## Demand function for tickets for a rock concert has been estimated

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1. (i) Demand function for tickets for a rock

concert has been estimated to be

ln

Q = 3.737 – 1.372 ln P +1.823 ln I

where Q denotes number of tickets

(in thousands), P the (average) ticket price and I the average income of the concert goers.

Determine the values of the price

elasticity of demand and the income elasticity of demand.

(ii) In a recent study it has been estimated that

the own price elasticity of demand for a special type of U.S. manufactured

automobile tires is – .75, while the income elasticity of demand is 1.1 and the

cross price elasticity of demand with respect to foreign imports is 1.4. The current sales volume for the U.S.

manufactured tires is 5 million unites per year. It is anticipated that the price of the

foreign imports will rise by 5%.

(a) Assuming that average income of

the target group of customers will not change, calculate the number of tires

that the tire manufacturers will be able to sell if they plan to increase their

own price by 3%.

(b)

According to newly released economic data It is now expected that over the next

year the average income of the target group of consumers in the U.S. will grow

by 4%. Calculate the amount (%) by which the U.S. tire manufacturers can adjust

their price if they wish to increase their sales volume by 8.4% over the

initial 5 million units. Assume the same increase in foreign tire prices as

above.

(iii) Bright Future, Ltd (BF) is a nonprofit

foundation providing medical treatment to emotionally distressed children. BF

has hired you as a business consultant to design an employment policy that

would be consistent with its goal of providing the maximum possible service

given its limited financial resources.

You have determined that the service (Z) provided by BF is a function of

its medical staff input (M) and social worker staff input (S) which is given

by:

Z

= M + .5S + .5 MS – S2

BFâs staff budget for the coming year is

$1,200,000. Annual employment costs are

$30,000 for each social worker staff member (S) and $60,000 for each medical

staff member (M).

(a) Using

the Lagrangean multiplier approach calculate the optimal (i.e., service maximizing) combination of medical

and social worker staff. Determine the

optimal amount of service provided by BF.

(b) Calculate BFâs marginal cost. Explain your answer.

(c) Using Excel-Solver verify your answer to (a).

(Showyour work. Show the spreadsheets in

detail. Show the Solver window embedded on the relevant worksheet so that the

commands in the Solver window become directly visible and are linked to the

cells of the worksheet. To show the solver window, use print screen command on

your key board and then create a MS Word document using paste. See The Solver

supplement for help.)

(iv) In year 2014 price of a (500 ml.) bottle of

wine made by Richard Mondavi was $14.00.

Fifty (thousand) bottles were sold. It was estimated that the own price

elasticity of demand for wine of that type was -1.4. Assuming a straight line demand curve, determine the

demand equation for Mondavi’s wine.

Show and explain all your calculations.

2 (i) The production function for a firm is given

by

q = L.7K.4

where q

denotes output; Land K

labor and capital inputs.

(a) Determine

marginal product of labor. Show whether or not the above production function exhibits diminishing marginal

productivity of labor.

(b) Calculate the output (or production)

elasticity with respect to labor.

(c) Determine the

nature of the Return to Scale as exhibited by the above production function.

Show and explain all calculations.

(ii) A

firmâs production technology is given by the production function

.0/msohtmlclip1/01/clip_image002.gif”>

where

L represents labor hours, K machine hours and q the amount of output.

The market wage and rental rates are, w= $64 and r = $128.

The

firm is operating in the long run where it can adjust both inputs.

(a) Suppose

that the firm currently is using twice as many units of labor as capital.

Is it minimizing its long run

total cost? If so why so and if not why

not? Explain. If it is not minimizing its long run cost, how

should it adjust its input usage? Explain. Provide appropriate calculations.

(b) Suppose that the firm wants to produce 128

units of output. Determine the cost minimizing combination of L and

K. Calculate the resulting long run

total cost. Show and explain all calculations.

(c) Calculate

the short run total cost if q =128 and w=

$64 and r = $128, but capital, K

is fixed at 1.

(d) Without assuming a specific numerical

production target, but using w= $64 and r = $128 calculate the equation for

the long run total cost function (in terms of q).

(Hint: Assume that the level

of output is q. Using the above w, r

values first determine the least cost combinations of L

and K)

(e) Using Excel- Solver verify your

answers to (b) above.

