Suppose Qxd = 10,000 − 2 Px + 3 Py − 4.

5M, where Px = $100, Py = $50, and M =

$2,000. How much of good X is consumed?
950 units

Suppose the demand function for a firm’s product is given by ln QXd = 7 - 1.5 ln PX +
2 ln PY - 0.5 ln M + ln A where:

Px = $15
Py = $6
M = $40,000, and
A = $350

a. Determine the own price elasticity of demand, and state whether demand is elastic,
inelastic, or unitary elastic.

Own price elasticity:  -1.5  -1.5 Correct 

Demand is:  elastic   Correct

b. Determine the cross-price elasticity of demand between good X and good Y, and

state whether these two goods are substitutes or complements.

Cross-price elasticity:  2  2 Correct 

These two goods are:  substitutes   Correct

c. Determine the income elasticity of demand, and state whether good X is a normal or
inferior good.

Income elasticity:  -0.5  -0.5 Correct 

Good X is:  inferior   Correct

d. Determine the own advertising elasticity of demand.

1  1 Correct 
Explanation
a. The own price elasticity of demand is simply the coefficient of ln Px, which is – 1.5. Since this number is
more than one in absolute value, demand is elastic.

b. The cross-price elasticity of demand is simply the coefficient of ln Py, which is 2. Since this number is
positive, goods X and Y are substitutes.

c. The income elasticity of demand is simply the coefficient of ln M, which is -0.5. Since this number is
negative, good X is an inferior good.

d. The advertising elasticity of demand is simply the coefficient of ln A, which is 1.

Suppose the own price elasticity of demand for good X is -2, its income elasticity is 3,
its advertising elasticity is 2, and the cross-price elasticity of demand between it and
good Y is -4. Determine how much the consumption of this good will change if:

Instructions: Enter your responses as percentages. Include a minus (-) sign for all
negative answers.

a. The price of good X decreases by 6 percent.

12  12 Correct percent

b. The price of good Y increases by 8 percent.

-32  -32 Correct percent

c. Advertising decreases by 4 percent.

-8  -8 Correct percent

d. Income increases by 5 percent.

15  15 Correct percent
Explanation
a. Use the own price elasticity of demand formula to write %ΔQXd / (-6) = -2. Solving, we see that the demand
for good X will change by 12 percent if the price of good X decreases by 6 percent.

b. Use the cross-price elasticity of demand formula to write %ΔQXd / (8) = -4.  Solving, we see that the demand
for X will change by -32 percent if the price of good Y increases by 8 percent.

c. Use the formula for the advertising elasticity of demand to write %ΔQXd / (-4) = 2. Solving, we see that the
demand for good X will change by -8 percent if advertising decreases by 4 percent.

d. Use the income elasticity of demand formula to write %ΔQXd / (5) = 3.  Solving, we see that the demand for
good X will change by 15 percent if income increases by 5 percent.

You are the manager of a firm that receives revenues of $40,000 per year from
product X and $90,000 per year from product Y. The own price elasticity of demand
for product X is -1.5, and the cross-price elasticity of demand between
product Y and X is -1.8.

How much will your firm's total revenues (revenues from both products) change if
you increase the price of good X by 2 percent?

Instructions: Enter your response rounded to the nearest dollar. Use a negative sign
(-) if applicable.

$  -3,640  -3,640 Correct

Explanation
Using the change in revenue formula for two products, ΔR = [$40,000(1 - 1.5) + $90,000(-1.8)](0.02) = -
$3,640. Thus, a 2 percent increase in the price of good X would cause revenues from both goods to decrease by
$3,640.

A quant jock from your firm used a linear demand specification to estimate the
demand for its product and sent you a hard copy of the results. Unfortunately, some
entries are missing because the toner was low in her printer. Use the information
presented below to find the missing values. Then, answer the accompanying
questions.

Instructions: Do not round intermediate calculations. Round only your final

calculation. Enter your final responses rounded to two decimal places. Include a
minus (-) sign for all negative answers.
 
