Running head: Response to Critical Thinking 2
Sheu Mojeed
Module 2 – QCT 2
BUSI620
Liberty University
1
Running head: Answers for Critical Thinking 22
Salvatore Chapter 4:
A.Discussion Questions: 8
Answ er:
NoteDQ8: Calculate the percentage decrease in quantity due to 10% increase in price.
Since E = %∆Q / %∆P, then %∆Q = E * %∆P
A.Elasticity of natural gas is 1.40 and 2.10,
%∆Q = E * %∆P = 1.40 * 10% = 14% in the short run,
%∆Q = E * %∆P = 2.10 * 10% = 21% in the long run.
B.Elasticity of electricity is 0.13 and 1.89,
%∆Q = E * %∆P = 0.13 * 10% = 1.3% in the short run,
%∆Q = E * %∆P = 1.89 * 10% = 18.9% in the long run.
Discussion Questions: 11
Note: DQ11: Change “between apples and cheese is 0.4” to “between apples and cheese
is negative 0.4.”
Answ er:
Relationship between apple and apple juice - 0.8/0.5 = 1.6
Relationship between apples and cheese - 0.8/0.4 = 2
Relationship between apples and beer - 0.8/0.1 = 8
Problem: 3(a) Note: P3 (a): Substitute the given value of independent variables into the
equation in problem 2 and show the new equation as Qc= a – 100Pc, a is a number. See
equation (4-5) as the example (p.130).For N, enter 225 not 225,000,000
Answ er:
Given the function Qc= 100,000-100Pc+ 2,000N + 50I + 30Pf - 1,000Pg +3A + 40,000Pi,
we now substitute the variables into this function Qc= $100,000-100Pc+
2,000(225,000,000) + 50(12,000) + 30(10,000) - 1,000(1) +3(250,000) + 40,000(0)
Qc = 450,001,749,000 - 100Pc
P3 (b): Note: Do not plot the demand curve, but find the value of Qc, if Pc is $10,000.
If Pc = $10,000, Qc = 450,000,749,000
Running head: Answers for Critical Thinking 2 3
Problem: 7 Note: is asking whether the transportation authority should increase or
decrease the price per ride based upon the price elasticity of demand.
Answ er:
The transportation authority should increase the price to eliminate its operating deficit.
The price increase would not cause demand to fall by much as demand is inelastic.
P7 (b): Note Suggestion – increase the price of a ride from $1 to be $1.50, a 50% increase
in price. Given the price elasticity of demand of -0.4, calculate the percentage change in
the ride and the total new rides (the original rides are 100 million = $100 million/$1)
using equation (4-7). Then use the total new rides time the new price of $1.50 to obtain
the new total revenue
Answ er:
% change in the ride = percentage change in price*price elasticity of demand = 50*(-0.4)
= -20% i.e. ride will decline by 20%.
%∆TR = 100/100 -0.2=0.8
Substitute into the equation:
New total revenue = new price *new rides = 1.5*0.8 =1.2.
1.2*100= $120 million
Problem: 9
Answ er
E = -1.2
η = %∆Q / %∆Y =3.0
%∆P = 5%
%∆Y = 3%
a)The overall change in sales is the sum of changes from price and that from income:
%∆Q = E * %∆P + η * %∆Y = -1.2 * 5% + 3.0 * 3% = -6% + 9% = 3%
so the sales in volume will increase by 3%.
b)If they want to increase the number of sales by 5%, they cannot increase the price by
that much:
%∆Q = E * %∆P + η * %∆Y = 5%
-1.2 * %∆P + 3.0 * 3% = 5%
1.2 %∆P = 4%
%∆P =3.33%
Running head: Answers for Critical Thinking 24
Problem: 15
Answ er:
A.Q X = 1.0 - 2.0(2) + 1.5(4) + 0.8(2.50) - 3.0(1) + 1.0(2)=4 million dollars
B.x=-2 Inelastic
I=1.5 elastic
PY=0.8 elastic
M=-3 inelastic
A=1 elastic
C.Q X = 1.0 - 2.0P X + 1.5I + 0.8P Y - 3.0P M + 1.0A
Q X = 1.0 - 2.0(2*.9) + 1.5(4*1.05) + 0.8(2.50*.9) - 3.0(1) + 1.0(2*1.2)=4.9 million
D.Q X = 1.0 - 2.0(2) + 1.5(4) + 0.8(2.50) - 3.0(1) + 1.0(2+i)=(4*1.3)
solve for I, I =1.2
Therefore, increase A from 2 to 3.2
Froebet al. Chapter 6:
A.Individual Problem: 6-1,
Note: P6-1: Use price elasticity estimator on page 64. The desired markup is 1/׀e1=׀/the
absolute value of the price elasticity. The initial actual markup is (P-MC)/P, P=$8.50.
