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Solution Manual For Economics For Managers 2nd Edition by Farnham
Solution Manual For Economics For Managers 2nd Edition by Farnham
3. a. Revenue will rise because demand is inelastic. A 10 percent price increase will cause the
quantity demanded to fall by 5 percent, but that will be more than offset by the 10 percent
b. Revenue will rise because demand is elastic. A 5 percent price decrease will cause the
quantity demanded to rise by 12.5 percent, and that will more than offset the lower price on
c. Revenues will not change. Because elasticity is –1, a 1 percent increase in price will
result in a 1 percent decrease in quantity demanded, and thus revenue will not change.
d. Revenues will rise. Because demand is perfectly inelastic, there will be no change in the
quantity demanded when price increases, and, thus, revenues will increase.
4. a. PX = 250 – 1/2Q
TR = $31,250.
d. The midpoint of the demand curve is at Q = 250, P= $125. Above that point, demand is
5. Demand is elastic (and, thus, revenues will fall if you increase the price and rise if you
lower it). Your good is a normal good and is income elastic (or a luxury good). The related
good is a complement because a rise in the price of the other good causes a decrease in
demand for your product; the goods are fairly strong complements, as the demand for your
6. Demand is inelastic (and, thus, revenues will rise if you increase the price and fall if you
lower it). Your good is a normal good and is income inelastic (or a necessity good). The
related good is a substitute because a rise in the price of the other good causes an increase in
demand for your product; the goods are fairly good substitutes as the demand for your
Application Questions
1.a. The short-run price elasticity of demand is -0.06 (-0.6% / 10%), while the long-run price
elasticity is -0.4 (-4% / 10%). As expected the short-run price elasticity is smaller than the
long-run price elasticity because consumers have more time to change their behavior over the
long run. The income elasticity of demand is 0.5 (-0.5% / -1%). Gasoline is a normal good
with a positive income elasticity of demand (as income increases, gasoline demand increases
b. The Congressional Budget Office (CBO) report, Effects of Gasoline Prices on Driving
Behavior and Vehicle Markets, was based on four years of data collected from metropolitan
freeways in California from 2003 to 2006. The study showed that average weekday traffic
volumes on some freeways declined slightly in response to higher gasoline prices. Most of
that response was on freeways adjacent to commuter rail systems which showed slightly
greater ridership. The CBO also found that a 20 percent increase in gasoline prices resulted
in a 2.6 percentage point increase in the market share of new cars. All major car categories
gained market share. However, the market share of all types of light trucks, from minivans
c. Given the above income elasticity, the weak economy contributed to decreasing the demand
for gasoline. The housing market slump was also a factor as consumers had less home equity
to finance their expenditures. These changes also caused consumers to buy more fuel-
efficient cars.
2. We can use the facts in the question to make inferences about the price elasticity of demand
a. On the Cleveland–Los Angeles route, the decrease in fare resulted in about the same
revenue as the higher fare. This implies a consumer price elasticity of demand around –
1.00. At unit elasticity, any change in price results in no change in total revenue. On the
Cleveland–Houston route, the decrease in price resulted in less revenue, but greater market
share. Demand was inelastic on this route because quantity demanded increased as the
price was lowered, but total revenue decreased. Demand was price elastic on the Houston–
Oakland route because the lower airfares resulted in increased total revenue for
b. Consumer behavior differs on the three routes, but is also different from prior
expectations. As discussed in the chapter, the airlines typically assumed that demand for
business travel was inelastic, while demand for leisure travel was elastic. Under this
assumption, airline companies did not decrease business fares because they believed they
c. Many businesses have gotten tired of paying the high, unrestricted fares for their business
travelers. Employees began searching for lower restricted fares that would meet their
schedules or using videoconferencing or driving as a substitute for air travel. The terrorist
attacks on September 11, 2001, also had a major impact on the airline industry, with many
employees refusing to fly in the months following the attacks and with business only
slowly recovering in the following years. All of these factors resulted in major changes in
business traveler behavior and a probable increase in their price elasticity of demand. The
above market tests show that business demand is actually price elastic in certain markets.
3. Public health officials advocate the use of cigarette taxes to reduce teenage smoking because
the data in Table 3.7 show that the teenage price elasticity of demand for cigarettes is
approximately 1 or higher in absolute value. Thus, demand is unit or even price elastic.
