Part A: Conceptual questions
1. Suppose you own a pet shop. Your sales are decent but a marketing consultant tells you that you could increase your sales and be able to charge a higher price if you spend some money on local television ads. If the consultant is right, will advertising lead to an increase in quantity demanded? Or a shift in the demand curve? Both? Neither? Explain your answer and make sure to cite at least one of the required readings in your answer.
2. You are the owner of a furniture factory. You normally produce 100 pieces of furniture a day because that is how much you can produce given the amount of qualified workers in your town and the amount of reasonably priced wood that you can purchase locally. Then one day you get an order from a large national retail chain who wants to purchase 200 pieces of furniture a day from you. You are hesitant, as you will have to pay higher wages to get some qualified workers to move to your town. You also will need to pay higher prices for wood because you will no longer be able to rely solely on local suppliers and will have to spend more on shipping wood from other towns. But you drive a hard bargain and the retail chain agrees to pay one and a half times your normal price. Does this situation describe a change in quantity supplied? A shift in the supply curve? Both? Neither? Explain your answer and make sure to cite at least one of the required readings in your answer.
3. Suppose marijuana has just been legalized in your state. Nobody in your home town wants to start a marijuana business, as this would be too much of a stigma. But being an MBA student, you know a good business opportunity when you see one and decide to take a stab. Shortly after starting up your business, you gain a loyal following of customers and start raking in some steep profits. However, the local government decides that they want a cut of your profits and starts charging a 20% sales tax on marijuana. Do you think this would lead to a 20% or greater loss in sales? Do you think marijuana in this situation would be facing inelastic or elastic demand? Explain your reasoning, and make sure to cite at least one of the required readings regarding elasticity.
Part B Quantitative Problem
Suppose the demand function for a new smartphone can be expressed as QD = 1000 – 1.5P with QD being quantity demanded and P being price. The supply function can be expressed as QS = 50 + 2P
Fill out the following table using the above equations:
Surplus Amount or Shortage Amount
Now answer the following questions:
1. What is the equilibrium price? You can compute this either using Microsoft Excel, or by using algebra from the equations above and solving for a price where quantity supplied equals quantity demanded. Show your work by either showing the algebra steps or by showing how you used Excel to calculate.
2. Suppose the supply function changes to 100 + 2P. What is the new equilibrium? Show your work by either showing the algebra steps or by showing how you used Excel to calculate.
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