Eco 550 Check Your Understanding Week 2

Eco 550

“Check your understanding” Week 2 Chapter 3 3,4,7

Chapter 4 5,6,7

Chapter 3

3.     ED = [(1800 −1500)/(1800+1500)]/[(1.75 − 2.25)/(1.75 + 2.25)], so ED =   −0.727 for Mmmm Sundaes.   This is inelastic in this price range.   It suggests the OldeYoguart Factory should consider a price increase, as this will increase revenues and reduce costs.

4.   a. ED=   −30%/+100% =   −0.3 is the price elasticity for subway rides.   This is inelastic.

b.     Ridership probably would not return to the original level because some people may have invested in alternatives (cars, etc.) or found other transit options that they are reluctant to give up.

7.   Any demand function can be decomposed into percentage changes and elasticities of the component parts.   If Q = f(P, A), where P is price, A is advertising, ED and EA are price and advertising elasticities, then: %ΔQ = %ΔP(ED) + %ΔA(EA) = (+4%)(-1.5) + (+11%)(.6) = +.6%.   We expect a small increase in quantity of .6%.Total revenue will increase since both price and quantity increase.   With 6% higher prices and .6% higher quantity, revenue rises about 6.6%.   The prediction is less precise than this analysis suggests, because it is based on calculus which works best for very small changes.   

Chapter   4

5. Demand for Tweetie Sweeties by General Cereals question:

a. The price elasticity is -2.15, which is elastic.

b. The advertising elasticity 1.05.

c. The population elasticity is 3.70.   A one-percent increase in the population over under the age of 12 will lead to a 3.7% increase in the demand for Tweetie Sweeties.

6. Demand for haddock question:

a. The price elasticity is -2.174, which is elastic.

a. The income elasticity is 0.461, which is a normal good, but a necessity like most food items.

b. The cross price elasticity with meat and poultry is 1.909.   Fish and meat/poultry are substitutes.

c. Haddock is elastic, a necessity, and other meats are close substitutes.

d. A 5% increase in income...