SUMMARY
OUTPUT            
             
Regression
Statistics            
Multiple R 0.38          
0.14  0.
14
R Square Correct          
0.13  0.
Adjusted R 13
Square Correct          
Standard
Error 20.77          
Observatio
ns 150          
            
Analysis of            
 Variance
Degrees of Mean Significan
  Freedom Sum of Squares Square F ce F  
10,398.87  10,398 5199.4 12.0
Regression 2 .87 Correct 3 5 0.00  
Residual 147 63,408.62 431.35      
149  14
9
Total Correct 73,807.49        
             
Coefficient Lower Upper
  s Standard Error t Stat P-value 95% 95%
15.33  15.33 28.5 89.1
Intercept 58.87 Correct 3.84 0.00 9 5
-1.93  -
1.93 -
Price of X -1.64 0.85 Correct 0.06 3.31 0.04
1.11  1.
Income 11
(‘000s) Correct 0.24 4.64 0.00 0.63 1.56

a. Based on these estimates, write an equation that summarizes the demand for the
firm’s product.

Instructions: Enter your responses rounded to two decimal places. Do not round

intermediate calculations. Round only your final calculation.

QXd =  58.87  58.87 Correct -  1.64  1.64 Correct PX +  1.11  1.11 Correct M

b. Which regression coefficients are statistically significant at the 5 percent

level?  Intercept and Income  Correct
Explanation
The table below contains the answers to the regression output.

SUMMARY
OUTPUT            
             
Regression
Statistics            
 Multiple R 0.38          
R Square 0.14          
Adjusted R
Square 0.13          
Standard 20.7
Error 7          
Observatio
ns 150          
            
Analysis of
Variance            
Degrees of Sum of Significan
  Freedom Squares Mean Square F ce F  
5199.4 12.0
Regression 2 10,398.87 3 5 0.00  
63,408.
Residual 147 62 431.35      
73,807.
Total 149 49        
             
Standard Lower Upper
  Coefficients Error t Stat P-value 95% 95%
58.8 28.5 89.1
Intercept 7 15.33 3.84 0.00 9 5
- -
Price of X 1.64 0.85 -1.93 0.06 3.31 0.04
Income
(‘000s) 1.11 0.24 4.64 0.00 0.63 1.56
d
a. Using the coefficient estimates for the Intercept, price of X and Income, we have Q  = 58.87 - 1.64PX +
X
1.11M.

b. Only the coefficients for the Intercept and Income are statistically significant at the 5 percent level or better.

The demand function for good X is QXd = a + bPX + cM + e, where Px is the price of
good X and M is income. Least squares regression reveals that:

      

      

      
      

      

The R-squared is 0.35.

a. Compute the t-statistic for each of the estimated coefficients.

Instruction: Enter your responses rounded to the nearest two decimal places. If

entering a negative number, be sure to use a negative sign (-).

  =  1.55  1.55 Correct 

  =  -5.22  -5.22 Correct 

  =  1.64  1.64 Correct 

b. Determine which (if any) of the estimated coefficients are statistically different
from zero.


The coefficient estimates for a and c are statistically different from zero.

The coefficient estimates for b and c are statistically different from zero.

The coefficient estimate for c is statistically different from zero.

The coefficient estimate for b is statistically different from zero. 

c. What does the R-square in this regression indicate?

 
65 percent of the variability in the dependent variable is explained by price and
income.

35 percent of the variability in income is explained by price.

35 percent of the variability in the dependent variable is explained by price and
income. 

35 percent of the variability in price is explained by income.
Explanation
a. The t statistics are as follows: 

      

      

  

b. Since   

  the coefficient estimate, â, is not statistically different from zero. Since 

 , the coefficient estimate, 

 , is statistically different from zero. Finally, since 

  the coefficient estimate, 

 , is not statistically different from zero.

c. The R-square tells us that 35 percent of the variability in the dependent variable is explained by price and
income.

Revenue at a major smartphone manufacturer was $2.4 billion for the nine months
ending March 2, up 77 percent over revenues for the same period last year.
Management attributes the increase in revenues to a 103 percent increase in
shipments, despite a 33 percent drop in the average blended selling price of its line of
phones.
Given this information, is it surprising that the company’s revenue increased when it
decreased the average selling price of its phones?


No. Own price elasticity is -3.12, which means demand is elastic and a decrease
in price will raise revenues. 

Yes. Own price elasticity is -0.32, which means demand is inelastic and a
decrease in price will decrease revenues.

