Topics: Supply and demand, Consumer theory, Elasticity Pages: 2 (352 words) Published: February 22, 2013

1.If the price of VCRs declines by 20 percent, and the quantity sold rises 40 percent, what is the price elasticity of VCRs, ceteris paribus.


2.The cross price elasticity between the demand for Washington State apples relative to Pennsylvania apples is +0.7. What can be said about the perceived differences in quality between the two apple varieties? How would your answer change if the cross price elasticity were only +0.1?

Since the cross price elasticity is positive, these 2 apple varieties are substitutes for each other. The Ecross= +0.7 indicates a closer substitute relationship. If the Ecross were +0.1 the substitute relationship would be weaker, they would be close to be complementary products.

3.Automobile manufacturers have discovered that the price elasticity of demand for autos is much higher for short duration manufacturer rebates (a type of sale) than if the price were lowered permanently. Therefore, a temporary price cut raises more revenue than a permanent price reduction. What is it about the nature of automobiles that would explain this? Automobiles are durable goods. In the short-run consumers are more responsive to price change. Consumers are less likely to buy another car if theirs is still working correctly. Buying a new car would become a necessity in the long term.

4.Price increases reduce the quantity of the product a manufacturer sells and produces. Less production usually means less total cost. Would it be reasonable for a profit maximizing firm to raise price if demand were unit elastic? If demand were inelastic?

If the demand were unit elastic the total revenue function is maximized. But if the price increases, total revenue would remain constant because the decrease in quantity demanded balanced the price increase. When demand is inelastic is the best moment to raise prices because it increases revenue.

5.Would you forecast quantity...
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