Q T # 2

Questions for Critical Thinking 2

Salvatore’s Chapter 4:

a. Discussion Questions: 8 and 10.

b. Problems: 3(a) and (b), 7, 9, and 14.

Note:

1. D8: Calculate the percentage decrease in quantity due to 10% increase in price.

2. 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. 128).

3. Revised P3(b). If Pc is $10,000, find the value of Qc.

4. P7(a) is asking should the transportation authority increase or decrease the price per ride based upon the price elasticity of demand.

5. P7(b): 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.

6. P14: Use equation (4-12) to find the answer. To maximize the profit, MR=MC=$8.

Froeb et al.’s Chapter 6:

a. Individual problems: 6-1, 6-3, and 6-5.

Note:

1. P6-1: Use price elasticity estimator on page 64. The desired markup is 1/׀e׀=1/the absolute value of the price elasticity. The initial actual markup is (P-MC)/P, P=$8.50.

2. P6-3: What would happen to the elasticity of demand in the long run (p. 67).

3. P6-5: Use (P-MC)/P = 1/׀e׀ to calculate MC and then use the same equation to find out the new price.

Salvatore’s Chapter 5:

a. Problems: 8, 15(b) and (c), and appendix problem 2 (p. 215).

Note:

1. P15(b) is to evaluate the above regression results in terms of the signs of the coefficients, the statistical significance of the coefficients, and the explanatory power of the regression (R2). The number in parentheses below the estimated slope coefficients refer to the estimated t values. The rule of thumb for testing the significance of the coefficients is if the absolute t value is greater than 2, the coefficient is significant, which means the coefficient is significantly different from 0. For example, the absolute t value for Px is 5.12, which is greater than 2; therefore, the coefficient of Px, (-9.50) is significant. In order words, Px does affect Qx. If the price of the commodity X increases by $1, the quantity demanded (Qx) will decrease by 9.50 units.

2. P15(c). Are X and Z complements or substitutes?

3. For appendix problem 2, use the table right under the problem on page 215, not Table 5-6, for the regression analysis. Enter the data in columns like table 5-11.