The document contains examples of calculating price elasticity of demand, income elasticity of demand, cross price elasticity of demand, and other elasticities from demand equations and consumption data. Price elasticity is computed to be -0.72 for sundaes, -1.5 for a firm's product, and -0.15 for subway rides. Income elasticity is calculated as 0.461 for haddock. Advertising elasticity is determined to be 1.05 and 0.6 in separate examples. Point elasticities and other interpretations are derived from logarithmic and exponential demand functions estimated for various goods.

1. Chapter 3:
3. The Olde Yogurt Factory has reduced the price of its popular Mmmm Sundae from $2.25 to
$1.75. As a result, the firm’s daily sales of these sundaes have increased from 1500/day to
1800/day. Compute the arc price elasticity of demand over this price and consumption
quantity range.
- price elasticity= (dq/dp * p/q)
= 1800-1500)/ (1.75-2.25) *( 2.25+1.75)/1500+1800)
= 300/-0.5 * 4/3300
= -0.72
The price elasticity of demand is -0.72 and consumption varies from 1500/day to 1800/day and its
range is 300/day (1800-1500)
4. The subway fare in your town has just been increased from a current level of 50 cents to
$1.00 per ride. As a result, the transit authority notes a decline in ridership of 30 percent.
a. Compute the price elasticity of demand for subway rides.
- Ed = change Q/change P = 0.3/2 = 0.15
So the demand for subway rides is inelastic
b. If the transit authority reduces the fare back to 50 cents, what impact would you expect on
the ridership? Why?
- If the transit authority reduces the fare back to 50 cents, there will be an increase in ridership of 30
percent, so the will not be the significant change of demand.
7. In an attempt to increase revenues and profits, a firm is considering a 4 percent increase in
price and an 11 percent increase in advertising. If the price elasticity of demand is -1.5 and the
advertising elasticity of demand is +0.6, would you expect an increase or decrease in total
revenues?
4*-1.5
= - 6%
and
= 0.6*11
= 6.6%

2. Chapter 4
5. General Cereal is using a regression model to estimate the demand for Tweeties Sweeties,
whistle-shaped, sugar-coated breakfast cereal for children. The following (multiplicative
exponential) demand function is being used. 6,280
a. Determine the point price elasticity of demand for Tweetie Sweeties.
= -2.15
b. Determine the advertising elasticity of demand.
= 1.05
c. What interpretation would you give to the exponent of N?
6. The demand for haddock has been estimated as
log Q = a+b log P + c log I + d log P m
a. Determine the price elasticity of demand.
= -2.174
b. Determine the income elasticity of demand.
= 0.461
c. Determine the cross price elasticity of demand.
= 1.909
d. How would you characterize the demand for haddock?
Haddock is in demand
e. Suppose disposable income is expected to increase by 5 percent next year. Assuming all
other factors remains constant, forecast the percentage change in the quantity of haddock
demanded next year.
- 1.975%
7. An estimate of the demand function for household furniture produced the following results:
F = 0.0036Y1.08R0.16P−0.48 r2 = 0.996
a. Determine the point price and income elasticities for household furniture.

3. b. What interpretation would you give to exponent for R? Why do you suppose R was included
in the equation as a variable?
c. If you were a supplier to the furniture manufacturer, would you have preferred to see the
analysis performed in physical sales units rather than dollars of revenue? How would this
change alter the interpretation of price coefficient, presently estimated as -0.48?
-