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Week 2 - Assignment

The document contains summaries of demand equations and elasticities for different states: - Demand equations show the relationship between quantity demanded, price, and income. Price elasticities indicate whether demand is elastic or inelastic. - Income elasticities show whether goods are normal, inferior, or luxury goods. Cross-price elasticities indicate if goods are substitutes or complements. - Statistics like R-squared, F-statistic, and t-statistics evaluate the quality and significance of the demand models and variables.

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Shakil Reddy Bhimavarapu
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© © All Rights Reserved
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Download as DOCX, PDF, TXT or read online on Scribd
42 views

Week 2 - Assignment

The document contains summaries of demand equations and elasticities for different states: - Demand equations show the relationship between quantity demanded, price, and income. Price elasticities indicate whether demand is elastic or inelastic. - Income elasticities show whether goods are normal, inferior, or luxury goods. Cross-price elasticities indicate if goods are substitutes or complements. - Statistics like R-squared, F-statistic, and t-statistics evaluate the quality and significance of the demand models and variables.

Uploaded by

Shakil Reddy Bhimavarapu
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Week 2 Assignment

Chapter 2, Q5

a. Inverse demand function is Px = 125 – 0.25 Qdx

b. When Px = $50, Qdx = 500-4(50) = 300

Consumer surplus = 0.5 (500-300) (50) = $ 5000

c. When Px = $35, Qdx = 500-4(35) = 360

Consumer surplus = 0.5 (500-360) (35) = $ 2450

d. So long as the law of demand holds, a decrease in price leads to an increase in consumer
surplus, and vice versa. In general, there is an inverse relationship between the price of a
product and consumer surplus.

Chapter 2, Q20

Given the demand and supply functions mentioned below:

Qd memory = 11200 – 100 Pmemory – 2 P desktop

Qs memory = 1000 + 25 Pmemory + N

Qd desktop = 1600 – 2 Pdesktop + 0.6M

Where, Qd memory, Qs memory are the quantity of memory modules that would be demanded

and supplied next year and Pmemory is the market prices of memory module and Pdesktop the

projected selling price of desktops and N is the number of manufacturers of memory modules.

Equilibrium will occur when the quantity demanded equals quantity supplied. It will be

represented as:

Qd memory = Qs memory

Equating the two functions and solving for the equilibrium price,

11200 – 100 Pmemory – 2 P desktop = 1000 + 25 Pmemory + N


Week 2 Assignment
11200 – 125 Pmemory – 2(980) = 1100

125 Pmemory = 8140

Pmemory = $ 65.12

Hence, the price of a memory module is $65.12

Plugging the value of price in the demand function which can be seen as:

Qd memory = 11200 – 100 Pmemory – 2 P desktop

= 11200 – 100(65.12) – 2(980)

= 2728 in thousands of units

Hence, the quantity demanded for the memory modules all over the industry will be 2728000

The company will manufacture 27280 Units as there are 100 firms with equal market

share.

The prices of desktops increased to $1,080 the demand for desktops and memory modules will

be affected which can be seen as done below:

11200 – 100 Pmemory – 2 P desktop = 1000 + 25 Pmemory + N

Pmemory = $ 63.52

Plugging the value of price in the demand function which can be seen as:

Qd memory = 11200 – 100 Pmemory – 2 P desktop

= 11200 – 100(63.52) – 2(1080)

= 2688 in thousands of units

Hence, the quantity demanded for the memory modules all over the industry will be 2688000

The company will manufacture 26880 Units.

When the price of a desktop increases by $100, the price of memory modules falls by a $1.6 and
the quantity of memory modules demanded falls by 40,000 units.
Week 2 Assignment
When the price of the desktop is higher, the demand for desktop decreases which in turn lowers
the demand for memory modules, and its price decreases.

Thus, the relationship between desktop and memory module is one that of complementary goods.
A rise in the price of desktops decreases the demand for memory cards.

Chapter 3, Q2

Own price elasticity is the percentage change in quantity demanded of the commodity due to
percentage change in own price of the commodity.

Total revenue is the total amount earned by the seller by seller all the units of output.

Cross-price elasticity is the percentage change in quantity demanded of the commodity due to
percentage in price of related goods.

Given,

Qdx = 1200 – 3Px – 0.1 Pz where Pz = $300

At Px = $ 140, Pz = $300,

Qdx = $ 750

E Qx, Px = - 3(Px/Qx)

= -0.56 is own price elasticity of demand.

Since, the absolute value of own price elasticity of demand is less than 1. It means that
demand is inelastic. Any decision to decrease the price of the commodity will lead to fall in
total revenue earned by the firm.

At Px = $ 240, Pz = $300,

Qdx= 450

E Qx, Px = -3 (Px/Qx) = -1.6

-1.6 is the own price elasticity of demand.


Week 2 Assignment
Since, the absolute value of own price elasticity of demand is greater than 1. It means that
demand is elastic. Any decision to increase the price of the commodity will lead to fall in total
revenue earned by the firm.

Cross Elasticity = -0.1 (Pz/Qx) where Pz= $ 300, Qx = 750

Cross Elasticity = -0.04

Since, the cross-price elasticity of demand is a negative number. It means that goods X and Z are
Complements.

