Chapter Exercises

4.10The demand for canal transportation was more inelastic after the development of regional railroads than before.Do you agree? Explain. 4.11Suppose that the market for illegal drugs is perfectly competitive. Suppose further that domestic crime rates are positively related to the value of illegal drug sales and that the demand for drugs is price inelastic.The government’s primary weapon in the war on drugs is to interdict then flow into the country from outside its borders.What is the likely effect of interdiction on domestic crime rates? Do you support such a policy? What alternative approach to the war on drugs would you recommend? 4.12A monopolist would never produce a good along the inelastic portion of a linear demand curve.Do you agree? Explain. 4.13A consortium is formed of the world’s leading oil producers form a cartel to control crude oil supplies and international oil prices.The objective of the cartel is to reduce output,raise prices,and increase cartel revenues.Under what circumstances will the cartel’s efforts be successful? Do you believe that this is a realistic scenario? 4.14The world’s leading coffee bean producers form a cartel to control coffee bean supplies and international coffee prices.The objective of the cartel is to increase output,lower prices,and increase cartel revenues. Under what circumstances will the cartel’s efforts be successful? Do you believe that this is a realistic scenario? 4.15Suppose that the demand equation for a firm’s product has been estimated as Qx = 100P-3.5I0.25,where P and I are price and income,respectively. a.What,if anything,can you say about the price elasticity of demand for good X? b.What,if anything,can you say about the income elasticity of demand for good X? c. What,if anything,can you say about the relationship between the slope of the demand curve and the price elasticity of demand? d.What,if anything,can you say about the effect of a price decrease on firm revenues? e. How would your answer to part c be different if the demand equation had been linear?

CHAPTER EXERCISES

4.1The Sylvan Corporation has estimated the price elasticity of demand for synthetic wood sorrel to be -0.25. a.If the price of Sylvan wood sorrel increases by 10%,what will happen to the quantity demanded of wood hewers? b.What will happen to Sylvan’s revenues as a result of the price increase?

4.2Suppose that the cross-price elasticity of demand for good X is 2.5. The price of good Y increases by 25%. a.What is the relationship between good X and good Y? b.How will the increase in the price of good Y affect sales of good X? 4.3Suppose that the cross-price elasticity of demand for good M is -1.75 and the price of good N falls by 10%. a.What is the relationship between good M and good N? b.How will the fall in the price of good N affect sales of good M? 4.4Suppose that the income elasticity of demand for a good is 3.5. a.What type of good is this? b.What increase in income will be necessary for the demand for the good to increase by 21%? 4.5Silkwood Enterprises specializes in gardening supplies.The demand for its new brand of fertilizer,Meadow Muffins,is given by the equation Q = 120 - 4P. a.Silkwood is currently charging $10 for a pound of Meadow Muffins. At this price,what is the price elasticity of demand for Meadow Muffins? b.At a price of $10,what is Silkwood’s marginal revenue? c. What price should Silkwood charge if it wishes to maximize its total revenue? d.At the total revenue maximizing price,what is the price elasticity of demand for Meadow Muffins? e. Diagram your answers to parts a through d. 4.6Just-the-Fax,Max,Inc.has determined that the demand for its fax machines is Q = 3,000 - 1.5P. a.Calculate the point-price elasticity of demand when P = $600. b.At P = $600,what is the firm’s marginal revenue? c. Find the total revenue maximizing price and quantity for the firm. 4.7The market research department of Paradox Enterprises has determined that the demand for fingolds is Q = 1,000 - 5P + 0.05I - 50Pz,where P is the price of glibdibs, I is income,and Pz is the price of ballzacks.Suppose that P = $5, I = $20,000,and Pz = $15. a.Compute the price elasticity of demand for fingolds. b.Is the firm maximizing its total revenue at P = $5.If not,what price should it charge? c. At P = $5,compute the income elasticity of demand for fingolds. d.At P = $5,compute the cross-price elasticity of demand for fingolds. 4.8The demand equation for a firm’s product has been estimated as log

Qx = 1,500 - 2log Px + 0.5log I + 0.25log Py - 1.5log Pz,where Qx represents unit sales of brand X, Px is the price of brand X, I is per-capita income, Py is the price of brand Y,and Pz is the price of brand Z.

a.What is the price elasticity of demand for brand X? b.What is the income elasticity of demand for brand X? What type of good is brand X? c. What is the cross-price elasticity of demand for brand X in relation to the price of brand Y? What is the relationship between brand X and brand Y? d.What is the cross-price elasticity of demand for brand X in relation to the price of brand Z? What is the relationship between brand X and brand Z? e. What effect will an increase in the price of brand X have on the firm’s total revenues? 4.9The demand curve for widgets is QD = 10,000 - 25P. a.How many widgets could be sold for $100? b.At what price would widget sales fall to zero? c. What is the total revenue (TR) equation for widgets in terms of output, Q? What is the marginal revenue equation in terms of Q? d.What is the point-price elasticity of demand when P = $200? What is total revenue at this price? What is marginal revenue at this price? Explain your result. e. Suppose that the price of widgets fell to P = $150.What would be the new point-price elasticity of demand? What is total revenue at this price? What is marginal revenue at this price? Explain your result. f. Suppose that the price of widgets rose to P = $250.What would be the new point-price elasticity of demand? What is total revenue at this price? What is marginal revenue at this price? Explain your result. g.Suppose that the supply of widgets is given by the equation QS =-5,000 + 50P.What is the relationship between quantity supplied and quantity demanded at a price of $300? h.In this market,what is the equilibrium price and what is the quantity? 4.10The demand for high-top bell-knots is given by the equation Q = 50 - 2P. a.What is the point-price elasticity of demand at P = $20? b.If the price were to fall to $15,what would happen to total expenditures on this product and what would this imply about the price elasticity of demand? c. Verify your answer to part b by computing the arc-price elasticity over this interval. d.What,if anything,can you say about the relationship between the point-price elasticities of demand calculated in parts a and b and the arc-price elasticity of demand calculated in part c? 4.11The demand equation for product X is given by Qx = (2IPy)/(5Px), where I is income, Px the price of product X,and Py the price of product Y. Also, I = $1,000, Px = $20,and Py = $5.