Economics Course

1. XYZ Corporation is a manufacturer of widgets. Over the past several months, it has been selling its widgets for $100 each and unit sales have averaged 5,000 units per month. This month its competitor, ABC, Inc. raised the price of its widgets from $100 to $110. XYZ noted that its unit sales increased by 200 units.

a. What is the cross price elasticity of demand between XYZ’s and AB C’s widgets?

b. If XYZ knows that the price elasticity of demand for its widgets is -2.0, what price would XYZ be able to charge and still sell 5,000 widgets, assuming ABC keeps its price at $110?

2. The demand function for bicycles in Mapleville is estimated to be

Qd = 2,500 + 10Y – 6 P

Where Y denotes income in thousands, Qd is the quantity demanded in units, and P is the price of bicycles. When P = $120, Y = 12,

a. What is the price elasticity of demand?

b. What is the income elasticity of demand?

3. A local realtor estimated the long-term income elasticity of demand for rental properties to be 0.9 and the long-run income elasticity for owner-occupied housing to be 1.10. Recent estimates indicate that income is forecast to rise at 5% per year over the next 2 years. What is the expected effect on the quantity demanded for rental housing and owner-occupied housing (assuming rental rates and the price of housing remain constant). If housing prices rise during the same period, how would the quantity demanded of each type of housing be affected?

4. Your market research group estimated the following demand curve for gadgets, the product your company produces and sells.

Qd = 4,000 – 40P

If this relationship between quantity demanded and prices continues to hold true in the future,

a. How many gadgets will be demanded at $10, $20, and $30?

b. What is the arc price elasticity between $10 and $20; between $20 and $30?

c. What is the point price elasticity at each of the three prices?

d. If your company sold 3,000 gadgets last year, what is the price it charged?