Teenagers are sensitive to the price of cigarettes and will reduce or quit smoking in response
to the taxes imposed on cigarettes. Cigarette taxes are a good source of revenue for state and
local governments, given that the price elasticity of demand for adults is inelastic. This
means that an increase in price results in an increase in total revenue, given that the
4. A price elasticity of demand for urban transit between –0.1 and –0.6 means that demand is
inelastic for transit users. Thus, increased fares will result in higher revenue for local
governments and transit authorities. This is the economic argument for raising transit fares.
However, there may be political constraints on raising fares. The inelastic demand may result
from the low income levels and lack of automobiles and other substitute forms of travel of
transit riders. Voters may perceive increased fares as placing an unfair burden on these low-
income riders. Transit authorities often obtain voter approval for new transit systems by
promising not to raise fares for a certain number of years. Governmental decisions are
5. Information for case studies can be found in sources such as the following: Butscher ,
Stephan A. Consumer Loyalty Programmes and Clubs, Aldershot, UK and Burlington, VT:
Gower, 2002; Basso LJ, Clements MT, Ross TW. Moral Hazard and Consumer Loyalty
6. The price elasticity of demand for the product of an individual firm is typically greater than
the price elasticity for the product overall because the individual firm competes with all the
other producers of the same product. There are more substitutes for the product of an
individual firm than for the product overall. This outcome is most clearly shown in Table 3.7
for agricultural products. The demand for many of the products in the table is inelastic for the
product overall, while the table shows a price elasticity of demand for individual producers
ranging from –800 to –31,000 (extremely elastic). The price elasticity of demand for
individual physicians is also much larger than that for medical or dental care as a commodity.
The demand for dental care may be inelastic, while the demand for care from any given
dentist is price elastic, given the number of other dentists providing similar care.
7. EBay has been shifting the site’s emphasis away from auctions and toward fixed-price
listings in response to increased competition from Amazon.com and other rivals. The
company reduced the charge to post items and increased what it collected when an item sold.
The company also installed a new system to determine which items appear first in a search
which uses a formula that takes into account price and how well an item’s seller ranks in
consumer satisfaction. EBay also offered fee discounts to their best-rated sellers. See:
Geoffrey A. Fowler, “Auctions Fade in eBay’s Bid for Growth,” Wall Street Journal, May
26, 2009.
8. The U.S. Postal Service raised Priority Mail rates by 16 percent, and Bear Creek Corporation
reduced its package shipping by 15 to 20 percent. The implied price elasticity of demand
(%Q/%P) ranges from –15/16 = –0.94 to –20/16 = –1.25. If this response is typical for all
Postal Service customers, revenues will either remain approximately the same or decrease,
given that the price elasticity of demand is approximately unitary or price elastic. Particularly
if the demand is elastic, the Postal Service will not be able to reduce its deficit by this
strategy because revenues will decrease. Consumers will use Federal Express or UPS instead
Chapter 4
Technical Questions
1.a. Wendy’s was trying to determine consumer preferences for a new product, the vanilla Frosty,
to appeal to younger diners. The company brought more than 100 consumer testers to its
headquarters to sample different flavors of vanilla. Although the company ran the risk of
alienating existing customers with the new Frosty, sales increased 25% after Wendy’s
b. Kraft Foods had to develop a new Oreo to sell in China because traditional Oreos were too
sweet and too expensive for the Chinese market. The company tested 20 prototypes on a
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“I find here still the Jews. The same precise account of their
arrival and taking up their residence in the valleys of Atlas. One is
here from Jerusalem begging alms, unusual amongst the Jews. He
is advanced in years, quite blind, and has kept constant pace with
me, taking advantage of my escorts from Tangier to this place: is
anxious to get to Arowan,[160] where there is a very learned Rabbi. I
cannot help him; my means will not allow me. They ask nearly as
much for his passage as my own; having a greater fear of the Jews
getting to Soudan than the Christians. I trust by this time your Royal
Highness has recovered your perfect sight, hoping that about the
period of this letter’s reaching England, your Royal Highness will
have received the copies of the inscriptions from the tombs of the
district of Mesfywa. I can hardly expect the copy of the record from
Couba or Kobba will reach Morocco till the end of the autumn, when
the Rabbi told me he should be returning, and would deliver it to the
Consular Agent, the Jew Courkoss, to whom I have several times
written. My companion begs most respectfully to present his duty,
and hopes your Royal Highness will deign to receive the few lines
from his pen, which he begs me to enclose. I am sorry to say I have
great fears for his health; he cannot bear fatigue, and has been
attacked with ophthalmia. The whole of the Soudan people know
him, and tell me he will prove a certain passport; that he is a cousin
of Hamed Libboo; and another of his cousins, Ali, called Koutouk,
the warrior, is now king of Kong, and that many of his family are at
Kong, all rich and in power.