Answ er:
[(5000-4000)/(5000+4000)]/ [(8.50-9.50)/(8.50+9.50)]
(1000/9000)/(-1)/18
0.11/-.056
Demand Elasticity =-1.964
Desired Markup
1/-1.964=-.5092
Initial Markup
(P-MC)/P, P=$8.50 MC=$4
=8.50-4/8.50
=4.50/8.50
=.52941
No, the price increase was not profitable.
B.Individual Problem: 6-3,
P6-3: What would happen to the elasticity of demand in the long run (p.67)
Answer:
The demand curve becomes more elastic over time. Consumers will accept the price
increase in the short run, but as time goes on they will attempt to avoid the higher priced
B.Problem 15(b) and(c), and appendix problem 2 (p. 218).
Answ er:
Running head: Answers for Critical Thinking 25
tickets; perhaps by going to another theater or by taking of matinee prices which are
usually cheaper.
C.Individual Problem: 6-5.
Note: P6-5: Use (P-MC)/P = 1/׀e׀ to calculate MC, and then use the same equation to find
out the new price.
Answ er:
Normal price $10 what should be the promotional price?
MC=0.5
Promotional price=$8.33
Salvatore Chapter 5:
A.Problems: 8
Note: P8 (b)’s answer is based upon the income elasticity (p. 141).
Answ er:
a.Yes. The given public goods conforms the law of demand. Because the negative sign of
the price elasticity of demand shows that as price increases quantity demanded will
decreases and vice versa. Elementary school aid, parks & recreation areas, Highway
construction and mint were the public goods whose price elasticity of demand is elastic.
b.The given public goods were normal goods. Because, they are having positive income
elasticity of demand.
increases by 10%, all of the increases in income will not be spent on
college and university education.
c. If the price or cost of college and university education increases by 10 percent, then based on the
price elasticity of demand (0.87), the demand for college and university education will decline by
8.7%. Though income
Running head: Answers for Critical Thinking 26
The regression equation is given as:Q^x=121.86 – 9.50Px + 0.04Y – 2.21Pz
The adjusted coefficient of determination is given as 0.9633.
The F-ratio is given as 167.33
(c)z is a related commodity to the actual product. Maybe it is an ingredient of the actual
product. Otherwise, the value of the adjusted coefficient of determination would never
have increased with its inclusion.
Appendix problem 2 (p. 215)
Multiple R
R Square
Adjusted R
Square
Standard
Error
Observation
s
ANOVA
Regression
Residual
Total
Intercept
X1
X2
0.9839803
7 8
0.9682173
8
5
0.9644782
5
3
7.2049881
6
8
20
df
2
17
19
Co
efficients
114.07379
5
5
-
9.4701906
0
4
0.0289367
3
6
SS
26884.3
882.501
5
27766.8
Standar
d Error
29.9311
9
1.81958
1
0.00642
2
MS
13442.1
5
51.9118
5
t Stat
3.81120
1
-5.2046
4.50586
1
F
258.94
1
8
P-value
0.0013
9
6
7.16E-
05
0.0003
1
2
Significance
F
1.85614E-
13
Lower 95%
50.9244982
6
-
13.3091711
6
0.01538745
6
Upper
95%
177.223
1
-
5.63121
0.04248
6
Lower
95.0%
50.924
5
-
13.309
2
0.0153
8
7
Upper
95.0%
177.223092
7
-
5.63121004
8
0.04248601
6
Running head: Answers for Critical Thinking 2 7
References
Froeb, L. M. (2014). Managerial economics: a problem solving approach (3rd Ed) Australia:
South-Western Cengage Learning.
Salvatore, D. (2012). Managerial economics in a global economy (7th Ed) Oxford: Oxford
University Press.
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