Chapter 3, Q3

Own price elasticity is the percentage change in quantity demanded of the commodity due to
percentage change in own price of the commodity.

Cross-price elasticity is the percentage change in quantity demanded of the commodity due to
percentage in price of related goods.

Income elasticity is the percentage change in quantity demanded of the commodity due to
percentage income of the consumer.

Advertising elasticity is the percentage change in quantity demanded of the commodity due to
percentage change in advertising expense.

As per information, demand function is given by,

ln Qdx = 7 - 1.5 lnPx + 2 ln Py -0.5 ln M + ln A

Where Px = $15, Py = $6, M =$40,000, A= $350

Since, demand function is given in log-linear form. The coefficient associated with variables
shows the elasticity of quantity demanded with respect to that variable.

Own price elasticity of demand = -1.5

Since, the absolute value of own price elasticity of demand is greater than 1. It means that
demand is elastic.

Since, demand function is given in log-linear form. The coefficient associated with variable ln Py
shows the cross-price elasticity of quantity demanded.

Cross price elasticity of demand = 2


Week 2 Assignment
Since, the cross-price elasticity of demand is a postivie number. It means that goods X and Y are
substitutes.

Since, demand function is given in log-linear form. The coefficient associated with variable M
shows the cross-price elasticity of quantity demanded.

Income elasticity of demand = -0.5

Since, the income elasticity of demand is a negative number. It means that good X is a inferior
good.

Since, demand function is given in log-linear form. The coefficient associated with variable  A
shows the cross-price elasticity of quantity demanded.

Own advertising elasticity of demand = 1

Chapter 3, Q19

Statistics for Illinois:

1.The estimated demand equation is Q = -42.65 +2.62P +14.32M


2.Price slope is upward (positive number)
3.An Increase with income (in $1,000) increases demand by 14.332 units
4.t-statistic associated with income is greater than 2 in absolute value, so Income is a
significant factor in determining quantity demanded.
5.R-square is extremely low, the model explains only 9% of the total variation in demand.
6.Price and income are important factors in determining quantity demanded
Week 2 Assignment
Statistics for Indiana:

1.The estimated demand equation is Q = 97.53 -2.52P +2.11M


2.The equation says increasing Price by $1 decreases quantity demanded by 2.52 units.
3.Increasing income by $1,000 increases demand by 2.11 units
4.t-statistic associated with Price and Income is greater than 2 in absolute value, so Price and
Income are significant factors in determining quantity demanded.
5.R-square is high, the model explains only 76% of the total variation in demand.
6.Price and income are important factors in determining quantity demanded

Statistics for Michigan:


Week 2 Assignment
1.The estimated demand equation is Q = 182.44 -1.02P +1.41M
2.The equation says increasing Price by $1 decreases quantity demanded by 1.02 units.
3.Increasing income by $1,000 increases demand by 1.41 units
4.t-statistic associated with Price and Income is greater than 2 in absolute value, so Price and
Income are significant factors in determining quantity demanded.
5.R-square is low, the model explains only 40% of the total variation in demand.
6.F-statistic is zero, suggesting that the overall fit of the regression to the data is highly
significant.
Price and income are important factors in determining quantity demanded

Statistics for Minnesota:

1.The estimated demand equation is Q = 81.7 -0.12P +3.14M


2.The equation says increasing Price by $1 decreases quantity demanded by 0.12 units.
3.Increasing income by $1,000 increases demand by 3.14 units
4.t-statistic associated with Income is greater than 2 in absolute value, so Income is
significant factor in determining quantity demanded.
5.R-square is low, the model explains only 41% of the total variation in demand.
6.F-statistic is zero, suggesting that the overall fit of the regression to the data is highly
significant.
Week 2 Assignment

Statistics for Missisipi:

1.The estimated demand equation is Q = 124.31 -0.79P +7.45M


2.The equation says increasing Price by $1 decreases quantity demanded by 0.79 units.
3.Increasing income by $1,000 increases demand by 7.45 units
4.t-statistic associated Income is greater than 2 in absolute value, so Income is significant
factor in determining quantity demanded.
5.R-square is high, the model explains 78% of the total variation in demand.
6.F-statistic is zero, suggesting that the overall fit of the regression to the data is highly
significant.
Week 2 Assignment
Statistics for Ohio:

1.The estimated demand equation is Q = 111.06 -2.48P +7.03M


2.The equation says increasing Price by $1 decreases quantity demanded by 2.48 units.
3.Increasing income by $1,000 increases demand by 7.03 units
4.t-statistic associated with Price and Income is greater than 2 in absolute value, so Price and
Income are significant factors in determining quantity demanded.
5.R-square is high, the model explains 98% of the total variation in demand.
6.F-statistic is zero, suggesting that the overall fit of the regression to the data is highly
significant.
Week 2 Assignment
Statistics for Wisconsin:

1.The estimated demand equation is Q = 107.6 -1.94P +10.01M


2.The equation says increasing Price by $1 decreases quantity demanded by 1.94 units.
3.Increasing income by $1,000 increases demand by 10.01 units
4.t-statistic associated with Price and Income is greater than 2 in absolute value, so Price and
Income are significant factors in determining quantity demanded.
5.R-square is high, the model explains 100% of the total variation in demand.
6.F-statistic is zero, suggesting that the overall fit of the regression to the data is highly
significant.

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