“Hoping this will find your Royal Highness in the enjoyment of
perfect health, and trusting shortly to have the honour of addressing
your Royal Highness from Soudan,
“I have the honour to be, &c. &c.
“John Davidson.”
“‘Even now,’ he adds, ‘after waiting for the Cafila, which will be
immense, near 400 men, and, they say, 2,000 camels, I am not even
going with it. I should, by all accounts, as a Christian and a doctor,
be worried to death. I go straight from this to Arowan, never touching
the Cafila route at all; we shall not see a single tent. There are some
wells, known only to two or three of the guides. We take five naggas
(she camels) for milk, the five men, and Mohammed El Abd, some
zimēta (barley meal). I take the biscuit for Abou and self; each
carries a skin of water, to be touched only if the milk fails: thirty days
to bring us to Arowan, and five more to Timbuctoo.’
“I have made the above extracts to assure you that the
arrangements were made, and Mr. Davidson ready to start at a
moment’s notice, and that in the course of two or three days I hope
to have the pleasure to acquaint you of his having proceeded on his
journey. Once away from Wád Nún, and I have every and the fullest
confidence of his efforts being crowned with success.
“I have the honour to be, Sir,
“Your most obedient servant,
“Wm. Willshire.”
“P.S.—I open this letter to add, I have received a letter from Mr.
Davidson, dated Saturday, the 5th inst., who appears in high spirits,
and writes,—
“‘The start is to be on Monday, although I do not go on that day;
everything is now packed up, and placed ready to be put on the
camels, with which Abou starts at day-break on Monday. I am to be
left here, as if having sent him on. Mohammed El Abd remains
behind. On Wednesday or Thursday, according to the distance made
by the camels on the first day, we start on horseback, accompanied
by Beyrock and about six horsemen, and are to make Yeisst, if
possible, in one day. Here I leave the district of Wadnoon. And to this
place is three days’ journey for loaded camels. I here leave my horse
and mount my camel, and we push on to the tents.’
“Mr. Davidson did not start on a sudden, on the 3d inst., as stated
to me by a courier, who brought me a letter from him of that date,
and which I reported in a letter I had the honour to address to his
Majesty’s secretary of state, Viscount Palmerston, on the 8th inst.,
and which you will oblige me by correcting and making known to his
lordship.
“Your most obedient servant,
“W. W.”
The following extracts from Mr. Willshire’s letters will give all the
intelligence received respecting the sequel of Mr. Davidson’s
expedition:—
Society of London:—
“To the Noble Prince, exalted by the Lord, Mulai Abd Errachnan ben
Hussein, whom God protect.
“An English gentleman having arrived at Gibraltar within a few
days past, as bearer of a letter, which he is charged to deliver to his
Imperial Majesty, from the King my most gracious sovereign, may it
please your Imperial Majesty to deign to cause me to be informed
when and where it may be convenient for your Imperial Majesty to
receive the bearer of the royal letter.
“Peace—this 20th day of September, in the year of Christ 1835
(26th Joomad the 1st, 1251).
“Edw. Drummond Hay,
“H. B. M.’s Agent and Consul-General in Morocco.”
“In the name of the merciful God, and there is no power or
strength but in God the high and excellent.
“To the faithful employed Drummond Hay, Consul for the English
nation—this premised—
“Your letter has reached our presence, exalted of God, regarding
the gentleman who arrived at Gibraltar with a letter from the Pre-
eminent of your nation; in consequence whereof, if he please to
deliver the letter to our employed, the kaid ............[202] Essedy, for the
purpose of being forwarded to our presence, exalted of God, he may
do so; but if he wish to bear it himself, he is to proceed to Swerrah
by sea, and thence he may come to our high presence, since the
voyage by sea is more convenient than that by land, and the journey
from the said port to our presence is short.
“Peace—11th Joomad the 2d, 1251 (4th October, 1835).
THE END.
LONDON:
Printed by J. L. Cox and Sons, 75, Great Queen Street,
Lincoln’s-Inn Fields.
FOOTNOTES: