Week 2 Check Understanding
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.
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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?
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.
5. General Cereals is using a regression model to estimate the demand for Tweetie Sweeties, a whistle – shaped, sugar-coated breakfast cereal for children. The following (multiplicative exponential) demand function is being used:
Where QD – quantity demanded, in 10 oz. boxes
P- price per box, in dollars
A - advertising expenditures on daytime television, in dollars
N – proportion of the population under 12 years old
a. Determine the point price elasticity of demand for Tweetie Sweetie
price elasticity of demand for the Tweetie Sweeties = 6280
b. Determine the advertising elasticity of demand
advertising elasticity of demand = -2.15
c. What interpretation would you give to the exponent of N?
there is something missing in the given equation
i.e before 1.05N3.70
with the complete equation
i can tell something about N
McGuigan, J. R., Moyer, R. C., & Harris, F. H. D. (2011). Managerial Economics: Applications, Strategy, and Tactics (12th Ed.). Mason, OH South-Western Cengage Learning.