Week 2 Check Understanding
Chapter 3
3. The Old Yogurt Factory has reduced the price of its popular Sundae from $2.25 to $1.75. As a result, the firm’s daily sales of these sundaes have increased from 1500 a day/ to 1800 a day. Compute the arc price elasticity of demand over this price and consumption quantity range.
The arc price elasticity can be computed with the formula of arc elasticity. After the calculation we are getting that the arc price elasticity will be equal to 0.72 which is less than 1, that means that the price is inelastic.
4. The subway fare in your town has just been increased from a current level of 50 cents to $1.00 per ride. As a result, the transit authority notes a decline in rider-ship of 30 percent. a. compute the price elasticity of demand for subway rides. We can compute the price elasticity in demand with the formula: Ed = change Q/change P = 0,3/2 = 0,15 So the demand for subway rides is inelastic b. if the transit authority reduces the fare back to 50 cents, what impact would you expect on the ridership? Why? If the transit authority reduces the fare back to 50 cents, there will be an increase in ridership of 30 percent, so the will not be the significant change of demand.
7. In an attempt to increase revenues and profits a firm is considering a 4 percent increase in price and an 11 percent increase in advertising. If the price elasticity of demand is -1.5 and the advertising elasticity of demand is +0.6, would you expect an increase or decrease in total revenues?
Price:
MR=change TR(price)/change Q (price)
We know only Ed so we can compute the change Quantity: -0.06
MR=0.04/-0.06= -0.66 so Marginal Revenue is less than 1, so there will be decrease in total revenues.
MR=change TR (advertising)/Change Q (advertising)
MR=0.11/0.06=1.83 which is more than 1 – so there will be increase in total revenues.
Chapter 4