Question 1. Steam Cleanin Inc. offers professional carpet cleaning to homeowners in Huntsville Alabama. The company is the low-cost provider in this market with fixed costs of $168,750 [er year plus variable costs of $10.00 per room of carpet cleaning. Annual demand and marginal revenue for the company are:
P = $40 - $0.001Q
MR = dTR/dQ = $40 – $0.002Q
A. Calculate the profit-maximizing activity level.
B. Calculate the company’s optimal profit and return-on-sales levels.
Question 2. Florida Orange Juice is a product of Florida’s Orange Growers’ Association. Demand and supply of the product are both highly sensitive to changes in the weather. During hot summer months, demand for orange juice and other beverages grow rapidly. On the other have, hot dry weather has an adverse effect on supply by reducing the size of the orange crop.
Demand and supply functions for Florida orange juice are as follows:
Qd = 4,500,000 – 1,200,000P + 2,000,000Ps + 1,500Y + 100,000T
Qs = 8,000,000 + 2,400,00P – 500,000PI – 80,000PK – 120,000T
Where P is the average price of Florida ($ per case) Ps is the average retail price of canned soda ($ per case), Y is income (GNP in $billions), T is the average daily high temperature (degrees), PI is the average price of unskilled labor ($ per hour), and PK is the average cost of capital (in percent).
A. When quantity is expressed as a function or price, what are the Florida demand and supply curves if p = $11, Ps = $5, Y = $12,000 billion, T = 75 degrees, and PI = $6, and PK = 12.5%.
B. Calculate the surplus or shortage of Florida orange juice when P = $5, $10, and $15.
C. Calculate the market equilibrium price-output combination.
Question 3. Interior Landscapes, Inc. is a leading distributor of potted plants and their maintenance for business environments. Demand for Interior’s services is tied to the overall pace of business activity and therefore is sensitive to changes in national income. The greenery service sector is highly competitive, so Interior’s demand is also very price-sensitive.
During the past year, Interior’s sold 10,500 potted plants at an average wholesale price of $25 per plant. This year, per capita income is expected to fall from $34,200 to $30,600 as the nation enters a steep recession. Without any price change, Interior’s expects current-year sales to fall to 7,500 potted plants.
A. Calculate the implied are income elasticity of demand.
B. Given the projected fall in income, the sales manager believes that current volume of 10,500 plants could only be maintained with a price cut or $5 per unit. On this basis, calculate the implied are price elasticity of demand.
C. Holding all else equal, would a further increase in price result in a higher or lower total revenue?
Question 4. The Real Kool Toys Company manufactures and sells educational toys. An empirical demand function for one of the firm’s products has been estimated over the last 21 quarters using regression analysis. The estimated demand function is:
Qy = -8,000 – 5,000Py + 192A + 3001 + 2,000Px
{6,000) (1,000) (120) (200) (800)
R2 = 91%
SEE = 1,000
Here Qy is quantity (measured in units) of Product Y demanded in the current period, A is hundreds of dollars of advertising ($00), I is thousands of dollars of disposable income per captia ($000), and Px is the price ($) of another toy manufactured by a competitor, ABC Toys. The terms in parentheses are the standard errors of the coefficients.
A. How would you characterize the ability of the empirical demand function to explain demand for product Y?
B. Currently, Py is $8, advertising is $25,000, disposable income per capita is $20,000 and Px is $7. What are expected sales of Y in this period, and what range of sales would you specify for the current period if you wanted to establish a 99% confidence interval?
C. What is the demand curve currently facing Real Kool for Product Y? (Note: Be careful to properly account for the units in which advertising and income appear in the estimated demand function.)
D. What is the point price elasticity of demand for Y at the current price?
E. Given the current price elasticity of demand would a price reduction increase Real Kool profits? Explain.
F. What demand curve would Real Kool face Product Y if it raised advertising expenditures to $37,500.
Question 5. A correspondent informs us that on Armistice Day, (November 11, 1928) he had lived as long in the twentieth century as he had lived in the nineteenth. What was the day of his birth and how old was he, assuming he was born at midday?