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).
