Undergraduate Programs: Business Administration and Economics 2012-2013
P rofessor :
F ernando S. Machado ( email@example.com )
João Pereira de Almeida, Eduardo Catroga, João Coelho, Marta Francisco, Mário Meira, Francisca Rebelo, João Brogueira de Sousa.
Basic Analysis of Markets
How important is it for a firm to know that the own price elasticity of the demand is unitary?
Admit that the market demand faced by a company is given by:
q D( p, m, a) 20 p 1.5 m 0.5 a 0.1
where q is the quantity demanded of the good, p is the price, m is an indicator of consumer income and a, the expenditure in advertising.
a) Compute and interpret the elasticity of demand in order to each one of the righthand variables. b) What is the effect on demand if the price of the good increases by 3%? c) It was estimated that consumer income will drop by 3% next year. How much must the price also vary so for the quantity demanded next year to be equal to this year’s? (assume that the expenditure in advertising will not change)
For each of the following pairs of goods, identity the one that you expect to have a higher price elasticity of demand:
a) Rolls Royce and Ford Escorts
b) Coca-Cola and Cola Continente
c) O Crime and O Diário Económico
Suppose that when a firm lowers the price it charges, its revenue increases. Is the demand elasticity positive or negative? Is demand elastic or inelastic? Why?
The market demand for potatoes is given by:
q P 300 0.1m 100 p P 80 p R
where q P is the quantity demanded, m is average income, p P is the price of potatoes and p R is the price of rice.
a) Are potatoes a normal or an inferior good?
b) Is rice a substitute or complement to potatoes?
c) Suppose that m 8000 and p R 30 . What are the demand elasticities if p P 20 ? What if p P 22 ? Why are these values different?