes. Noriko Tanaka, a 34-year-old Softbank customer in Tokyo, said she likes the iPhone's touch screen, but would prefer a phone with digital television capability. "The touch screen looks fun, but I'm not sure I could get used to it," said Ms. Tanaka. Another challenge for Softbank is that Apple's marketing for the new iPhone has touted the devices compatibility with 3G wireless networks, which give users faster access to the Internet. While this is a relatively new service in the U.S., 3G access has been a standard feature on Japanese phones for years. "The iPhone is a difficult phone to use for the Japanese market because there are so many features it doesn't have," says Eimei Yokota, an analyst with MM Research. He said one small but must-have feature that is often cited as a deficiency in the iPhone is the lack of "emoji," clip art that can be inserted in sentences to jazz up emails. Japanese consumers have also shied away from the phone because of its high price. Through a complex discount equation, Softbank makes a 16-gigabyte phone available for about 58,560 yen, or around $540, for current Softbank customers or 34,560 yen, or around $320, for new customers, both prices require a two-year contract. That compares with a U.S. price of $299 with AT&T Inc. under similar conditions. In addition, Japanese customers pay as much as $60 a month to access the Internet and download software applications, along with the usual calling charges. Softbank has lowered its starting data service price since the iPhone launch, but the potential cost is prohibitive for some people, particularly when many Japanese phones are on sale at a lower price. Takuro Hiraoka, an analyst for GfK Marketing Services Japan Ltd., says Apple could take more advantage of this feature to boost sales going forward. "Japanese users don't know what to do with an iPhone," he said. "Sales could grow if Apple provides specific examples of how it can be used." 8 ECO 204, 2008-2009, Test 1 (Version A) This test is copyright material and may not be used for commercial purposes without prior permission (a) (5 points) Can a shortage of iPhones be blamed for declining sales in Japan? In which other case discussed in class was a shortage partially responsible for declining market shares? (b) (10 points) How are Japanese perceptions of iPhone vs. other phones different from that of consumers in other countries? Be specific, quoting from the article to back your arguments and use indifference curves to illustrate your answer. Based on your answer what would you advice Apple do immediately? Discuss any potential problems with your recommendation. 9 ECO 204, 2008-2009, Test 1 (Version A) This test is copyright material and may not be used for commercial purposes without prior permission (c) (5 points) In hindsight, what should Apple have done before entering the Japanese market? 10 ECO 204, 2008-2009, Test 1 (Version A) This test is copyright material and may not be used for commercial purposes without prior permission Question 4 (15 points) Recently BMW conducted a survey of consumer preferences about BMW and Ford cars. The survey indicates that customers have a constant marginal rate of substitution along their indifference curves for every two Ford cars, consumers are willing to tradeoff a BMW car. (a) (5 points) Let Ford cars be on the xaxis and BMWs on the yaxis. What is the MRS of the indifference curves? Give a brief explanation and graph the indifference curves in Figure 3 below: Figure 3 11 ECO 204, 2008-2009, Test 1 (Version A) This test is copyright material and may not be used for commercial purposes without prior permission (b) (5 points) What is the equation of the utility function for the indifference curves in Figure 3? Show all steps clearly. (c) (5 points) The average Ford car is priced at $20,000. What is the maximum price BMW can charge to have positive market share against Ford? (You don't need to solve part (b) for this question). 12 ECO 204, 2008-2009, Test 1 (Version A) This test is copyright material and may not be used for commercial purposes without prior permission Question 5 (20 points) Ajax and Alma like steaks and wine as perfect complements. For every steak, Ajax likes to have 2 glasses of wine, while Alma likes to have a glass of wine. Let steaks be "good 1" and wine be "good 2". (a) (10 points) What is Ajax's utility function for steaks and wine? What is Alma's utility function for steaks and wine? Show all steps and calculations, using graphs to illustrate your answer. 13 ECO 204, 2008-2009, Test 1 (Version A) This test is copyright material and may not be used for commercial purposes without prior permission (b) (10 points) What is Alma's demand equation for steaks? What is Alma's income and price elasticity for steaks? Show all steps clearly. The End 14 ECO 204, 2008-2009, Test 1 (Version A) This test is copyright material and may not be used for commercial purposes without prior permission WORKSHEET 15 ...
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This note was uploaded on 05/02/2011 for the course ECO 204 taught by Professor Hussein during the Fall '08 term at University of Toronto- Toronto.

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