Problems 3a Starting With The Estimated Demand Function For

Problems3a Starting With The Estimated Demand Function For Chevrole

Problems 3. (a) Starting with the estimated demand function for Chevrolets given in problem 2, assume that the average value of the independent variables changes to N=225 million, I=$12,000, P F =$10,000, P G =100cents, A=$250,000, and P I =0 (i.e., the incentives are phased out). Find the equation of the new demand curve for Chevrolets.

Revised 3(b): If P c is $10,000, find the value of Q c. The function from Problem 2 is: Qc= 100, P c + 2,000 N + 50 I + 30 P f - 1,000 P g + 3 A + 40,000 P i.

7. The total operating revenue of a public transportation authority is $100 million while its total operating cost is $120 million. The price of a ride is $1, and the price elasticity of demand for public transportation has been estimated to be -0.4. By law, the public transportation authority must take steps to eliminate its operating deficit. (a) Should the transportation authority increase or decrease the price per ride based on the price elasticity of demand? (b) Use equation (3-7). Suggestion: increase the price of a ride to be $1.50.

14. Suppose that a firm maximizes its total profits and has a marginal cost (MC) of $8 and the price elasticity of demand for the product is (-)3. Find the price at which the firm sells the product. Use equation (3-12), noting that to maximize profits, marginal revenue (MR) equals marginal cost (MC).

15. Integrating Problem. Starting with the data for Problem 6 and data on the price of a related commodity from 1986 to 2005, we estimated the regression for the quantity demanded (X) on the price of the commodity (P X), consumer income (Y), and the price of the related commodity (P Z). The regression results are: X = 121.86 - 9.50 P X + 0.04 Y - 2.21 P Z (t-values in parentheses). The R-squared (R2) is 0.9633, F-statistic = 167.33, Durbin-Watson (D-W) = 2. (b) Evaluate the regression in terms of the signs of the coefficients, their statistical significance (t-values), and the explanatory power (R2). The rule of thumb is that if |t| > 2, the coefficient is statistically significant. For PX, the t-value is 5.12, indicating its significance. (c) Determine whether X and Z are complements or substitutes based on the signs of their coefficients.

Paper For Above instruction

Understanding demand functions and their determinants is fundamental in microeconomics, especially for businesses and policymakers aiming to optimize decisions. The problems posed herein examine the implications of shifting variables, elasticity, and regression analysis in understanding consumer behavior and firm or government strategies.

Part 1: Changing Demand with Variable Shifts for Chevrolet

Starting with the original demand function for Chevrolets, which likely took the form Qc = 100 - Pc + 2000N + 50I + 30Pf - 1000Pg + 3A + 40000Pi, the first task is to analyze how the demand curve shifts when variables change to specified levels. Given N=225 million, I=$12,000, Pf=$10,000, Pg=100 cents, A=$250,000, and Pi=0 (indicating incentives are phased out), we substitute these values into the original demand function to derive the new demand equation.

Calculating: Qc,new = 100 - Pc + 2000(225) + 50(12000) + 30(10000) - 1000(100) + 3(250000) + 40000(0). This simplifies to: Qc,new = 100 - Pc + 450,000 + 600,000 + 300,000 - 100,000 + 750,000 + 0. Summing constants: 100 + 450,000 + 600,000 + 300,000 - 100,000 + 750,000 = 2,100,100. Therefore, the new demand function is Qc = 2,100,100 - Pc.

Part 2: Quantitative Analysis at Pc = $10,000

Using the derived demand function, if Pc = $10,000, then Qc = 2,100,100 - 10,000 = 2,090,100 units. This large demand indicates high market size or perhaps inert demand due to the scale of variables incorporated.

Part 3: Pricing Strategy and Demand Elasticity in Public Transportation

The public transportation scenario presents a typical case of economic regulation. The authority's current operating data shows a deficit, with revenue at $100 million and costs at $120 million. The demand elasticity of -0.4 indicates that demand is relatively inelastic, meaning that changes in price will produce less than proportional changes in quantity demanded.

Based on elasticity, the transportation authority faces the decision to increase or decrease prices to reduce deficits. Since elasticity is less than 1 in absolute value, raising prices can lead to total revenue increase, aiding in deficit reduction. Specifically, the elasticity of -0.4 suggests that a 1% increase in price would decrease quantity demanded by only 0.4%, thus increasing total revenue. Computationally, if the fare increases from $1 to $1.50, the expected decrease in demand will be less than proportional, but total revenue is likely to rise, as the price increase dominates the inelastic demand.

Part 4: Profit Maximization with Elastic Demand

For a firm with a marginal cost of $8 and an elasticity of demand of -3, the profit-maximizing price can be determined through the relationship: P = (E / (E+1)) * MC. Substituting E = -3 gives:

P = ( |-3| / (|-3| + 1) ) 8 = (3 / 4) 8 = $6. Since price cannot be below marginal cost for profit maximization, the firm would set P = $6. However, in reality, the negative elasticity implies that the firm could charge a higher price as demand is quite elastic, but the exact optimal price depends on other market factors and strategic considerations.

Part 5: Regression Analysis and Relationship between Variables

The regression analysis for the quantity demanded (X) as a function of the price of the commodity (PX), consumer income (Y), and the price of a related commodity (PZ) yields the equation: X = 121.86 - 9.50 PX + 0.04 Y - 2.21 PZ. This statistical model has a high R2 of 0.9633, indicating that approximately 96.33% of the variation in demand is explained by these variables.

The significant t-values, particularly for PX (5.12), show that the effects are statistically significant. The positive coefficient for income (Y) suggests that demand increases with income, which is consistent with normal goods. Conversely, the negative coefficient for PZ indicates that the commodities are substitutes; as price PZ rises, demand for the original commodity (X) falls.

Conclusion

These analyses underscore the importance of understanding how demand responds to varying market conditions, policy changes, and economic variables. Businesses can leverage demand elasticity and regression insights to optimize pricing strategies and forecast demand trends, while policymakers can use these tools to craft effective regulations that balance revenue generation with consumer welfare.

References

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