Managerial Economics

In Class Exercise Three B

1.  Assume the following demand function is determined by a firm after gathering some data on their customers -

Q demanded = 100 - 10P

Graph at least 4 pts on this demand curve.  At what price would demand be zero?

2.  The American Bagel Co. is considering opening a Bagel bakery and coffee shop near Campus.   In an effort to predict the profitability of this venture, their in-house consulting team estimated that the daily demand for Bagels in the area to be the following

            Qd = 20 - 5P + 20P_p - 30P_c + 5I

                   Where P = the price of bagels, P_p = the price of pastries (each), P_c = the price of coffee (per cup), and  I  = Income (average annual per capita, for local residents in thousands of dollars - with income, can always assume in thousands - so for example, 20,000 - you would use 20 in the equation)

a. Comment on this estimated demand function.  Are the signs on the variables reasonable (do they make sense with respect to economic theory)?  Why or why not? (Restrict your commentary to the signs of the variables)

            Reasonable Sign? (Y/N)                      Reason

P

P_p

P_c

I

b. Suppose that the price of pastries = $1, coffee costs $.50 per cup, and average per capita income in the market area is $12,000.  What would Qd be if the price of bagels = $1.00?

Qd =

c. What happens to the predicted number of bagels sold per day if the price of bagels is increased from $1.00 to $2.00? Is this a change in demand or a change in quantity demanded?

Quantity Changes from:         

Change in Demand or Change in Quantity Demanded (Circle One)

d. Holding the price of bagels again at $1.00, what happens to the predicted number of bagels sold per day if the price of coffee increases from $.50 to $1.00 per cup.  Is this a change in demand or a change in quantity demanded?

Change in Demand or Change in Quantity Demanded (Circle One)

For this problem you need a new demand curve:

Qd =   

e.  If you want to sell 150 bagels, what price would you charge (all other things constant, using the Pc = $1.00)  Hint:  this is kind of a trick question.

New Problem:  Consumer Surplus:  Now assume the following demand function:

Q_d = 20 - 4P

Suppose that the price is $1.  How much consumer surplus will consumers receive at that price? 

Graph this - show all numbers on your graph.

If your advertising campaign managed to change your demand function to Qd = 35 - 4P, does consumer surplus increase or decrease?  Graph both demand functions on the same graph.

What might you do to your price after your advertising campaign?  Explain.

New Problem:

Your flower shop consulting team estimated the following demand for tulips (sold in bunches) in your town (per day):  Qd = 200 - 14P + 6I - 10Pv + 3Pd

Where P = price of tulips

Pv = price of vases

Pd = price of daisies

I = Income

If the price of daisies = $15,

the price of vases = $5,

and income is = to $50,000 (i.e. use 50)

What would demand for tulips be if the price is $10?

What about at a price of $15?

If you wanted to sell 400 tulip bunches , what price would you charge?

What would happen to your demand if the daisy sellers lowered their price to $10? (your price is $15)

Show this shift in your demand curve on a graph (so show both graphs - before and after the daisy price change).  Show at least one intercept for each.

Given your demand function now -- what is your consumer surplus at a price of $15?  Show graphically as well.