Davenport University Non Price Determinants of Demand Problem Set 2

Using D/S Model to Investigate Non-Price Determinants of Demand

1. Text ch 3 Prob 6. Joy’s Frozen Yogurt shops have enjoyed rapid growth in northeastern states in recent years. From the analysis of Joy’s various outlets, it was found that the demand curve follows this pattern:

Q = 200 – 300P + 120I +65T – 250Ac + 400Aj

where Q = number of cups served per week

P = average price paid for each cup

I = per capita income in the given market (thousands of dollars)

T = average outdoor temperature

Ac = competition’s monthly advertising expenditures (thousands of dollars)

Aj = Joy’s own monthly advertising expenditures (thousands of dollars)

One of the outlets has the following conditions: P = 1.5, I = 10, T = 60, Ac = 15, Aj = 10.

1. Estimate the number of cups served per week by this outlet. Determine the outlet’s demand curve.

1. What would be the effect of a 5 thousand dollar increase in the competitor’s advertising expenditure?

1. What would Joy’s advertising expenditure have to be to counteract this effect?

2. Text ch 3 Prob 9. Suppose a firm has the following demand equation:

Q = 1,000 – 3,000P + 10A

where Q = quantity demanded

P = product price (in dollars)

A = advertising expenditures (in dollars)

Assume for the following questions that P = $3 and A = $2,000.

1. Suppose the firm dropped the price to $2.50. Would this be beneficial for the firm? Explain.

1. Suppose the firm raised the price to $4.00 while increasing its advertising expenditure by $100. Would this be beneficial for the firm? Explain.

Comparative Statics

3. Refer to the graph that follows, which represents a theoretical D/S model with a market in equilibrium at price P* and quantity Q*.

1. Assume that this product is endorsed by a popular sports figure and as a result becomes more popular. In the immediate future (short run), which way will the demand curve shift (left or right)? Will the new equilibrium price be (higher or lower)? Will the new equilibrium quantity be (higher or lower)?

1. Consider again the situation in part a. If this is a competitive market, what will happen to equilibrium quantity in the LONG run? To equilibrium price in the LONG run?

1. Begin again with the initial equilibrium. Assume now that a natural disaster destroys a factory where this product is produced. Will the immediate impact be on the demand curve or on the supply curve? Which way will the curve shift (left or right)? Will the new equilibrium price be (higher or lower)? Will the new equilibrium quantity be (higher or lower)?

1. Consider again the situation in part c in which a natural disaster occurs. If this is a competitive market, what will happen to equilibrium quantity in the LONG run? To equilibrium price in the LONG run?

Price Elasticity of Demand

4. Text ch 4 Prob 13. According to a study, the price elasticity of shoes in the United States is 0.7, and the income elasticity is 0.9.

1. Would you suggest that the Brown Shoe Company cut its prices to increase its revenue?
2. What would be expected to happen to the total quantity of shoes sold in the United States if incomes rise by 10 percent?

5. Text ch 4 Prob 17 adapted. The demand curve for product “a” is given as Q = 2000 -20P and the price is currently P = $70.

1. How many units will be sold at $70? At $80?
2. What is the price elasticity between $70 and $80? Use the “arc elasticity” method found on page 70 and shown here:

Arc Elasticity = Q2 – Q1(Q1 + Q2)/2P2 – P1(P2 + P1)/2

1. Based on this measure, is demand price elastic? Based on this measure, do you expect total revenue to increase or to decrease if the price is raised to $80?
2. What will be the total revenue at a price of $70? What will be the total revenue at a price of $80?
3. Be sure that your answer to part “d” is consistent with your answer to part “c.” (If it is not, go back and check for errors.)