Suppose Qxd = 10,000 − 2 P x + 3 Py − 4.5M, where Px = $100, Py = $50, and M =
$2,000. How much of good X is consumed?
950 units

Suppose the demand function for a firm’s product is given by ln Q X d  = 7 - 1.5 ln  P  X  +
 +
2 ln P Y 
Y  -
 - 0.5 ln M  +
 + ln A where:

 P  x = $15
 P  y = $6
 M  = = $40,000, and
 A = $350

a. Determine the own price elasticity of demand, and state whether demand is elastic,
inelastic, or unitary elastic.

Own price
price elasticity:
elasticity: -1.5 -1.5 Correct

Demand is: elastic

elastic Correc
Correctt
 b. Determine the cross-price elasticity
elasticity of demand between good X  and
 and good Y, and
state whether these two goods are substitutes or complements.

Cross-price elasticity: 2 2 Correct

These two goods are: substitutes Correct

c. Determine the income elasticity of demand, and state whether good  X  is
 is a normal or 
inferior good.

This website stores data

Income such as -0.5 -0.5 Correct
elasticity:
elasticity: Correct
cookies to enable essential site
functionality, as well as marketing,
personalization,
Good andXanalytics. You Correc
is: inferior Correctt
may change your settings at any time
or accept the default settings.
d. Determine the own advertising elasticity of demand.

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1 1 Correct
Correct
Marketing
Explanation
Personalization
a. The own price elasticity of demand is simply the coefficient of ln  P  x, which is – 1.5. Since this number is
more than one in absolute value, demand is elastic.
Analytics
 b. The cross-price
cross-price elasticity
elasticity of demand
demand is simply
simply the coefficient
coefficient of ln P  y, which is 2. Since this number is
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 positive, goods
goods X and Y are
are substitutes.

c. The income elasticity of demand is simply the coefficient of ln M , which is -0.5. Since this number is
negative, good X is an inferior good.

d. The advertising elasticity of demand is simply the coefficient of ln  A, which is 1.

Suppose the own price elasticity of demand for good X  is  is -2, its income elasticity is 3,
its advertising elasticity is 2, and the cross-price elasticity of demand between it and
good Y  is
 is -4. Determine how much the consumption of this good will change if:

Instructions: Enter your responses as percentages. Include a minus (-) sign for all
negative answers.

a. The price of good X  decreases

 decreases by 6 percent.

12 12 Correct
Correct percent
percent

 b. The price of good Y  increases

 increases by 8 percent.

-32 -32 Correct

Correct percent

c. Advertising decreases by 4 percent.

-8 -8 Correct
Correct percent
percent

d. Income increases by 5 percent.

15 15 Correct
Correct percent
percent
Explanation
a. Use the own price elasticity of demand formula to write %ΔQ Xd / (-6) = -2. Solving, we see that the demand
This website stores data such as
for good X will change by 12 percent if the price of good X decreases by 6 percent.
cookies to enable essential site
functionality, as well as marketing,
 b. Use the cross-price elasticity
elasticity of demand
demand formula %ΔQXd / (8) = -4. Solving, we see that
formula to write %ΔQ that the demand
personalization, and analytics. You
for X will change by -32 percent if the price of good Y increases by 8 percent.
may change your settings at any time
or accept the default settings.
c. Use the formula for the advertising elasticity of demand to write %ΔQ Xd / (-4) = 2. Solving, we see that the
demand for good X will change by -8 percent if advertising decreases
decreases by 4 percent.
Privacy Policy
d. Use the income elasticity of demand formula to write %ΔQ Xd / (5) = 3. Solving, we see that
that the demand for
good X will change by 15 percent if income increases by 5 percent.
Marketing
Personalization
You are the manager of a firm that receives revenues of $40,000 per year from
Analytics
 product X  and
 and $90,000 per year from product Y . The own price elasticity of demand
for product X  is
 is -1.5, and the cross-price elasticity of demand between
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 product Y  and
 and X  is
 is -1.8.

How much will your firm's total revenues (revenues from both products) change if
you increase the price of good X  by
 by 2 percent?

Instructions: Enter your response rounded to the nearest dollar. Use a negative sign
(-) if applicable.

$ -3,64
-3,640
0 -3,64
-3,640
0 Correct
Correct
Explanation
Using the change in revenue formula for two products, ΔR = [$40,000(1 - 1.5) + $90,000(-1.8)](0.02) = -
$3,640. Thus, a 2 percent increase in the price of good X would cause revenues from both goods to decrease by
$3,640.

A quant jock from your firm used a linear demand specification to estimate the
demand for its product and sent you a hard copy of the results. Unfortunately, some
entries are missing because the toner was low in her printer. Use the information
 presented below to find the
the missing values. Then, answer
answer the accompanying
questions.

Instructions: Do not round intermediate calculations. Round only your final

calculation. Enter your final responses rounded to two decimal places. Include a
minus (-) sign for all negative answers.
 
SUMMARY
OUTPUT  

 Regression
 Regression
 Statisticss  
 Statistic
Multiple R 0.38
This website stores data such as
cookies to enable essential site 0.1
0.14
4 0.
functionality, as well as marketing, 14
personalization,R and analytics. You
Square Correct  
may change your settings at any time
or accept the default settings. 0.10.13
3 0.
Adjusted R 13
Square Correct  
Privacy PolicyStandard
Error 20.77
Marketing
Observatio
Personalization
ns 150
Analytics
Analysis of
Save Accept All
 

Variance
 Degrees of   Mean  Significan
 Significan
  Fr
Free
eedo
domm Sum
Sum of Sq
Squa
uare
ress  Square F  ce F   
10,398.87 10,398 5199.4 12.0
Regression 2 .87 Correct 3 5 0.00
Residual 147 63,408.62 431.35
14
149
9 14
9
Total Correct   73,807.49
73

Coefficient   Lower  Upper 

s Standard Error t Stat P-value 95% 95%
15.33 15.33
15.33 15.33 28.5 89.1
Inte
Interc
rcep
ept
t 58.8
58.87
7 Correct   3.84 0.00 9 5
-1.93 -
-1.93
1.93 -
Price of X -1.64 0.85 Correct   0.06 3.31 0.04

1.11
1.11 1.
Income 11
(‘000s) Correct   0.24 4.64 0
0..00 0
0.
.63 1.56

a. Based on these estimates, write an equation that summarizes the demand for the
firm’s product.

Instructions: Enter your responses rounded to two decimal places. Do not round

intermediate calculations. Round only your final calculation.

QXd = 58.87 58.87 Correc

Correctt - 1.64 1.64 Correc
Correctt PX + 1.11 1.11 Correc
Correctt M

This website
 b.stores
Which dataregression
such as coefficients are statistically significant
coefficients significant at the 5 percent
cookies to enable essential site
level?
functionality, as wellIntercept and Income Correct
as marketing,
personalization, and analytics. You
Explanation
may change your settings at any time
The table below contains the answers to the regression output.
or accept the default settings.

 
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SUMMARY
Marketing
OUTPUT  
Personalization

Analytics
 Regressio
 Regression
 Statisticss n  
 Statistic
Save Accept All
 

Multiple R 0.
0.38
R Square   0.14  
Adjusted R
Square   0.13  
Standard 20.7
Error 7
Observatio
ns 150

Analysis of
Variance  
 Degrees of   Sum of   Significan
 Significan
Freedom  Squares Mean Square
Square F  ce F   
5199.4 12.0
Regression 2   10,398.87 3 5 0.00
63,408.
Residual 147 62 431.35
73,807.
Total   149 49

 Standard   Lower  Upper 

Coefficients  Error t Stat P-value 95% 95%
58.8 28.5 89.1
Intercept 7   15.33   3.84 0.00 9 5
- -
Price of X 1.64 0.85   -1.93   0.06 3.31 0.04
Income
(‘000s)   1.11   0.24 4.64 0.00 0.63 1.56
a. Using the coefficient estimates for the Intercept, price of X and Income, we have Q Xd = 58.87 - 1.64PX +
1.11M.

 b. Only the coefficients for the Intercept

Intercept and Income
Income are statistically
statistically significant at
at the 5 percent
percent level or better.
This website stores data such as
cookies to enable essential site
The
functionality, demand
as well function for good X  is
as marketing,  is QXd = a + bP X + cM + e, where  P  x is the price of
goodand
personalization,  X  and
 and  M  is
 isYou
analytics. income. Least squares regression
r egression reveals that:
may change your settings at any time
or accept the default settings.

