6921 Assignment 1_SP24

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Youngstown State University *

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6921

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Economics

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Feb 20, 2024

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Jonalyn Telesz OMBA 6921 – Industrial Economics WB Spring 2024 Assignment 1– 48 points - Due Friday, January 19, 2024 1. (12) Explain what would happen in the following markets given the following demand or supply shocks. In your answer clearly state what happened to supply or demand and what would happen to the equilibrium price and quantity as a result, other factors constant. A.) Market: Grapes. Shock: A major scientific study suggests that individuals who regularly consume grapes live on average five years longer and have a reduced risk of Alzheimer’s disease. A major study that reveals grapes have very beneficial health effects will cause the demand for grapes to increase. All other factors constant, the equilibrium price will shift to the right of the demand curve (increase) and the quantity produced will shift to the right (increase) as well. B.) Market: Electric vehicles. Shock: There is a significant decrease in electric battery production costs, which are used as an input in the production of electric vehicles. A significant decrease in electric battery production costs will increase the supply of electric vehicles (shift the supply curve to the right). Other factors constant, the increase in supply of electric vehicles will decrease the equilibrium price and increase the quantity. C.) Market: Used cars. Shock: There is a significant decrease in the price of new cars, which are a substitute of used cars. A significant decrease in the price of new cars will decrease the demand for used cars (shifting the demand curve to the left). Other factors constant, the quantity of used cars available will decrease and the equilibrium price will decrease. D.) Market: Orange juice. Shock: A citrus disease leads to a significant reduction in the U.S. orange crop. A decrease in supply for orange juice would occur after a citrus disease leads to a significant reduction in the U.S. orange crop (shift the supply curve to the left). Other factors constant, the quantity of oranges will decrease while the equilibrium price of oranges will increase. 2. (11) Suppose the estimated supply function for avocados is given by Q S  48  15 p – 10 p f , where p f is the price of fertilizer. The estimated demand for avocados is given by Q d  233  40 p + 5 p t , where p t is the price of tomatoes avocados per pound. ** assuming avocados and tomatoes are used interchangeably here & it was a typo not having the same food throughout**

a. (3) Solve for the initial equilibrium price and quantity of avocados if the price of fertilizer, p f , is equal to $0.35 per lb. and price of tomatoes avocados, p t , is equal to $0.80 per lb. 48+15p-10(0.35) = 233-40p+5(0.80) 48+15p-3.5 = 233-40p+4 44.5+15p=237-40p 55p/55=192.5/55 p=$3.50 Q d =233-40(3.50)+5(0.80) Q d =233-140+4 Q d = 237-140=97 avocados b. (3) Solve for the new equilibrium price and quantity of avocados if the price of fertilizer, p f , increases to $0.90 per lb. and price of tomatoes avocados, p t , remains $0.80 per lb. 48+15p-10(0.90) = 233-40p+5(0.80) 48+15p-9 = 233-40p+4 39+15p=237-40p 55p/55=198/55 p=$3.60 Q d =233-40(3.60)+5(0.80) Q d =233-144+4 Q d = 237-144= 93 avocados c. (3) Use these equilibrium values from parts a. and b. to solve for the price elasticity of demand for avocados. (%ΔQ d ) = ((93-97)/97) *100% = -4.12% (%Δp) = ((3.60-3.50)/3.50) *100% = 2.86% Ed = |(%ΔQ d ) / (%Δp)| = |-1.44| = 1.44 d. (2) Given your calculations, are avocados elastic, inelastic or unit-elastic? Have total expenditures on avocados increased, decreased, or not changed as a result of the change in the price of fertilizer? The price elasticity of demand is greater than 1 in absolute value, so avocados are elastic. Total expenditures on avocados have decreased as a result of the change in the price of fertilizer because the percentage change in quantity demanded is greater than the percentage change in price. Higher fertilizer costs could lead to higher production costs which can decreases the supply of avocados and lowers the expenditure on avocados.

