Increase your sales and be able to charge a higher price if you spend some money on local television ads.
IfN 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.
- 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.
- 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:
Price Quantity Demanded Quantity Supplied Surplus Amount or Shortage Amount
200
220
240
260
280
300
320
340
Now answer the following questions:
- 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.
- 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
Sample Solution