Privacy Policy
 
Marketing

Personalization

Analytics

Save Accept All

 

The R-squared is 0.35.

a. Compute the t -statistic

-statistic for each of the estimated coefficients.

Instruction: Enter your responses rounded to the nearest two decimal places. If

entering a negative number, be sure to use a negative sign (-).

  = 1.55 1.55 Correc

Correctt

= -5.22 -5.22 Correct

Correct

= 1.64 1.64 Correct

Correct

 b. Determine which (if any) of the

the estimated coefficients are statistically
statistically different
from zero.

This website stores data such as

cookies to enable essential site

functionality, as wellThe
as marketing,
coefficient estimates for a and c are statistically different from zero.
personalization, and analytics. You
may change your  settings at any time

or accept the defaultThe

settings.
coefficient estimates for b and c are statistically different from zero.


Privacy Policy The coefficient estimate for c is statistically different from zero.
Marketing


The
Personalization coefficient estimate for b is statistically different from zero.
Analytics

Savec. What does theAll

Accept  R-square in this regression indicate?
 

65 percent of the variability in the dependent variable is explained by price and

income.


35 percent of the variability in income is explained by price.



35 percent of the variability in the dependent variable is explained by price and

income.


35 percent of the variability in price is explained by income.

Explanation
a. The t  statistics
 statistics are as follows:

 b. Since

the coefficient estimate, â, is not statistically different from zero. Since

, the coefficient estimate,

This website, is statistically

stores different
data such as from zero. Finally, since
cookies to enable essential site
functionality,the
as coefficient estimate,
well as marketing,
personalization, and analytics. You
may change, is your
notsettings at yany
statistically
statisticall time from zero.
different
or accept the default settings.
c. The R-square tells us that 35 percent of the variability in the dependent variable
variable is explained by price and
income.
Privacy Policy
Revenue
Marketing at a major smartphone manufacturer was $2.4 billion for the nine months
ending March 2, up 77 percent over revenues for the same period last year.
Personalization
Management attributes the increase in revenues to a 103 percent increase in
Analytics
shipments, despite a 33 percent drop in the average blended selling price of its line of
 phones.
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Given this information, is it surprising that the company’s revenue increased when it
decreased the average selling price of its phones?

 No. Own price elasticity is -3.12, which means demand is elastic

elastic and a decrease
in price will raise revenues.


Yes. Own price elasticity is -0.32, which means demand is inelastic and a
decrease in price will decrease revenues.


Yes. Own price elasticity is -3.12, which means demand is elastic and a
decrease in price will decrease revenues.


 No. Own price elasticity is -0.32, which means demand is elastic

elastic and a decrease
in price will raise revenues.
Explanation
The result is not surprising. Given the available information, the own price elasticit
elasticity
y of demand for the
major smartphone manufacturer is EQ,P = 103 / (-33) = -3.12. Since this number is greater than one in absolute
value, demand is elastic. By the total revenue test, this means that a reduction in price will increase revenues.

Suppose the demand function for a firm’s product is given by ln Q X d  = 7 - 1.5 ln  P  X  +
 +
2 ln P Y 
Y  -
 - 0.5 ln M  +
 + ln A where:

 P  x = $15
 P  y = $6

 M  =
This website
 = $40,000, and
 A = $350
stores data such as
cookies to enable essential site
functionality, as well as marketing,
a. Determine the own price
personalization, and analytics. You
elasticity of demand, and state whether demand is elastic,
may change inelastic, or unitary
your settings elastic.
at any time
or accept the default settings.
Own price
price elasticity:
elasticity: -1.5 -1.5 Correct
Privacy Policy
Demand is: elastic
elastic Correc
Correctt
Marketing

Personalization
 b. Determine the cross-price elasticity
elasticity of demand between good X  and
 and good Y, and
Analytics
state whether these two goods are substitutes or complements.
Save Accept All
 

Cross-price elasticity: 2 2 Correct

These two goods are: substitutes Correct

c. Determine the income elasticity of demand, and state whether good  X  is
 is a normal or 
inferior good.

