Check Your Understanding
3. The Olde Yogurt Factory has reduced the price of its popular Mmmm Sundae from $2.25 to $1.75. As a result, the firm’s daily sales of these sundaes have increased from 1,500/day to 1,800/day. Compute the arc price elasticity of demand over this price and consumption quantity range.
Q₁ = 1500
Q₂ = 1800
P₁ = 2.25
P₂ = 1.75
[(1800 - 1500)/ (1.75 – 2.25)] * [(1.75 +2.25)/ (1800 + 1500)]
(300/-.5) * (4/3300) = 1200/-1650 = -.7272 or .73 percent
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 ridership of 30 percent.
a. Compute the price elasticity of demand for subway rides.
.30/(.50/1.00)= .30/.50= .60
b. If the transit authority reduces the fare back to 50 cents, what impact would you expect on the ridership? Why? I believe that the decrease in price would bring the revenue of the subway down due to the 50 cent decrease in cost.
.30/(100/.50)= .30/.20= .15 price of elasticity
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?
I believe there will be a decrease in total revenue based on the information that was provided to us in the question. The price of elasticity of demand is elastic in this problem because it is more than 1.
(.4)(1.5)+ (11) (0.6) = 6.54
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:
QD = 6,280P −2.15 A 1.05 N3.70 where QD = quantity demanded, in 10 oz: boxes
P = price per box, in dollars
A = advertising...