Managerial Economics Home Work-I Solutions
1. The Potomac Range Corporation manufactures a line of microwave ovens costing $500 each. Its sales have averaged about 6,000 units per month during the past year. In August, Potomac’s closest competitor, Spring City Stove Works, cut its price for a closely competitive model from $600 to $450. Potomac noticed that its sales volume declined to 4,500 units per month after Spring City announced its price cut. a. What is the arc cross elasticity of demand between Potomac’s oven and the competitive Spring City model? Solution:
Given: PA=$500, QA1=6,000, QA2=4,500, PB1=$600 and PB2=$450
b. Would you say that these two firms are very close competitors? What other factors could have influenced the observed relationship? Yes, they are close competitors and are substitutes because one product is cheaper than the other, so people will buy the cheaper one, even if they are the same product. Other factors could be brand names, sometimes people buy more expensive products because of the brand, another factor could be is there enough supply to go around, if they run out of that product will people wait or will they go buy the other one. c. If Potomac knows that the arc price elasticity of demand for its ovens is −3.0, what price would Potomac have to charge to sell the same number of units it did before the Spring City price cut? Solution:
Given: ED=-3.00 Q1=4,500, Q2=6,000, P1=$500
2. The price elasticity of demand for personal computers is estimated to be −2.2. If the price of personal computers declines by 20 percent, what will be the expected percentage increase in the quantity of computers sold? Solution:
Given: ED=-2.2, %∆P=-20%, Required: %∆Q=?
Therefore, the expected percentage increase in the quantity of computers sold is +44% because of the inverse relationship between price and quantity demanded. 3. The Olde Yogurt Factory has reduced the price of its...
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