Economics

Chapter 5

1. The president of the Micro Brewing Corporation asks you, as the company economist, to forecast changes in consumer beer purchases associated with a proposed price change. You conduct a survey and find that if the price of six-pack increases from $5.50 to $7.50, the quantity demanded will decrease from 2200 units to 1800 units a month. Should the Micro Brewing Corporation raise its price? Explain the economic basis for this recommendation to the president.

The total revenue test is used for determining if the demand is elastic or inelastic for a product. In this case, the Micro Brewing Company should increase prices. The total revenue test has come out positive, with an increase in price has caused a raise in total revenue, which will benefit the corporation. The price elasticity of demand for the product is inelastic giving there is change in price will not lower total revenue.

• Q2-Q1/ Q2+Q1 /2, P2-P1/ P2+P1/2

• 1800-2200/1800+2200/2, (7.50-5.50) / 7.50+5.50) / 2

• -0.65 < 1

2. What is the formula for measuring the price elasticity of supply? Suppose the price of apples goes up from $20 to $22 a box. In direct response, Goldsboro Farms supplies 1200 boxes of apples instead of 1000 boxes. Compute the coefficient of price elasticity (midpoints approach) for Goldsboro’s supply. It its supply elastic, or is it inelastic?

The formula for measuring the price of elasticity of supply is

Es = percentage change in quantity supplied/ percentage change in price

• Es = 200/ [(1000+1200/2) /2] /2 (2/20+22)/21}

• Es = 1.91

• The supply price is elastic

3. Two drivers - Tom and Jerry - each drive up to a gas station. Before looking at the price, each places an order. Tom says, "I'd like 10 gallons of gas." Jerry says, "I'd like $10 worth of gas." What is EACH driver's price elasticity of demand?

The two drivers have to different elasticity price demands. Tom’s demand is zero because regardless of how many gallons of gas he purchase will...