03 Jun Question Recent reports reveal market for RVs is
Question
Recent reports reveal market for RVs is faced with a many challenges over the next planning horizon.
You are an analyst working at a consulting firm. Your firm has been hired by the auto industry to
determine who the market for RVs will respond to the following issues in the next planning horizon.
The main issues that your firm would like you to analyze for the industry are: 1. Reduction in interest
rates. 2. An increase in the wages for workers (as the industry responds to increases in benefits and
adjustments as the minimum wage increases.
Currently, inverse market demand for RVs is: PRV = 20 – 0.1 (Qd) + 2 (M) + (Ps) 6 (Pgas) + 1(INT).
Where Prv is the average MRSP of RV in thousands of dollars/RV, Q d is the quantity demanded of
RVs in thousands of RVs, M is the average family income in thousands of dollars/year = 60, Ps is the
price of camper in thousands of dollars / camper = 25, Pgas is the price of gas in dollars/gallon = 2,
INT is the annual apr for a car loan in percentage points = 5.
The currently inverse market supply for this product is PSUV = -150 + 0.1 (Qs) + 0.5(W) + 0.2(Psteel).
Where PRV is as previously defined, Qs is the quantity supplied of RVs in thousands of RVs, W is the
wage for RV worker in dollars/ hour = 20, Psteel is the price of steel in dollars / ton= 350.
One producer of RVs has subcontracted with your firm to provide a more in depth analysis of their
firms production process. They have suggested they will only consider changes in the size of their
labor pool over the planning horizon. The firm estimates its production function to be Q = K0.5 x L0.5.
The firm knows that the labor pool has a marginal productivity (MP L) of 3.54 in thousands of RVs.
And the APL is currently 7.07 thousand RVs. The amount of capital is fixed at 10 in thousands of
units. L is the number of labor units in thousands of units. Typically the firm can vary labor. The firm
is hoping to get more productive with the increases in their offerings for benefits such that Q = 2( K0.5
x L0.5).
Part A) Historically, the average PRV is $35 in thousands of dollars. The industry is considering
(although illegal) maintaining this MRSP. What do you think will happen if the industry maintains
this price? Can you offer guidance to the industry on what the average MRSP should be? Consider
this analysis before the shocks
Part B) Determine the price elasticity of demand, cross price elasticity of demand and income
elasticity of demand. Also, determine the price elasticity of supply. Explain fully and show all work
necessary to arrive at the answer.
Part C) The next planning horizon will not allow for changes in capital. Prior to increases in
productivity, what is the marginal productivity of labor for 100 labor units (0.1 thousand)? Can the
firm increase the Marginal and Average productivity of labor by hiring more labor? Please explain
your answer fully. If the W is the wage for RV worker in dollars/ hour (or per labor unit) = 20, and is
fixed by the union, what will the resulting total cost function look like? Does the resulting production
function have diminishing returns? Explain fully and show all work to arrive at the answer
Part D) Provide a full analysis of the shocks (1. and 2.) for the industry, what do you predict will
happen to demand, supply, equilibrium price and quantity? Explain fully and do not take all the
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