Agricultural and Applied Economics 215 Consumer Behavior Assignment #1

Transcription

1 Agricultural and Applied Economics 215 Consumer Behavior Assignment #1 Answer the following questions. I would like you to generate WORD and/or EXCEL-type files that contain your answers to the following questions. You need to your answers to your TA by Monday, Oct. 3 rd, 8 am. Again, as mentioned in the syllabus, no late assignments will be accepted. [70 Total Points] 1. [20 pts] Prof. Gould loves buffalo wings. Through the services of a market research firm you have obtained information as to the level of satisfaction (i.e. utility) Prof Gould experiences as a result of alternative amount of wings consumed at a sitting. This data is contained within the Tot Utility worksheet located within the Assign1.xls spreadsheet file found in the Assignments section of the class website. (a) [ 5 pts] Use a spreadsheet program such as EXCEL to create a line graph of Prof Gould s total utility curve where total utility is a function of wings consumed and based on the above data. Make sure you label the axes. (b) [5 pts] Does Prof Gould s utility function exhibit the theoretical assumption of diminishing marginal returns from increased buffalo wing consumption? Provide numerical evidence, in addition to your graph, supporting your answer. (c) [5 pts] Using your spreadsheet program, create a 2 nd line graph showing the marginal utility curve. Make sure you label your axes. (d) [5 pts] Approximately how many buffalo wings would Prof. Gould need to consume to maximize his utility? Provide numerical evidence in addition to your just created total utility graph. 2. [25 pts] Suppose you work for the Wisconsin Milk Marketing Board and you are interested in determining the structure of the market demand for a unique aged cheddar cheese made only in Wisconsin. You want to do this to evaluate how sensitive consumers of this cheese are to changes in price and to assist Wisconsin cheesemakers in determining the optimal pricing point. You collect the necessary sales data and you estimate a statistical model showing the relationship between market price and the amount of this special aged cheddar cheese (measured in 1

2 100,000 lbs) sold monthly. This demand relationship is shown in Figure 1 below. The current market price is $7.50/lb and 150,000 lbs was sold last month at that price. (a) [5 pts] What is the market consumer surplus for purchasers of this aged cheddar at the $7.50 market price? Make sure you provide an actual value measured in $. Provide an interpretation of what this value means. (b) [5 pts] Next year a new cheese plant will come on-line and will dramatically increase the capacity of the aged cheddar industry in Wisconsin. This increase in supply is anticipated to cause the market price to decrease to $6.25/lb and your estimate is that the monthly amount of cheese that will be sold at this new price will be 225,000 lbs. What is your estimate of the age-cheddar cheese own-price point elasticity given the above information? Provide enough detail to show how you obtained the above elasticity estimate? (c) [5 pts] Given the possible change in price, would consumer surplus increase or decrease? What is your estimate of the change in consumer surplus that may result from this lower price (show your estimate in $). Show the calculations you used to arrive at your answer. (d) [10 pts] Suppose the income point elasticity for Wisconsin aged cheddar is President Obama has been able to pass a 2 nd stimulus package that results in an average increase in disposable income of 10%. As a result of this increase, what is your anticipated change in sales given that the market price remains unchanged at $6.25/lb? Show how you obtained your result. What is the impact on consumer surplus? Again, show how you obtained your result. (Hint: Assume a parallel shift of the demand curve.) 3. (25 pts) You are an analyst for General Motors (GM) and you are concerned as to the impact of a new Ford Escape hybrid model will have on the firm s small SUV line of vehicles as GM s SUV does not come with a hybrid version. GM set the base price of their SUV last $22,500 and sold 100,000 of these vehicles. Figure 2a provides a representation of your estimated GM SUV demand curve. You have also obtained information that has allowed you to estimate the Ford Hybrid demand curve. The estimated demand curve is shown in Figure 2b. At the current Ford hybrid price of $25,000 you estimate that Ford will sell 250,000 units. 2

3 (a) [5 pts] Given Figure 2a what is the estimated consumer surplus for GM s consumers as a whole given the above GM pricing point? (b) [10 pts] Six months after these prices have been set, the Federal government initiates a new program where there is a $2,500 cash rebate applied to the purchase of any hybrid purchased next year (i.e., Cash-For-Hybrids program). You estimate that that as a result of this rebate program sales of the GM SUV will fall to 80,000 at the $22,500 base price. What has to be the relationship between the GM SUV and Ford Escape hybrid for this estimate to be correct? Provide a quantitative answer to this question and show how you estimated this value. (Hint: Some type of point elasticity would be of some help here.) (c) [5 pts] What is the impact on the Ford Escape hybrid purchasers consumer surplus as a result of the Federal government s cash rebate program? Has it increased, decreased or remained the same? If it has changed, by how much did it change? (Hints: Will the Cash-For-Hybrids program cause the market demand curve for Ford Escape hybrids to shift inward or outward from its current location or will its location be unchanged? What information is needed to determine the slope of the linear demand curve?) (d) [5 pts] Given your answer to (b) what is the impact on consumer surplus of GM SUV consumers as a result of the cash rebate utilization by Ford Escape hybrid purchasers. Does it increase, decrease or does it remain the same from the value in a)? What is this value? If it has changed, by how much did it change? Make sure you show how you obtained this estimated consumer surplus change both graphically and mathematically. (Hint: Is the GM price changing?) 3

4 Figure 1. Market Demand For Wisconsin Aged Cheddar Cheese $/lb C 7.50 D A 6.25 E F B G H Thousand Lbs.

5 Figure 2a. Market Demand For GM s SUV $ Figure 2b. Market Demand For Ford Escape Hybrid $ SUV s Hybrids