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 – 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 competitor’s 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 company’s economist, having
investigated a large number of past data, has established the following
equation of demand for these cabinets:
Q
= 10,000 + 60B – 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 OE’s closest competitor
It is expected that
next year’s nonresidential construction index will stand at 160, OE’s average
price will be $40, and the competitor’s 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 OE’s projected
sales assuming the original price information of P = $40 and C = $35? Enter
your answer as whole numbers.

 

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