Q1: Ch 4 (20%)

The director of marketing at Vanguard Corporation believes that sales of the companys Bright Side laundry
detergent (S) are related to Vanguards own advertising expenditure (A), as well as the combined advertising
expenditures of its three biggest rival detergents (R). The marketing director collects 36 weekly observations
on S, A, and R to estimate the following multiple regression equation:
S = a + bA + cR
where S, A, and R are measured in dollars per week. Vanguards marketing director is comfortable using
parameter estimates that are statistically significant at the 0.05 level or better. The regression output from the
computer is as follows:
DEPENDENT VARIABLE: S
36
0.2964
PARAMETER

STANDARD

VARIABLE

ESTIMATE

INTERCEPT

175086.0

R- SQUARE
4.781

ERROR

F- RATIO
0.0150

P- VALUE ON F OBSERVATIONS:

T - RATIO

63821.0

P- VALUE

2.74

0.0098

0.4550

0.3250

2.63

0.0128

0.284

0.164

1.73

0.0927

a. Does Vanguards advertising expenditure have a statistically significant effect on the sales of Bright Side
detergent? Explain, using the appropriate p-value.
b. Does advertising by its three largest rivals affect sales of Bright Side detergent in a statistically significant
way? Explain, using the appropriate p-value.
c. What fraction of the total variation in sales of Bright Side remains unexplained (undetermined)? What other
explanatory variables might be added to this equation?
d. What is the expected level of sales each week when Vanguard spends $20,000 per week and the combined
advertising expenditures for the three rivals are $300,000 per week?
Solution
a.

The value of p for Vanguards advertising expenditure(A) is 0.0128.

As the value of p is lower than the significance level of 0.05, we say that Vanguards advertising
expenditure has a statistically significant effect on the sales of Bright Side detergent.

b.

The value of p for advertising expenditure by largest rivals (R) is 0.0927.

As the value of p is higher than the significance level of 0.05, we say that advertising expenditure of
largest rivals do not have a statistically significant effect on the sales of Bright Side detergent.
c.

R-squared value = 0.2964

So, 29.64% of variation in sales of Bright Side is explained by this mode.

So, (100%-29.64%) = 70.36% of variation in sales of Bright Side remains unexplained.

Other explanatory variables which could be added to this equation to make it more relevant are price
of product, customer income, etc.

d.

Sales per week = 175086 + 0.455*advertising expenditure of Van guard - 0.284*advertising

expenditure of rivals
Sales per week = 175086 + 0.455*20000 0.284*300,000 = $989,826
So, expected level of sales per week is $989,826

Q2: Ch 5 (10%)
Bridget has a limited income and consumes only wine and cheese; her current consumption choice is four
bottles of wine and 10 pounds of cheese. The price of wine is $10 per bottle, and the price of cheese is $4 per
pound. The last bottle of wine added 50 units to Bridgets utility, while the last pound of cheese added 40 units.
a. Is Bridget making the utility- maximizing choice? Why or why not?
b. If not, what should she do instead? Why?
Solution
a.

Marginal utility of bottle of wine = 50

Marginal utility of cheese = 40

For utility maximizing point

Marginal utility of bottle of wine/ Price of wine = Marginal utility of cheese/ price of cheese

50/ 10 = 40/ 4

5 = 10

As, left hand side is not equal to the right hand side, so we say the Bridget is not making a utility
maximizing choice.

b.

Bridget should consume more of cheese and less of wine, as utility per unit for cheese is more than
that of wine
This will bring the marginal utility of cheese down, thereby making left hand and right hand side of
utility maximizing condition same.

Q3: Ch 5 (10%)
Suppose Bill is on a low- carbohydrate diet. He can eat only three foods: Rice Krispies, cottage cheese, and
popcorn. The marginal utilities for each food are tabulated below. Bill is allowed only 167 grams of
carbohydrates daily. Rice Krispies, cottage cheese, and popcorn provide 25, 6, and 10 grams of carbohydrates
per cup, respectively. Referring to the accompanying table, respond to the following questions:
Units of food

Marginal utility

Marginal utility

(cups/day)

of Rice Krispies

of cottage cheese

Marginal utility
of popcorn

175

72

90

150

66

80

125

60

70

100

54

60

75

48

50

50

36

40

25

30

30

25

18

20

a. Given that Bill can consume only 167 grams of carbohydrates daily, how many cups of each food will he
consume daily? Show your work.
b. Suppose Bills doctor tells him to further reduce his carbohydrate intake to 126 grams per day. What
combination will he consume?
Solution
a.

