Bridget has a limited income and consumes only wine and cheese; her current consumption
choice is four bottles of wine and 10 pounds of cheese.
The price of wine is $10.00 per bottle,
and the price of cheese is $4.00 a pound.
The last bottle of wine added 50 units to Bridget’s
utility , while the last pound of cheese added 40 units.
a.
Is Bridget making the utility-maximization choice? Why or why not?
b.
If not, what should she be doing instead?
In an article about financial problems of USA Today, Newsweek reported that the paper was
losing about $20 million a year.
A Wall Street analyst said that the paper should raise its prices
from 50 cents to 75 cents, which he estimated would bring in an additional $65 million a year.
The paper’s publisher rejected the idea, saying that circulation could drop sharply after the price
increase,
citing The Wall Street Journal’s experience after it increased its price to 75 cents.
What implicit assumptions are the publisher and the analyst making about price elasticity?
Wilpen Company, a price setting firm, produces nearly 80 percent of all tennis balls purchased in
the United States.
Wilpen estimates the U.S. demand for its tennis balls by using the following
linear specifications:
Q= a+bP+cM+dPr
Where Q is the number of cans of tennis balls sold quarterly, P is the wholesale price Wilpen
charges for a can of tennis balls, M is the consumers average household income, and Pr is the
average price of tennis rackets.
The regression results are as follows
Dependant Variable: Q
R-Square
F-Ratio
P-Value on F
Observations: 20
0.8435
28.75
0.001
Variable
Parameter
Standard
Estimate
Error
T-Ratio
P-Value
Intercept
425120.0
220300.0
1.93
0.0716
P
-37260.6
12587
-22.96
0.0093
M
1.49
0.3651
4.08
0.0009
PR
-1456.0
460.75
-3.16
0.0060
a.
Discuss the statistical significance of the parameter estimates a, b, c, and d using the p-
values.
Are the signs of b, c, and d consistent with the theory of demand?
b.
What is the estimated number of cans of tennis ball demanded?
c.
At the values of P, M, and Pr given, what are the estimated values of the price (E),
income (Em), and cross-price elasticities (Exr) of demand?
d.
What will happen, in percentage terms to the number of cans of tennis balls demanded if
the price of tennis balls decreases by 15 percent?
e.
What will happen, in percentage terms, to the number of cans of tennis balls demanded if
the average household income increases by 20 percent?
f.
What will happen, in percentage terms to the number of cans of tennis balls demanded if
the average price of tennis rackets increases 25 percent?