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ECO 5308-810/811 SHOW ALL WORK FOR EACH NUMERICAL QUESTION TO RECEIVE CREDIT

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ECO 5308-810/811

SHOW ALL WORK FOR EACH NUMERICAL QUESTION TO RECEIVE CREDIT.  IF YOU JUST PROVIDE ANSWERS WITHOUT DISPLAYING THE STEPS, YOU WILL GET A ZERO FOR THE QUESTION.

 

1. Comparative Statics:   The Tobacco Market (25 Points)

 

Using Supply and Demand figures (label both the axes, supply/demand curves – before and after the shock), explain the following for each of the 5 events given below:

 

1. 1. if it is a demand or a supply related event (shifts of the supply/demand curves and their directions) and the appropriate non-price determinant of supply or demand associated with the event.
   2. the short-term impact on prices and output (rationing function)
   3. differentiate between a change in quantity demanded (supplied)

 and a change in demand (supply) for each case. Why? Explain.

1. 4.  Identify the conditions which can result in the guiding function and the consequent impacts on equilibrium prices and output

         changes in both the short run (rationing) and long-run (guiding)

         equilibrium prices and quantities before and after each event

        (Hint: Evoke the ceteris paribus condition for each case)

 

1. The FDA classifies the use of tobacco as an “addictive substance¹.”
2. U.S. Congress votes and President Biden signs to raise excise taxes on all tobacco products
3. Favorable growing conditions in Kentucky and North Carolina, major tobacco producing states, results in a bumper crop.
4. The cost of fertilizer used in the production of tobacco rises due to supply-chain issues in a post-Covid environment.
5. A study released by the National Institute of Health (NIH) reports a strong positive correlation of tobacco consumption with risk of cancer, strokes, heart attacks and worsening diabetes.

Note: Construct graphs in the body of the paper or draw, copy and incorporate them in the paper. Label both axes, supply/demand curves before/after an event as well as show the direction of prices and quantities.

https://www.fda.gov/tobacco-products/health-effects-tobacco-use/nicotine-why-tobacco-products-are-addictive

2. HOLIDAY INN and FRANCHISES (20 PTS)

 

An article in the Forbes magazine reported that large hotel chains, such as Holiday-Inn, are tending to reduce the number of hotels that they franchise to outside owners and increase the number of self-managed units. With the return of guests in post-Covid environment, corporate management are mandating private owners or franchises to make upgrades in their hotels. However, they are having a difficult time in enforcing the policy. Top management in Holiday Inn believe that upgrading is critical to maintain the reputation and expectations of a loyal base - “we’ve built our name on quality and strong brand loyalty.”   Answer the following questions with justifications using scholarly sources:

 

1. 1. Explain the nature of agency problem facing Holiday Inn

 

1. 2. Why would Holiday Inn worry about the quality of the hotels it doesn’t own but franchises?

 

1. 3. Why would a chain such as Holiday Inn tend to own hotels in resort areas, such as national parks, where there is little repeat business, and franchise hotels in downtown areas, where there is lot of repeat business?   What may be the business and economic rationale for adopting this strategy. Explain. 

 

1. 4. What incentives can Holiday Inn offer for franchises to upgrade their facilities in a cost-effective and profitable manner?  Think through and discuss any three of them which can be financially feasible and increase the participation rate.  

 

3.  ELASTICITIES: (20 POINTS)

 

Suppose Gap estimates the market demand for their Straight Jeans as Q = 840 – 0.50P, where Q = quantity demanded per period of time and P = price of Straight Jeans.  

 

1. If the price of Gap Jeans were reduced from $40 to $38 per pair, would you expect consumer expenditures for Jeans to rise, fall, or remain unchanged?  Why? (hint: elasticity & revenues relationship)

 

2. When Gap lower their price from $40 to $38, what predictions, if any, can you make about the effect the price reduction would have upon the firm’s profits?   Why?  Explain.

 

3.  Gap also sells 20,000 sport shirts for $23 per shirt. In early January 2022, Gap’s major competitor, Abercrombie & Fitch’s Company cut the price of their sports shirts from $25 to $18 with strong advertising of the price-change. With this change, orders received by Gap drops sharply, from 20,000 per month to 10,000 per month for March and April 2022.

 

Based on this data, calculate the cross elasticity of demand between Gap’ sport shirts and Abercrombie & Fitch’s sport shirts during February and March, 2022.   Are the two companies’ sport shirts good or poor substitutes? Why? Explain.

 

4. Other than price, what strategies can Gap adopt which will be cost-effective and help it to regain its market share and remain profitable?   Discuss any three well-thought out strategies in detail with good explanation. 

