Answer each question below, giving a complete explanation. a. Several years ago
ID: 1094634 • Letter: A
Question
Answer each question below, giving a complete explanation.
a. Several years ago the National Association of Broadcasters imposed restrictions on the amount of non-program material (commercials) that could be aired during children's television shows, effectively reducing the quantity of advertising allowed during children's viewing hours by 33 percent. Within four months, the price of a minute of advertising on network television increased by roughly 14 percent. What impact do you think this had on the revenues of the networks?
b. Your little sister needs $500 to buy a new bike. He has opened a lemonade stand to make the money he needs. He is currently charging $1.00 per cup, but wants to adjust his price to earn the money faster. What is your advice to him? Explain the assumptions you have made about the price elasticity of demand in this market.
c. Taxicab fares in most cities are regulated. Several years ago, taxicab drivers in Boston obtained permission to raise their fares 10 percent. They anticipated that revenues would increase by about 10 percent as a result. They were disappointed, however. When the commissioner granted the 10 percent increase, revenues increased but only by about 5 percent. What can you infer about the elasticity of demand for taxicab rides? What were taxicab drivers assuming about the elasticity of demand?
d. Suppose you are the manager of a home-building company and the government is considering eliminating the tax deductibility of mortgage interest payments. A typical consumer's marginal tax rate is 25 percent, and the elasticity of demand for new homes is -1.75. Your boss wants to know the impact of the proposed government policy on your business. What do you tell him?
e. If the price of pork chops falls from $8 to $6, and this leads to an increase in demand for apple sauce from 100 to 140 jars, what is the cross-price elasticity of apple sauce and pork chops at a pork chop price of $6?
f. You are the manager of a supermarket, and you know that the income elasticity of peanut butter is exactly -0.82. Due to the economic recession, you expect incomes to drop by 12 percent next year. How should you adjust your purchase of peanut butter?
Explanation / Answer
a) Suppose ads were shown for 60 seconds on children networks
after the restriction which is 33% reduction in the quantity of time
Ads were shown only for 50.2 seconds.
Suppose 60 seonds of advt cost $100
50.2 seconds cost = $83.66
The price of a minute rose by 14%
Now 60 seconds cost $114
50.2 seconds cost = $ 95.38
We can say revenues of the networks has decreased by $ 4.62
b) Currently the little sister is charging $1 per cup. If she increases the price per cup ,the demand for lemonade will reduce due to the increase in the prices. The best advice would be to reduce the prices further than increase the price, This way her sales volume will increase and she may be able to make $ 500 faster.
The assumptions made here are:
c) The percentage change in revenue is less than the percentage change in price. Therefore the demand is inelastic.
The taxi drivers were assuming that the revenue will be elastic i.e a percentage change in price will cause a greater percentage change in revenue. However, in this case the taxi drivers were wrong.
d) before the effect of new policy , the tax elasticity of demand for homes were elastic. Meaning the increase in tax deductibility of mortgage interest will cause an even greater demand to buy new homes from consumers.
After the new policy will be introduced , the tax elasticiy of demand for new homes will become inelastic . The new policy will reduce the demand for new homes due the elimination of tax deductibility of mortgage interest. This will negatively impact the business because the demand for new homes will come down.
e) cross price elasticity = 140-100 / 8-6 X 8+6 / 240
cross price elasticity = 20X0.058
cross price elasticity = 1.16
f) The income elasticity of demand for peanut butter is -0.82 which means the income elasticity of demand is inelastic.
The decrease in the income will cause a further decrease in the demand for peanut butter. If income is reduced by 12 percent , then the price of peanut butter should be further brought down by 12 percent so that the demand remains stable.
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