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Eco550

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  • November 2012
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CHAPTER 3

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.

Ey = ((1800 – 1500) / ((1800 + 1500) / 2))
((1.75 – 2.25) / ((1.75 + 2.25) / 2))
Ey = 300 ($4.00)
-$0.50 (300)
Ey = -8%

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.

fare price increase = 50 to 100 cents
% rise in fare (100-50/50) * 100 = 100%
decline in demand = 30%
Price elasticity = 30/100 = 0.3

b. If the transit authority reduces the fare back to 50 cents, what impact would you expect on the ridership? Why?

If the fare is reduced to 50 cents, demand for the rides increases this is because of the price of elasticity 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?

There will be a decrease in total revenue for two reasons, when you look at the advertising elasticity you see that the leading coefficient is low which means the markets may not be as receptive to the product that would be needed to boost sales. The second factor is the elasticity of demands; this is directly related to the total revenues being that as the firm increases the price the result is a decrease in total revenue because of decrease in quantity of sales (services).