1. Use the following information to compute own-price, income, and cross-price elasticities of demand for propane heaters. Then answer the questions that follow the table.
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A. Is the demand for propane heaters elastic? Explain.
B. Are propane heaters luxuries or necessities? Explain.
C. Do the cross-price elasticity calculations verify that propane heaters and heat pumps are substitutes? Explain.
D. Are propane heaters normal or inferior goods? Explain.
E. If you produce propane heaters and you learn that economists forecast a 5% decline in Gross Domestic Product (GDP = a measure of the value of goods produced domestically), forecast the effect on the sales of your heaters. Show your work.
F. If you produce heat pumps and consider lowering your price to compete with propane heater sellers, how would you change your price to reduce propane heater sales by 9%? Show your work.
G. If you reduced the price of propane heaters
that you sell by 3%, what effect would this have on your inventory during
the next sales period? Assume the price before the change was $100.
2. When Proctor and Gamble (PG) introduced Pringles, shaped and fried dehydrated potatoes, the Potato Chip Institute contended that the FDA not allow PG to use the familiar term "potato chip." Rather they argued OG should call Pringles a "potato snack." Debate centered on lexicography going back to 1909 and a statistical survey. In the end, the FDA allowed PG to designate Pringles as a potato chip qualified with "made from dried potatoes" in type half the size. [Source: FDA's Definition of a Potato Chip Is: A Potato Chip, Wall Street Journal, November 25, 1975.] Explain how we can use cross-price elasticities to categorize products that belong in the same industry.
3. Suppose the income elasticity for casino gambling is 3, and its cross-price elasticity with the take from bingo is 2.
A. Suppose the Cherokee tribe decides to increase its take from bingo by 0.5%, because more people are playing bingo since the casino opened. Advise the people of the Cherokee about the consequences of this action.
B. Suppose the economists predict 2.5% growth in income over the coming year. As an economic development director in Cherokee you want to plan for the growth in Cherokee. Predict the change in business if the economists are correct. Answer this question independently of the information in Part A.