Question

1.) Suppose we estimate that the demand elasticity for fine leather jackets is .7 at their current prices. Then we know that:

		a 1% increase in price reduces quantity sold by .7%.
		no one wants to buy leather jackets.
		demand for leather jackets is elastic.
		a cut in the prices will increase total revenue.
		leather jackets are luxury items.

2.) If the competitive firm can sell its product at $16 per unit and the marginal costs of the firm are MC = 1,100 - 2Q, then the firm will produce:

		1,084 units.
		542 units.
		16 units.
		1,100 units.

3.) Brewing Company experienced the following monthly sales (in thousands of barrels) during 2010:

Jan.	Feb.	Mar.	Apr.	May	June
97	92	110	110	113	116

Develop forecasts for February through July using the exponential smoothing method (with w = .7). Begin by assuming. Forecast(2)= Actual(1)=97.

What is the forecast of July Forecast(7) ?

		Jan.	Feb.	Mar.	Apr.	May	June	Jul
Actual		97	92	110	110	113	116
Forecast			97	93.5	105.1	108.5	?	?
		114.2
		114.7
		112.5
		115
		112

4.) If Tiger Toys faces a Non-linear demand curve of Q = 340 - 4 P1.02 and a MC = ATC = 20, then the optimal price and economic profit would be:

Hint: use Solver

		Price =49   ; Profit =   3715
		Price =44.5   ; Profit =   3057
		Price =40.7   ; Profit =   2505
		Price =45   ; Profit =   2205

Answer 1

Ans:

1) a 1% increase in price reduces quantity sold by .7%.

Explanation

The elasticity of demand measures the change in quantity demand for a good in response to the change in price. When the elasticity of demand is less than 1, the demand is inelastic. when the demand is inelastic, the change in the demand is less than the change in price.

If the demand elasticity for fine leather jackets is .7, it means that a 1% increase in price reduces quantity sold by .7%.

2) 542 units.

Explanation

MC = 1,100 - 2Q

at the profit maximizing output MC = MR

16 = 1,100 - 2Q

2Q = 1,100 - 16

Q = 1084 / 2

Q = 542

The firm will produce 542 units.