Krugman2e Solutions CH06
S87-S100_Krugman2e_PS_Ch06.qxp
9/16/08
9:20 PM
Page S-87
chapter:
6
Elasticity
1.
Nile.com, the online bookseller, wants to increase its total revenue. One strategy is to offer a 10% discount on every book it sells. Nile.com knows that its customers can be divided into two distinct groups according to their likely responses to the discount. The accompanying table shows how the two groups respond to the discount.
Group A
(sales per week)
Group B
(sales per week)
Volume of sales before the
10% discount
1.55 million
1.50 million
Volume of sales after the
10% discount
1.65 million
1.70 million
a. Using the midpoint method, calculate the price elasticities of demand for group A and group B.
b. Explain how the discount will affect total revenue from each group.
c. Suppose Nile.com knows which group each customer belongs to when he or she logs on and can choose whether or not to offer the 10% discount. If Nile.com wants to increase its total revenue, should discounts be offered to group A or to group B, to neither group, or to both groups?
1.
Solution
a. Using the midpoint method, the percent change in the quantity demanded by group A is
1.65 million − 1.55 million
0.1 million
× 100 =
× 100 = 6.25%
(1.55 million + 1.65 million)/2
1.6 million and since the change in price is 10%, the price elasticity of demand for group A is
6.25%
= 0.625
10%
Using the midpoint method, the percent change in the quantity demanded by group B is
1.7 million − 1.5 million
0.2 million
× 100 =
× 100 = 12.5%
(1.5 million + 1.7 million)/2
1.6 million and since the change in price is 10%, the price elasticity of demand for group B is
12.5%
= 1.25
10%
b. For group A, since the price elasticity of demand is 0.625 (demand is inelastic), total revenue will decrease as a result of the discount. For group B, since the price elasticity of demand is 1.25 (demand is elastic), total revenue will increase as a result of the discount.
c. If Nile.com wants to increase total revenue, it should
9/16/08
9:20 PM
Page S-87
chapter:
6
Elasticity
1.
Nile.com, the online bookseller, wants to increase its total revenue. One strategy is to offer a 10% discount on every book it sells. Nile.com knows that its customers can be divided into two distinct groups according to their likely responses to the discount. The accompanying table shows how the two groups respond to the discount.
Group A
(sales per week)
Group B
(sales per week)
Volume of sales before the
10% discount
1.55 million
1.50 million
Volume of sales after the
10% discount
1.65 million
1.70 million
a. Using the midpoint method, calculate the price elasticities of demand for group A and group B.
b. Explain how the discount will affect total revenue from each group.
c. Suppose Nile.com knows which group each customer belongs to when he or she logs on and can choose whether or not to offer the 10% discount. If Nile.com wants to increase its total revenue, should discounts be offered to group A or to group B, to neither group, or to both groups?
1.
Solution
a. Using the midpoint method, the percent change in the quantity demanded by group A is
1.65 million − 1.55 million
0.1 million
× 100 =
× 100 = 6.25%
(1.55 million + 1.65 million)/2
1.6 million and since the change in price is 10%, the price elasticity of demand for group A is
6.25%
= 0.625
10%
Using the midpoint method, the percent change in the quantity demanded by group B is
1.7 million − 1.5 million
0.2 million
× 100 =
× 100 = 12.5%
(1.5 million + 1.7 million)/2
1.6 million and since the change in price is 10%, the price elasticity of demand for group B is
12.5%
= 1.25
10%
b. For group A, since the price elasticity of demand is 0.625 (demand is inelastic), total revenue will decrease as a result of the discount. For group B, since the price elasticity of demand is 1.25 (demand is elastic), total revenue will increase as a result of the discount.
c. If Nile.com wants to increase total revenue, it should