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Economics: Demand and Supply Curve

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Chapter 7. Problems 3
Suppose that ex is the exchange rate between the U.S. dollar and the Chinese yuan in that ex indicates the number of yuan that can be purchased with one dollar. The demand for dollars, denoted, D$, is given by the equation D$= 2,800 - 200ex. The supply of dollars, denoted, S$, is given by the equation S$ = 400 + 100ex.
(a) Calculate the demand for dollars and supply of dollars at exchange rates between 0 and 12 increments of one.
(b) Graph the demand for dollars and supply of dollars against the exchange rate. What is the value of the equilibrium exchange rate?
(c) Suppose the demand for dollars increases by 300 billion at each exchange rate. Explain if the increase in demand results from a large purchase by the Chinese of a new American-made airplane or a large purchase by Americans of new lower priced Chinese-made high definition televisions. Calculate the new demand for dollars at each exchange rate and graph the new demand curve. What is the new equilibrium exchange rate, given the original supply of dollars?
(d) Suppose the supply of dollars increases by 600 billion at each exchange rate. Explain if the increase in supply results from a large purchase by the Chinese of a new American-made airplane or a large purchase by Americans of new lower priced Chinese-made high definition televisions. Calculate the new demand for dollars at each exchange rate and graph the new supply curve. What is the new equilibrium exchange rate, given the original demand for dollars?

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Solution Summary

The problem set deals with issues under Economics: demand and supply curve estimation.

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1. Xerox Corporation develops, manufacturers, and services document equipment and software solutions worldwide. Assume the company offered $75 off the $1,475 regular price on the Phaser 6360, a durable high-speed color copier, and Internet sales jumped from 700 units to 800 units per week.

A. Estimate the color copier demand curve, assuming that it is linear.

B. If marginal costs per unit are $650, calculate the profit-maximizing price-output combination.

2. The demand curve for a product is given by Qx = 1,000 - 2(Px) + .02(Pz), where Pz = $400.

A. What is the own price elasticity of demand when Px = $154? Is demand elastic or inelastic at this price? What would happen to the firm's revenue if it decided to charge a price below $154?

B. What is the own price elasticity of demand when Px = $354? Is demand elastic or inelastic at this price? What would happen to the firm's revenue if it decided to charge a price above $354?

C. What is the cross-price elasticity of demand between good X and good Z when Px = $154? Are goods X and Z substitutes or complements?

3. Suppose the own price elasticity of demand for good X is -2, its income elasticity is 3, its advertising elasticity is 4, and the cross-price elasticity of demand between it and good Y is -6. Determine how much consumption of this good will change if:

A. The price of good X increases by 5 percent.

B. The price of good Y increases by 10 percent.

C. Advertising decreases by 2 percent.

D. Income falls by 3 percent.

4. For the first time in two years, Big G raised cereal prices by 2 percent. If the volume of cereal sold by Big G dropped by 3 percent, what can you infer about the own price elasticity of demand for Big G cereal?

5. This year was prosperous for Starbucks Coffee. Revenues increased 9 percent. Suppose management attributes this revenue growth to a 5 percent increase in the quantity of coffee sold. If Starbucks' marketing department estimates the income elasticity of demand for its coffee to be 1.75, how will looming fears of a recession (expected to decrease consumers' incomes by 4 percent) impact the quantity of coffee ]Starbucks expects to sell?

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