3. (8) A short piece from The Economist noted that “A doctor of general medicine in New York typically earns 64% less than a peer in Alabama.” This is despite the fact that there is a significantly higher demand for general medicine in New York compared to Alabama. Use a market supply and demand diagram to depict this situation - that New York general medicine doctors earn less than their peers in Alabama, despite the higher demand - then briefly explain why this is the case. Note: The depiction can be completed with one diagram that has separate supply and demand curves for both Alabama and New York general medicine doctors. The demand for doctors in Ney York is higher than the demand for doctors in Alabama. However, New York has a larger quantity of doctors than Alabama has, thus driving the price of doctors in New York lower than the price of doctors in Alabama.

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4. (9) Read the following article on price elasticity from Harvard Business Review : https://goo.gl/gXSM8y (the pdf is in the Assignment folder in Blackboard) then use it to answer the following questions: a.) (3) Do companies prefer to sell products that are more elastic or more inelastic? Briefly explain. Companies prefer to sell products that are more inelastic because they are able to maximize profit in this scenario. Regardless of a change in price, the demand will not be affected (or affected very little). b.) (3) What does the article describe as the best way to calculate price elasticity, and what other information is relevant to inform marketing efforts? The article describes the best way to calculate price elasticity as: Price elasticity of demand = Percentage change in quantity demanded / percentage change in price. Price elasticity is also affected by other factors. Your competition, type of product, health of the economy, and the income of your buyers needs to be considered in marketing efforts. Price sensitivity is another form of information that can be relevant in marketing efforts, however price sensitivity is qualitative, where elasticity is quantitative. c.) (3) Suppose a marketing company runs a market test and finds that the price elasticity equals -1.6. Would a company be more inclined to increase or to decrease price given this elasticity? Explain what would happen to quantity purchased (by how much it would change) and total revenue (would it increase, decrease, or stay the same) if the company were to decrease price by 10%. The absolute value of -1.6 is greater than 1, so the product is elastic in price. The company would be more inclined to decrease the price given this elasticity because a decrease in price would increase the quantity demanded since the product is price elastic. If the company were to decrease price by 10%, -1.6 = % change quantity purchased / -10% % change in quantity purchases = (-1.6)(-10%) = 16% Quantity purchased will increase by 16%. Total Revenue = price x quantity = $0.90*116= $104.4 (theoretical numbers) Total Revenue = price x quantity = $1 *100 = $100 (theoretical numbers) The total revenue would increase if the company were to decrease price by 10% because the quantity sold would increase by 16%.

5. (8) A few years ago, YSU decreased the (advertised) tuition rate for its MBA program from $21,000/student to $13,000/student. Within two years, the number of students enrolled in the program increased from 150 to 400. a.) (3) Use these values to calculate the price elasticity of demand for YSU’s MBA program. Using the midpoint formula: Ed = | ((Q2-Q1)/((Q2+Q1)/2)) / ((P2-P1)/((P2+P1)/2)) | Ed = | ((400-150)/((400+150)/2)) / (13000-21000)/((13000+21000)/2)) | Ed = | 0.9090 / -0.4705 | Ed = |-1.93| = 1.93 Ed > 1, elastic b.) (2) What was YSU’s revenue from the MBA program before and after this price change? Total Revenue = price x quantity Total Revenue Before = $21,000 * 150 = $3,150,000 Total Revenue After = $13,000 * 400 = $5,200,000 c.) (3) What else needs to be considered to determine whether this price change had a positive or negative impact on YSU’s budget (or ‘bottom line’)? Under what condition would this price change have a negative impact on YSU’s budget? The supply price of elasticity will need to be considered to determine whether this price change had a positive or negative impact on YSU’s budget. A condition in which this price change would have a negative impact on YSU’s budget is if the supply of seats is price elastic, meaning a decrease in tuition would decrease the quantity of students YSU could support to enroll, thus decreasing revenue.

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