(Show

your work. Show the spreadsheets in detail. Show the Solver window embedded on

the relevant worksheet so that the commands in the Solver window become

directly visible and are linked to the cells of the worksheet. To show the

solver window, use print screen command on your key board and then create a MS

Word document using paste.)

(iii) Summit Farms hires unskilled daily workers to pick strawberries in their

fields. The actual production depends on the

availability of workers and weather related factors. Summit Farms has the following

data on the number of workers used, L and the

amount of production, q, measured in pounds of strawberries for 15 days.

Daily Production Data

Day

L

q

1

5

250

2

7

385

3

8

442

4

6

331

5

6

324

6

8

442

7

10

500

8

11

478

9

12

432

10

9

490

11

10

480

12

10

494

13

8

317

14

7

399

15

8

448

(a) Using

Excelâs Regression package estimate a production function for Summit Farms which is of the form: q =a

L3 + bL2. Provide the detailed regression output generated by Excel. Identify the estimates of

the coefficients a and b. Write the equation for the estimated production

function. Identify the value of R2

.

If you are using a Mac you can use the linest function key for running

the regression.

(b) Using

the estimated function and Excelâs charting tool plot the Total Product of Labor (TPL), the Average Product of Labor

(APL) and the Marginal Product of Labor Curves. Are these

graphs and thus the estimated cubic production function consistent with standard TPL, APL and MPL curves?

3. (i) The Write Easy Company manufactures a variety

of pens selling for $2.98 each. Sales have averaged 10,000 units per

month during the last year. Recently Write Easyâs closest competitor, Joy Write

Company cut its prices on similar pens from $3.49 to $2.59. As a result Write

Easyâs sales declined to 8,000 units per month.

(a) Calculate the arc cross price elasticity of

demand between Write Easyâs and Joy Writeâs pens.

(b) If Write Easy knows its own arc price

elasticity of demand for its pens to be -2.2, what price would they have to

charge in order to restore their monthly sales

back to 10,000 units? (Assume that Joy Write maintains its price at $2.59.)

Show and explain all calculations.

(ii) Dirt

Diggers (DD) is an excavating firm that excavates roadside ditches for laying drainpipe. Its output follows

the following production function:

Q = 10L – .1L2

where L

denotes labor hours and Q the length of the ditch in meters. DD hires labor

at the going wage rate of $12 per hours.

(a) DD has received an offer to excavate 250

meters for a lump sum price of $500. Should it accept the offer? Explain with appropriate calculations.

(b) Suppose

instead of the previous offer DD is offered as much or as little excavation work at a price of $2.00 per meter dug. Should it accept the offer?

If it does, calculate its profit and the optimal (profit maximizing) output

(meters dug) and labor usage.

(iii) As

the manager of an 80-unit motel you know that all units are occupied when you charge $60 a day per unit. Each occupied room costs $30 for service and

maintenance a day. You have also

observed that for every x dollars increase in the daily rate above $60, there

are 2x units vacant. Determine the daily

price that you should charge in order to maximize profit. Calculate the number of occupied units. Assuming that fixed cost is $550 calculate

optimal profit.

(Hint:

You may like to determine the demand function first.)

(iv) A firm is selling a product with a constant

marginal cost of $60. The own price elasticity of demand for the product has

been estimated to be -1.5. Calculate the profit-maximizing price that the firm

should charge.

(v) The

domestic demand and supply function for oil for a small country is given by: Qd= 210 â 1.5p

and Qs = – 140 + 2p, where p

is the price per barrel and Qd

Qs

are the quantities in million barrels.

(a) Use

Excel to calculate quantity demanded and quantity supplied for p =

$70, 75,80â¦.140 (in $5 increments).

Determine the equilibrium price and quantity

in absence of any oil import.

(b) Assume

that OPEC can sell unlimited quantity of oil at $80 per barrel. Using your

calculations in (a), determine the equilibrium price, amount of domestic consumption,

quantity supplied by domestic producers and the amount of oil import. (Assume that at a

given price, the amount of import is

the gap between domestic demand and domestic production.)

(c) Now,

suppose the countryâs government imposes a limit on the amount of oil that can be imported

from OPEC at their price of $80. Given that the limit

is set at 35 million barrel,

use Excel and the spreadsheet created in part

(a) above to calculate the aggregate supply of oil that includes the domestic

supply and the import from OPEC. Calculate the domestic price for oil,

domestic consumption and domestic production.

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