Bill will go on choosing products with high Marginal utility till his consumption budget of 167 grams of
carbohydrate is used
1.

Chose 1 unit of Rice, Marginal utility = 175

Carbohydrate = 25 grams

2.

Chose 1 unit of Rice, Marginal utility = 150

Carbohydrate = 25 grams + 25 grams = 50 grams

3.

Chose 1 unit of Rice, Marginal utility = 125

Carbohydrate = 50 grams+ 25 grams = 75 grams

4.

Chose 1 unit of Rice, Marginal utility = 100

Carbohydrate = 75 grams + 25 grams = 100 grams

5.

Chose 1 unit of Popcorn, Marginal utility = 90

Carbohydrate = 100 grams + 10 grams = 110 grams

6.

Chose 1 unit of Popcorn, Marginal utility = 80

Carbohydrate = 110 grams + 10 grams = 120 grams

7.

Chose 1 unit of rice, Marginal utility = 75

Carbohydrate = 120 grams + 125 grams = 145 grams

8.

Chose 1 unit of cheese, Marginal utility = 72

Carbohydrate = 145 grams + 6 grams = 151 grams

9.

Chose 1 unit of popcorn, Marginal utility = 70

Carbohydrate = 151 grams + 10 grams = 161 grams

10. Chose 1 unit of cheese, Marginal utility = 66
Carbohydrate = 161 grams + 6 grams = 167 grams

So, in total he consumes

5 cups of rice, 2 cups of cheese and 3 cups of popcorn

b.

For a carbohydrate intake f 126 grams

Bill will go on choosing products with high Marginal utility till his consumption budget of 167 grams of
carbohydrate is used
1.

Chose 1 unit of Rice, Marginal utility = 175

Carbohydrate = 25 grams

2.

Chose 1 unit of Rice, Marginal utility = 150

Carbohydrate = 25 grams + 25 grams = 50 grams

3.

Chose 1 unit of Rice, Marginal utility = 125

Carbohydrate = 50 grams+ 25 grams = 75 grams

4.

Chose 1 unit of Rice, Marginal utility = 100

Carbohydrate = 75 grams + 25 grams = 100 grams

5.

Chose 1 unit of Popcorn, Marginal utility = 90

Carbohydrate = 100 grams + 10 grams = 110 grams

6.

Chose 1 unit of Popcorn, Marginal utility = 80

Carbohydrate = 110 grams + 10 grams = 120 grams

7.

Chose 1 unit of rice, Marginal utility =72

Carbohydrate = 120 grams + 6grams =126 grams

So, in total he consumes

4 cups of rice, 1 cups of cheese and 2 cups of popcorn

Q4: Ch 5 (10%)
In terms of the consumer theory set forth in this chapter, can you explain the meaning of the following
statements?
a. I wanted to buy a Boxster rather than a Malibu, but it just wasnt worth it.
b. Id like to go to Mexico over spring break, but I just cant afford it, said Don. Jill asked, Dont you have
enough money in your account? Don replied, Yeah, but I cant afford to go.
Solution
a.

The statement means that for me the marginal utility of buying a Boxster was more that of a Malibu.
However, the price of the Boxster was very high. So, buying a Boxster would not have been an optimal
utility maximising point for me. So, it was not worth it.

b.

This statement mean that the marginal utility of going to Mexico is high and Don has enough money
too. However, the opportunity cost of going to Mexico is too high and Don cannot afford to incur such
high opportunity costs.

Q5: Ch 6 (20%)
Assume that the demand for cosmetic or plastic surgery is price inelastic. Are the following statements true or
false? Explain.
a. When the price of plastic surgery increases, the number of operations decreases.
b. The percentage change in the price of plastic surgery is less than the percentage change in quantity
demanded.
c. Changes in the price of plastic surgery do not affect the number of operations.
d. Quantity demanded is quite responsive to changes in price.
Solution
a.

Yes, price elasticity of demand is always negative. So, as the price of surgery increases, the number of
operations decreases.

b.

False, the percentage change in the price is not less than the percentage change in quantity
demanded. This is because price elasticity is in the inelastic range which is from 0 to -1.
And, Elasticity = percentage change in demand/ percentage change in price
So, for elasticity to be between 0 and 1, the denominator should be more than the numerator.

c.

False, changes in the price of plastic surgery affects the number of operations

d.

False, Quantity demanded is not that responsive to changes in price, as the demand is price inelastic.

