BUS 640 WEEK 2,
Marginal Rate of Substitution. What is the marginal rate of substitution (MRS) and why does it diminish as the consumer substitutes one product for another? Use examples to illustrate
Demand Elasticity. Please, read the article Hainer, R. (2010), provided in the required readings section for this week. The tobacco industry is a prime example to consider when talking about price elasticity of demand. While nicotine use can be addictive for many users, it is not addictive for the so-called “social smokers”.
What can we say about the price elasticity of demand for nicotine products (such as cigarettes, pipes, tobacco) in the group of nicotine addicted users, versus the group of “social smokers”? Can we say whose demand is likely to be more elastic? Why?
Week 2 Assignment
Consumer Demand Analysis and Estimation Applied Problems. Please, complete the following 3 applied problems in a Word or Excel document. Show all your calculations and explain your results. Submit your assignment in the drop box by using the Assignment Submission button.
1. Roshima is researching universities where she could study for her MBA degree. She is considering 3 major attributes that she considers important in her choice: ranking, price, and location. The value she places on each attribute, however, differs according to whether she remains full-time employed during her studies or quits her job and focuses on her degree. If she continues to work full time and takes all her courses online, then ranking is the most important attribute, twice as important as price and three times as important as location. If she quits her job and attends school full time, then location becomes three times as important as ranking and twice as important as price. She is considering two universities, respectively, the MBA program at Arizona State University (ASU) and the MBA program at University of Phoenix (UOP), both of which are priced at approximately $25,000. She has rated each attribute on a scale of 1 to 100 for each of the two schools.
a. Which of the two options should Roshima pursue of she wants to keep her full-time job? (Calculate the total expected utility from each school option and compare. Graph is not required)
b. Which of the two options should she pick if she plans to quit her job and dedicate to her studies?
c. Which option should she pursue if the probability of being laid off and unable to find a new job is estimated as 0.6? Show your calculations and explain your reasoning.
2. The demand function for Einstein Bagels has been estimated as follows:
– 40.73Px + 84.17Py + 0.55Ax
where Qx represents thousands of bagels; Px is the price per bagel; Py is the average price per bagel of other brands of bagels; and Ax represents thousands of dollars spent advertising Einstein Bagels. The current values of the independent variables are , , and
a. Calculate the price elasticity of demand for Einstein’s Bagels and explain what it means.
b. Derive an expression for the (inverse) demand curve for Einsteins’s Bagels.
c. If the cost of producing Einstein’s Bagels is constant at $0.10 per bagel, should they reduce price and thereafter, sell more bagels (assume profit maximization is the company’s goal)?
d. Should Einstein Bagels spend more on advertising?
3. The consulting firm that you work for has been hired by the US Government to provide an independent analysis of the demand-side effects of a contemplated increase in the tax on gasoline. They provide you with a data set relating to the period 1962-1987, which they say contains valuable historic lessons relating to the impact of volatile pump prices due to the supply restrictions imposed by the Organization of Petroleum Exporting Countries (OPEC), and the Corporate Average Fuel Economy (CAFE) regulations that required car manufacturers to increase the fuel efficiency of the cars they sold, while at the same time Real Disposable Income (RDI) per capita was rising, the number of passenger cars (NPC) almost doubled, and inflation was pushing up the Consumer Price Index (CPI).
Where: Qx is the gasoline consumption by passenger cars (in millions of gallons);
Px is the retail (pump) price of gasoline, in cents per gallon;
NPC is the number of registered passenger cars (in thousands);
MPG is the national average of miles travelled per gallon of gasoline;
RDI is Real Disposable Income per capita (in 1982 dollars); and
CPI is the Consumer Price Index (base year 1967).
This data illustrates some very interesting issues that were happening over that tumultuous period of our history. You will note that the pump price of gasoline more than doubled five-fold from the mid-1960s to the mid-1970s, and then doubled again in the early 1980s, due to the OPEC crises. The number of passenger cars climbed relentlessly with the love affair with ‘muscle cars’ despite the increasing pump price of gasoline, and indeed outpacing the increases in real disposable income per capita. The average MPG climbed only slowly as manufacturers increased the fuel efficiency of new cars and consumers slowly traded up to the more efficient cars new cars and retired their older vehicles. The changes in CPI show that the rate of inflation was generally much greater than the rate of increase of pump prices as the increased production and transportation costs due to rising fuel prices pervaded the entire economy, pushing up the prices of food and other household items that drive the CPI.
a. Reconcile the fact that while the quantity demanded of gasoline and pump prices both rise over this period generally, they are inversely related along a demand curve.
b. Conduct a multiple regression analysis to explain the quantity demanded of gasoline in terms of the other data provided. (Transpose this data into an Excel spread-sheet and use the Excel regression tool, if loaded, or alternatively download an ‘add-in’ regression program such as ‘Statpro’ to find the regression statistics).