1. (5 points) Suppose demand is given by Q
x
d
= 50 − 4Px
+ 6Py
+ Ax,
where Px
= $4, Py
= $2, and Ax
= $50.
(a) What is the quantity demanded of good x? Please show your calculations.
(b) What is the own price elasticity of demand (point elasticity) when PX
= $4? Is demand elastic
or inelastic at this price? Please explain.
(c) What is the cross price elasticity of demand between good X and good Y when PX
= $4 (point
elasticity) ? Are goods X and Y substitutes or complements? Please explain.
2.(5 points) Suppose the own price elasticity of demand for good X is −0.25, and the quantity of good X increases by 5 percent. What would you expect to happen to the total expenditures on good X? Please explain and show any calculations.
3.(5 points) When the price of butter was "low," consumers spent $5 billion annually on its consumption. When the price doubled, consumer expenditures increased to $7 billion. Recently you read that this means that the demand curve for butter is upward sloping (i.e., price and quantity demanded are directly related, as price increases, quantity demanded also increases). Do you agree? Explain.
4. (5 points) Revenue at a major smart phone manufacturer was $2.3 billion for the nine months ending March 2, up 85 percent over revenues for the same period last year. Management attributes the increase in revenues to a 108 percent increase in shipments (quantity demanded), despite a 21 percent drop in the average blended selling price of its line of phones.
Given this information, please calculate the price elasticity of demand and then explain whether it is surprising that the company’s revenue increased when it decreased the average selling price of its phones? Please explain.
5. (10 points) The data file
Homework3.Question5.xlsx, has data from the United States. The variables included in the data set are
Real GDP Real GDP of the United States
Inflation Annual Inflation in the United States
Housing Price Average annual Housing Prices in the United States
Interest Rate Annual Market Interest rate
UNRATE Unemployment rate
LFPR Labor Force Participation rate – the proportion of the adult population that
is a member of the labor force, the labor force is the sum of all employed and unemployed
GovtEduc Government expenditure in billions of dollars on education
(a) Run a regression of Real GDP on Inflation, Housing Price, Interest Rate, Unrate, LFPR, and
GovtEduc. Please copy and paste your EXCEL regression output (do not upload your EXCEL file with the results).
(b) What sign would you expect for each of the coefficients (positive or negative)? Please
explain.
(c) Discuss the “Fit” of the regression.
(d) Which coefficients of independent variables in the regression are significant? Please explain.
(e) Which of the variables given above can be used to explain the Real GDP in the United
States? Please explain.
(f) If you had to choose one variable as a policy maker to concentrate on in order to increase
Real GDP in the United States, based on the above regression results, which variable would you choose? Please explain.