Q6: Ch 6 (10%)
The price elasticity of demand for imported whiskey is estimated to be 0.20 over a wide interval of prices. The
federal government decides to raise the import tariff on foreign whiskey, causing its price to rise by 30
percent.
Will the quantity demanded on imported whiskey rise or fall, and by what percentage amount?

What is the percentage change in the total revenue after the tariff increases?
Solution
Price elasticity of demand = -0.2
So, if the average price increases by 30%

Price elasticity of demand = Percentage change in quantity demanded/ percentage change in price
-0.2 = Percentage change in quantity demanded/ 30%
Change in demand of tennis balls = -0.2*30% = -6%

So, quantity demanded on imported whiskey falls by 6%

Total revenue before price increase = Q*P

Total revenue after price increase = (1-0.06)*Q *(1.3P) = 1.222Q*P

So, change in total revenue = {(1.222Q*P - Q*P) / QP}*100 = 22.2%

So, total revenue increases by 22.2% after the tarrif increase.

Q7: CH 7 (20%)
Wilpen Company, a price- setting firm, produces nearly 80 percent of all tennis balls purchased in the United
States. Wilpen estimates the U. S. demand for its tennis balls by using the following linear specification:
Q = a + bP + cM + dPR

where Q is the number of cans of tennis balls sold quarterly, P is the wholesale price Wilpen charges for a can
of tennis balls, M is the consumers average household in-come, and PR is the average price of tennis rackets.
The regression results are as follows:
DEPENDENT VARIABLE: Q
20
0.8435
PARAMETER

R- SQUARE
28.75

F- RATIO
0.001

P- VALUE ON F OBSERVATIONS:

STANDARD

VARIABLE

ESTIMATE

INTERCEPT

355120.0

ERROR
220300.0

T- RATIO

P- VALUE

1.93

0.0716

37260.6

12587

22.96

0.0093

1.49

0.3651

4.08

0.0009

PR

1456.0

460.75

3.16

0.0060

Discuss the statistical significance of the parameter estimates b, c, and d using the p-values. Given the signs of
c and d, please comment on the good category of tennis ball and its relationship with tennis rackets.
Wilpen plans to charge a wholesale price of $1.65 per can. The average price of a tennis racket is $110, and
consumers average household income is $24,600.
b. What is the estimated number of cans of tennis balls demanded?
c. At the values of P, M, and PR given, what are the estimated values of the price (E), income (E M), and crossprice elasticities (EXR) of demand? Round to hundredth.
d. What will happen, in percentage terms, to the number of cans of tennis balls demanded if the average price
of tennis rackets increases 25 percent?
Solution
a.

p value for wholesale price = 0.0093

So, parameter estimate for wholesale price, b is statistically significant as p value is less than
significance level of 0.05

p value for consumers average household income = 0.0009

So, parameter estimate for consumers average household income, c is statistically significant as p
value is less than significance level of 0.05

p value for average price of tennis rackets = 0.0060

So, parameter estimate for average price of tennis rackets, d is statistically significant as p value is
less than significance level of 0.05

So, all three parameters for dependent variables are statistically significant.

Sign of parameter c is positive. So, this means that tennis ball is a normal good. This is because the
demand rises as income rises.

Sign of parameter d is negative. So, this means that tennis ball and tennis rackets are complementary
goods. When the price of rackets rise, the demand for tennis balls decrease and when the price of
rackets drops, the demand for balls increase.

b.

c.

Demand = 355120 -372602.6*P + 1.49*M 1456*PR

Demand = 355120 -372602.6*1.65 + 1.49*24600 1456*110

Demand = 462,442

Demand,Q = a + bP + cM + dPR

Differentiating Demand with respect to price

d(Q)/dP = b
So, price elasticity, E = (P/Q)* (dQ/dP) = (1.65/462442)*(-372602.6) = -1.33

Differentiating Demand with respect to income

d(Q)/dM = c

So, income elasticity, EM = (M/Q)* (dQ/dM) = (24600/462442)*(1.49) = 0.08

Differentiating Demand with respect to price of rackets

d(Q)/dPR = d
So, cross- price elasticity, EXR = (PR/Q)* (dQ/dPR) = (110/462442)*(-1456) = -0.37

d.

Cross Price elasticity = -0.37

So, if the average price of rackets increases by 25%

Cross price elasticity = Change in demand of tennis balls/ change in price of rackets
-0.37 = change in demand of tennis balls/ 25%
Change in demand of tennis balls = -0.37*25% = -9.25%

So, the demand number of cans of tennis balls decreases by 9.25%, when price of rackets is increased
by 25%