Income elasticity:
elasticity: -0.5 -0.5 Correct
Correct

Good X is: inferior Correc

Correctt

d. Determine the own advertising elasticity of demand.

1 1 Correct
Correct
Explanation
a. The own price elasticity of demand is simply the coefficient of ln  P  x, which is – 1.5. Since this number is
more than one in absolute value, demand is elastic.

 b. The cross-price

cross-price elasticity
elasticity of demand
demand is simply
simply the coefficient
coefficient of ln P  y, which is 2. Since this number is
 positive, goods
goods X and Y are
are substitutes.

c. The income elasticity of demand is simply the coefficient of ln M , which is -0.5. Since this number is
negative, good X is an inferior good.

d. The advertising elasticity of demand is simply the coefficient of ln  A, which is 1.

Suppose the own price elasticity of demand for good X  is  is -3, its income elasticity is
-2, its advertising elasticity is 4, and the cross-price elasticity of demand between it
and good Y  is
 is -2. Determine how much the consumption of this good will change if:
This website stores data such as
Instructions: Enter your responses as percentages.
cookies to enable essential site
Include a minus (-) sign for all
negative
functionality, as well asanswers.
marketing,
personalization, and analytics. You
may change a.your
Thesettings
price at
ofany time X  decreases
good  decreases by 7 percent.
or accept the default settings.

21 21 Correct
Correct percent
percent
Privacy Policy

 b. The
Marketing price of good Y  increases
 increases by 10 percent.
Personalization
-20 -20 Correct
Correct percent
Analytics

Savec. Advertising
Acceptdecreases
All by 2 percent.
 

-8 -8 Correct
Correct percent
percent

d. Income increases by 4 percent.

-8 -8 Correct
Correct percent
percent
Explanation
a. Use the own price elasticity of demand formula to write %ΔQ Xd / (-7) = -3. Solving, we see that the demand
for good X will change by 21 percent if the price of good X decreases by 7 percent.

 b. Use the cross-price elasticity

elasticity of demand
demand formula %ΔQXd / (10) = -2. Solving, we see
formula to write %ΔQ see that the
demand for X will change by -20 percent if the price of good Y increases by 10 percent.

c. Use the formula for the advertising elasticity of demand to write %ΔQ Xd / (-2) = 4. Solving, we see that the
demand for good X will change by -8 percent if advertising decreases
decreases by 2 percent.

d. Use the income elasticity of demand formula to write %ΔQ Xd / (4) = -2. Solving, we see that
that the demand for 
good X will change by -8 percent if income increases by 4 percent.

Revenue at a major smartphone manufacturer was $2.5 billion for the nine months
ending March 2, up 80 percent over revenues for the same period last year.
Management attributes the increase in revenues to a 142 percent increase in
shipments, despite a 22 percent drop in the average blended selling price of its line of
 phones.

Given this information, is it surprising that the company’s revenue increased when it
decreased the average selling price of its phones?

Yes. Own price elasticity is -0.15, which means demand is inelastic and a
This website stores decrease in price will decrease revenues.
data such as
cookies to enable essential site

functionality, as well as marketing,
personalization, and No. OwnYou
analytics. price elasticity is -0.15, which means demand is elastic
elastic and a decrease
in price
may change your settings willtime
at any raise revenues.
or accept the default settings.


Yes. Own price elasticity is -6.45, which means demand is elastic and a
Privacy Policy decrease in price will decrease revenues.
Marketing


 No.
Personalization Own price elasticity is -6.45, which means demand is elastic
elastic and a decrease
in price will raise revenues.
Analytics
Explanation
Save Accept All
 

The result is not surprising. Given the available information, the own price elasticit
elasticity
y of demand for the
major smartphone manufacturer is EQ,P = 142 / (-22) = -6.45. Since this number is greater than one in absolute
value, demand is elastic. By the total revenue test, this means that a reduction in price will increase revenues.

This website stores data such as

cookies to enable essential site
functionality, as well as marketing,
personalization, and analytics. You
may change your settings at any time
or accept the default settings.

Privacy Policy

Marketing
Personalization

Analytics

Save Accept All