Yes. Own price elasticity is -3.12, which means demand is elastic and a
decrease in price will decrease revenues.

No. Own price elasticity is -0.32, which means demand is elastic and a decrease
in price will raise revenues.
Explanation
The result is not surprising. Given the available information, the own price elasticity of demand for the
major smartphone manufacturer is EQ,P = 103 / (-33) = -3.12. Since this number is greater than one in absolute
value, demand is elastic. By the total revenue test, this means that a reduction in price will increase revenues.

Suppose the demand function for a firm’s product is given by ln QXd = 7 - 1.5 ln PX +
2 ln PY - 0.5 ln M + ln A where:

Px = $15
Py = $6
M = $40,000, and
A = $350

a. Determine the own price elasticity of demand, and state whether demand is elastic,
inelastic, or unitary elastic.

Own price elasticity:  -1.5  -1.5 Correct 

Demand is:  elastic   Correct

b. Determine the cross-price elasticity of demand between good X and good Y, and

state whether these two goods are substitutes or complements.
Cross-price elasticity:  2  2 Correct 

These two goods are:  substitutes   Correct

c. Determine the income elasticity of demand, and state whether good X is a normal or
inferior good.

Income elasticity:  -0.5  -0.5 Correct 

Good X is:  inferior   Correct

d. Determine the own advertising elasticity of demand.

1  1 Correct 
Explanation
a. The own price elasticity of demand is simply the coefficient of ln Px, which is – 1.5. Since this number is
more than one in absolute value, demand is elastic.

b. The cross-price elasticity of demand is simply the coefficient of ln Py, which is 2. Since this number is
positive, goods X and Y are substitutes.

c. The income elasticity of demand is simply the coefficient of ln M, which is -0.5. Since this number is
negative, good X is an inferior good.

d. The advertising elasticity of demand is simply the coefficient of ln A, which is 1.

Suppose the own price elasticity of demand for good X is -3, its income elasticity is
-2, its advertising elasticity is 4, and the cross-price elasticity of demand between it
and good Y is -2. Determine how much the consumption of this good will change if:

Instructions: Enter your responses as percentages. Include a minus (-) sign for all
negative answers.

a. The price of good X decreases by 7 percent.

21  21 Correct percent

b. The price of good Y increases by 10 percent.

-20  -20 Correct percent

c. Advertising decreases by 2 percent.

-8  -8 Correct percent

d. Income increases by 4 percent.

-8  -8 Correct percent
Explanation
a. Use the own price elasticity of demand formula to write %ΔQXd / (-7) = -3. Solving, we see that the demand
for good X will change by 21 percent if the price of good X decreases by 7 percent.

b. Use the cross-price elasticity of demand formula to write %ΔQXd / (10) = -2.  Solving, we see that the
demand for X will change by -20 percent if the price of good Y increases by 10 percent.

c. Use the formula for the advertising elasticity of demand to write %ΔQXd / (-2) = 4. Solving, we see that the
demand for good X will change by -8 percent if advertising decreases by 2 percent.

d. Use the income elasticity of demand formula to write %ΔQXd / (4) = -2.  Solving, we see that the demand for
good X will change by -8 percent if income increases by 4 percent.

Revenue at a major smartphone manufacturer was $2.5 billion for the nine months
ending March 2, up 80 percent over revenues for the same period last year.
Management attributes the increase in revenues to a 142 percent increase in
shipments, despite a 22 percent drop in the average blended selling price of its line of
phones.

Given this information, is it surprising that the company’s revenue increased when it
decreased the average selling price of its phones?


Yes. Own price elasticity is -0.15, which means demand is inelastic and a
decrease in price will decrease revenues.

No. Own price elasticity is -0.15, which means demand is elastic and a decrease
in price will raise revenues.

Yes. Own price elasticity is -6.45, which means demand is elastic and a
decrease in price will decrease revenues.

No. Own price elasticity is -6.45, which means demand is elastic and a decrease
in price will raise revenues. 
Explanation
The result is not surprising. Given the available information, the own price elasticity of demand for the
major smartphone manufacturer is EQ,P = 142 / (-22) = -6.45. Since this number is greater than one in absolute
value, demand is elastic. By the total revenue test, this means that a reduction in price will increase revenues.