## Davenport Econ625 Problem set 3

1)

An American company that

sells consumer electronics products has manufacturing facilities in Mexico,

Taiwan, and Canada. The average hourly wage, output, and annual overhead cost

for each site are as follows:

Mexico

Taiwan

Canada

Hourly Wage Rate

$1.50

$3.00

$6.00

Output per Person

10

18

20

Fixed Overhead Cost

$150,000

$90,000

$110,000

If we use output per

person as a proxy for marginal product, what is output/wage rate for each

country?

2)

Which location has the

highest MP per dollar?

Mexico

Taiwan

Canada

3)

Questions 1 through 5 are

based on the following scenario (adapted from Chapter 5 demand estimation

question number 3, p.163)

The maker of a

leading brand of low-calorie microwavable food estimated the following demand

equation for its product using data from 26 supermarkets around the country for

the month of April:

Q

= -5,200 â 42P + 20Px + 5.2l + 0.20A+ 0.25M

(2.002)

(17.5) (6.2) (2.5)

(0.09) (0.21)

R2

= 0.55 n = 26 F = 4.88

Assume the following

values for the independent variables:

Q

= Quantity sold per month

P

(in cents) = Price of the product = 500

Px

(in cents) = Price of leading competitorâs product = 600

I

(in dollars) = Per capita income of the standard metropolitan statistical area (SMSA)

in which the supermarket is located = 5,500

A

(in dollars) = Monthly advertising expenditure = 10,000

M

= Number of microwave ovens sold in the SMSA in which the supermarket is

located = 5,000

Calculate

the quantity using the given values for the independent variables.

4)

Refer to question 1. Calculate the price elasticity of demand.

Hint: Use the point elasticity method described on page 72. A numeric example

is demonstrated in the second paragraph on that page.

5)

Based on the price

elasticity of demand, do you think that

this firm should cut its price to increase its market share?

Yes, demand is

inelastic so cutting price would increase revenue.

**Yes, demand is

elastic so cutting price would increase revenue.

6)

Using the information in

question 1, compute the income

elasticity.

7)

Based on the price

elasticity of income, do you think that

this company would be extremely concerned about the impact of a recession on

its sales?

Yes, income elasticity is relatively high, so

a recession (with lower income) would likely reduce sales.

Yes, income elasticity is relatively low, so

a recession (with lower income) would likely reduce sales.

No, income elasticity is relatively high, so

a recession would not have a large impact on sales.

No, income elasticity is relatively low, so a

recession would not have a large impact on sales.

8)

Office Enterprises (OE)

produces a line of metal office file cabinets. The companyâs economist, having

investigated a large number of past data, has established the following

equation of demand for these cabinets:

Q

= 10,000 + 60B â 100P + 50Cwhere

Q = Annual number of cabinets sold

B

= Index of nonresidential construction

P

= Average price per cabinet charged by OE

C

= Average price per cabinet charged by OEâs closest competitor

It is expected that

next yearâs nonresidential construction index will stand at 160, OEâs average

price will be $40, and the competitorâs average price will be $35.

Forecast

annual sales. Enter your response as a whole number without the dollar sign.

9)

If the index forecast was

wrong, and it turns out to be only 140 next year, what will be OEâs projected

sales assuming the original price information of P = $40 and C = $35? Enter

your answer as whole numbers.

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