 

4. FORECASTING:  (35 points)

(To answer this question, consider working through the problem described and discussed in Chapter 5 (Pages 117-122)

 Case Study:  Stormy Burgers in Hamilton, Texas

Claire Clifford, an owner of Stormy Terrific Burgers in Hamilton, Texas inherited her Dad’s business in 2019.  Her Dad, Rusty Clifford owned and operated this business since 1989 based on his instincts in a small community. However, Claire realizes that the market has changed and use management tools to approach the business decision making. 

Claire hires her former classmate Ms. Jessica Parker, an MBA from Tarleton.  Claire tasks Jessica to estimate the empirical demand function for her firm’s principal sales - burgers.  Jessica uses data for the last 36 months of Burgers sales from the firm’s records.  Claire had kept meticulous records on prices for its Burgers as well as a prices charged by one of her competitors, Hot & Juicy Burgers.

Jessica obtains average household income figures from the Small Business Development Center (SBDC) in Hamilton. In addition, Burger King also serves as a competitor in the trade area selling their Whoppers.  Ms. Parker is able to estimate the price of their Whoppers for the last 36 months from advertisements in old newspapers in the library.

Furthermore, Jessica adjusts the price and income data for inflation using a deflator from the Survey of Current Business. To measure the number of buyers in the market area (N), Ms. Parker collected data on the number of residents in Hamilton.  As it turned out, the number of residents had not changed significantly during the last 36 months. Therefore, Jessica decides to drop N from her demand model.  

Jessica estimates the following linear specification of demand using the Stat function in Excel:

Q= a + b (P) +c (M) + d (P_SB) + e P(_W)

Where:

 

Q= total sales of Burgers at Stormy Burgers 

P= price of a burger at Stormy Burgers

M= average annual household income in Hamilton, TX

P_SB= price of a burger at Hot & Juicy Burgers

P_W= price of a Whopper at Burger King

 

The following computer printout shows the results of the least-squares regression:

Dependent Variable	Q	R-Square	F-Ratio	P-Value On F
Observations	36	0.455	101.90	0.0001

Variable	Parameter Estimate	Standard Error	T-Ratio	P-Value
Intercept	183.80	301.05	0.61	0.3305
P	-21.42	18.4863	1.16	0.9101
M	4.09109	1.5024	2.73	0.0001
PHJ	10.30	6.25	1.65	0.3171
PBK	7.84	3.297	2.38	0.0501

 

 

 

 

 

Jessica calculates demand elasticities at values of P, M, P_SB, and P_W that she feels “represents” the average values of Burgers market in Hamilton for the past 36 months. These values are:

P_SB= $7.50,   M= 25 (in thousands),  P_HJ= $8.25, and P_BK = $4.50  

Using this information, answer the following questions:

1. Estimate the total number of sales using the equation specified above with the empirical results

 

2. Calculate the own-price elasticity, income elasticity and cross-price elasticities with Hot & Juicy Burgers and BK Whopper.  Claire also expects Jessica to provide a logical and economic interpretation of the calculated elasticities. What will they be?   Explain  

 

Hint: All of the calculations will be “point elasticities” as explained in the textbook

 

3. Using both the results and economic rationale, what advice should Jessica make to Claire?

1. should Claire raise or lower the price using economic rationale
2. As the economy is likely heading into a recession by end of this year, what impact should Claire expect on Stormy Burgers sales?  Why?
3. Who is the main competitor – Hot & Juicy Burgers or Burger King?  Hint: Use the magnitude of the cross-price elasticities

 

4. Based on the table above, identify which regression coefficients are statistically significant?  Why? Hint: Use the textbook discussion on this topic.

 

5. What is the interpretation of R² found in the results?  Why did Jessica decide not to include population data in her study?  If Claire engages Jessica as a follow-up study, what additional variables she should consider?   Why?  Explain 

 

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FINAL NOTES:

As this is a graduate level course, I am expecting serious, well thought out and detailed responses to these questions, using the textbook and at least 3-4 additional scholarly sources, where needed.   Please document these sources using either the APA or MLA style. 

Please do not procrastinate and turn in rough drafts with grammatical and spelling errors.  My motivation in these assignments is to help you prepare for the major exams. Another objective is to comprehend and recognize the challenges which are encountered in managing and remaining profitable in a variety of businesses (small and large) in the United States and beyond.  Your responses should reflect accordingly.  

Please check the Grading Rubric which I will use to grade your papers.  Wish you all success in completing the assignment.