# price-elastic demand curve

Soft Drink Bottling Data

Total Product Labor Capital

245 250 30

240 270 34

300 300 44

320 320 50

390 350 70

440 400 76

520 440 84

520 440 86

580 450 104

600 460 110

600 460 116

log(TP) log(L) log(K)

2.389166084 2.397940009 1.477121255

2.380211242 2.431363764 1.531478917

2.477121255 2.477121255 1.643452676

2.505149978 2.505149978 1.698970004

2.591064607 2.544068044 1.84509804

2.643452676 2.602059991 1.880813592

2.716003344 2.643452676 1.924279286

2.716003344 2.643452676 1.934498451

2.763427994 2.653212514 2.017033339

2.77815125 2.662757832 2.041392685

2.77815125 2.662757832 2.064457989

#### Solution Preview

Please see the attached file.

1. If a company faces a price-elastic demand curve, it can increase the revenue by decreasing the price. (Points: 5)

True

False

Answer: True, when the demand is in price elastic range, the decrease in price is more than compensated by the increase in demand and hence the total revenues are higher.

2. F-test measures the statistical significance of each explanatory variable. (Points: 5)

True

False

Answer: False. F test measures the statistical significance of overall regression model. The significance of each explanatory variables is checked using t-test.

3. A lawyer whose annual income used to be $150,000 quit the job and opened a restaurant. The total cost of operating the restaurant business is $100,000, and the annual revenue is $250,000. What is the lawyer's economic cost of running the restaurant business? (Points: 5)

$100,000

$150,000

$250,000

$300,000

$50,000

Answer:

Economic cost = Operating cost of restaurant + The opportunity cost of the Lawyers time

=100,000+150,000

=$250,000

4. Total revenue function is

TR = -Q(Q-10)

and total cost function is

TC = 2Q.

What is the profit-maximizing Q?

(Points: 5)

2

4

6

10

12

ANSWER:

At price maximizing Q, MC=MR

MR=dTR/dQ= -2Q+10

MC=dTC/dQ=2

So we have

-2Q+10=2

Solving we get Q=4

5. What was NOT the effect of the "voluntary export restraint" on Japanese cars in 1981? (Points: 5)

Answer: Japan started to export high-end automobiles to U.S.

Domestic car prices jumped up.

U.S. consumers had to pay more to purchase cars.

Japanese auto manufacturers suffered a significant decrease in revenue.

US car auto manufacturers enjoyed higher profits.

6. Click demand data and using the data, estimate the following regression equation:

P = 14254 - ( ) Q

Note: Be careful. The equation shows that the independent variable is Q and the dependent variable is P.

Note: Do not round the estimate. Just write the whole number. Be careful with the sign.

(Points: 10)

The answer is 125.63

See the regression output if required.

SUMMARY ...

#### Solution Summary

Examine price-elastic demand curve.