Case Problem Set A

Gary operates an automobile detailing business in a mid-sized town in Pennsylvania. An

automobile detailer restores a car to the level of cleanliness and perfection that it had when
it was new. His fastidious nature, attention to detail, and ability to effectively manage
employees have helped to make his business profitable, but he believes that more
information about the market would allow him to operate more efficiently. He uses
regression analysis to estimate the demand function for his business and gets the following
result:
QX = 235 - 3PX + 40A - 20U + 8PW

The number of detailing jobs he gets per month (QX) depends on the price he charges per
job (PX), his monthly advertising expenditures (A) measured in $1,000s, the regional
percentage unemployment rate (U), and the average price charged by local car wash
businesses (PW) for a standard wash and wax.

Use the estimated demand function given above to solve Problems 1 through 8.

1. Is automobile detailing a normal good or an inferior good? How can you tell?
2. Is a wash and wax at the local car wash a complement or a substitute for
automobile detailing? How can you tell?
3. Gary is currently charging $65 per detailing job and spending $3,500 per month on
advertising. The regional unemployment rate is 7.5% and the average price of a wash
and wax at a local car wash is $15. How many detailing jobs per month can Gary
expect under these conditions.

4. Derive the demand curve for detailing jobs under current conditions. Calculate
the values needed to fill in the demand schedule below and then plot the
schedule on the graph provided.
4. Derive the demand curve for detailing jobs under current conditions. Calculate the
values needed to fill in the demand schedule below and then plot the schedule on the graph
provided.

PX 105 95 85 75 65 55 45 35 25
15
QX

Chapter 3: Problem 4

120

100

80
Price

60

40

20

0
0 50 100 150 200 250 300 350
Quantity

5. Calculate the point price elasticity of demand under current conditions. Is it

elastic or inelastic? Also calculate marginal revenue. If the marginal cost of
a detailing job is equal to $12, should Gary increase price, lower price, or hold price
constant?
6. Calculate the point advertising elasticity of demand (%QX/%A) under current
conditions. Is it elastic or inelastic? How many additional detailing jobs would
result if Gary spent an additional $1,000 on advertising? How much additional
revenue will be generated, under current conditions, if an additional $1,000
is spent on advertising?

7. Assume that Gary increases his advertising expenditures to $4,500 while all other
conditions remain unchanged. Derive the new demand curve for detailing
jobs. Calculate the values needed to fill in the demand schedule that follows and
then plot this schedule on the same axes you used for Problem 4. How does an
increase in advertising expenditures influence the demand curve? How would an
increase in the price charged for a detailing job influence the demand curve?

PX 105 95 85 75 65 55 45 35 25
15
QX

8. Assume that Gary increases his advertising expenditures to $4,500 and raises his
price to $70 and that all other conditions remain unchanged. Calculate the point
price elasticity of demand and use it to calculate marginal revenue. If the marginal
cost of a detailing job is equal to $12, should Gary increase price, lower price, or
hold price constant?