Eric Stevanus-2201756600-LA28

1. Elasticity.
The demand for personal computers can be characterized by the following point
elasticities: price elasticity = —5, cross-price elasticity with software = —4, and income
elasticity = 2.5.
Indicate whether each of the following statements is true or false, and explain your
answer.
a. A price reduction for personal computers will increase both the number of units
demanded and the total revenue of sellers.
True, since the price elasticity is negative, a price reduction would increase The
number of demand quantity.

And true as well for the fact that total revenue would increase, since if the price is
elastic, the percentage of decrease of the price, is lower than the percentage of
increase of demand ( more change in demand than in price), therefore, increases the
Total revenue.

b. The cross-price elasticity indicates that a 5 per cent reduction in the price of
personal computers will cause a 20 per cent increase in software demand.
False, the given cross-price elasticity explain the relationship between price of
software , and the quantity of personal computer demanded, no the other way
around.

c. Demand for personal computers is price elastic and computers are cyclical normal
goods.
True, since the coefficient of price elasticity is >1 which is 5 ( ignore the negative
sign). Which means that it’s price elastic
True, Computers are normal goods, since the income elasticity is positive
d. Falling software prices will increase revenues received by sellers of both computers
and software.
Falling Software prices, will increase the quantity of personal computer demanded,
which will then increases the total revenue received by computers (the computer
price stays the same, but the quantity demanded increases) – True

But we can’t say for sure, if falling software prices will increase the revenue of
software, since we don’t know the price elasticity of software – Unknown. If it’s
elastic, it will increases it’s revenue, if it’s inelastic, then the total revenue would go
down.
 Eric Stevanus-2201756600-LA28
e. A 2 per cent price reduction would be necessary to overcome the effects of a 1 per
cent decline in income.
-5 = ΔQ/ -2
ΔQ= 10

2,5= ΔQ/-1
ΔQ=2,5

False, Since the percentage changes in quantity of personal computer

demanded is different

The right percentage of price reduction to overcome the effects of a %1

decline in income is % 0.5

2. Advertising Elasticity.
Enchantment Cosmetics, Inc., offers a line of cosmetic and perfume products marketed
through leading department stores. Product manager Erica Kane recently raised the
suggested retail price on a popular line of mascara products from $9 to $12 following
increases in the costs of labor and materials. Unfortunately, sales dropped sharply from
16200 to 9000 units per month. In an effort to regain lost sales. Enchantment ran a
coupon promotion featuring $5 off the new regular price. Coupon printing and
distribution costs totaled $500 per month and represented a substantial increase over
the typical advertising budget of $3250 per month. Despite these added costs, the
promotion was judged to be a success, as it proved to be highly popular with
consumers. In the period prior to expiration, coupons were used on 40 per cent of all
purchases and monthly sales rose to 15000 units.

a. Calculate the arc price elasticity implied by the initial response to the Enchantment
price increase.

9000−16200 9+12
= × =−2
12−9 16200+ 9000

b. Calculate the effective price reduction resulting from the coupon promotion.

15000x 40%x7=42000 ΔP=-5 x 0,4 = -$2

15000x60%x12=108000 The effective price reduction is
108000+42000=150.000 $2
150.000 / 15000 = $10
10$-$12 = -$2 OR
The effective price reduction is
$2
 Eric Stevanus-2201756600-LA28

c. In light of the price reduction associated with the coupon promotion and assuming
no change in the price elasticity of demand, calculate Enchantment's arc advertising
elasticity.
Q−9000 10+12
−2= ×
10−12 Q+9000
Q−9000 22
−2= ×
−2 Q+9000
−2 × ( Q+9000 )=( Q−9000 ) ×−11
- 2 Q−18000=−11 Q+99000
9 Q=117000
Q = 13000

15000−13000 3750+3250
EA = ×
3750−3250 15000+13000

EA =1

d. Why might the true arc advertising elasticity differ from that calculated in part C?
Because, when a company is using a coupon promotions, it involves more than just
the independent effects of a price cut, plus an increase in advertising. Different from
a wide broad price cut that tells the exact price that the demand would most likely
buy, coupons only targets the price sensitive population of the customers, which
means that the advertising elasticity stated in C may be overstated, since it doesnt
tells us the exact price cut that it has over the period, while a wide broad price cut
does.

3. Cross-Price Elasticity.
B B Lean is a catalog retailer of a wide variety of sporting goods and recreational
products. Although the market response to the company's spring catalog was generally
good, sales of B. B. Lean's $140 deluxe garment bag declined from 10000 to 4800 units.
During this period, a competitor offered a whopping $52 off their regular $137 price on
deluxe garment bags.
a. Calculate the arc cross-price elasticity of demand for B. B. Lean's deluxe garment
bag.
(4.800−10.000)
%ΔQ X ×100 %
EQ , P =
d
7.400
X Y %ΔP Y = −52
×100 %
111
70,27 %
=
46,85 %
 Eric Stevanus-2201756600-LA28
= 1,5

b. B. B. Lean's deluxe garment bag sales recovered from 4800 units to 6000 unit
following a price reduction to $130 per unit. Calculate B. B. Lean's arc price elasticity
of demand for this product.

%ΔQ X d

EQ , PX = (6.000−4.800)
X %ΔP X ×100 %
5.400
=
(130−140)
× 100 %
135
22,22%
= - 7,41%
= -3
c. Assuming the same arc price elasticity of demand calculated in part B, determine the
further price reduction necessary for B. B. Lean to fully recover lost sales (i.e., regain
a volume of 10000 units).

(10.000−6.000)
× 100 %
Price reduction (-) = 8.000
3,5
50 %
=
3,5
= 14,29%

4. Income Elasticity.
Ironside Industries, Inc., is a leading manufacturer of tufted carpeting under the Ironside
brand. Demand for Ironside's products is closely tied to the overall pace of building and
remodeling activity and, therefore, is highly sensitive to changes in national income. The
carpet manufacturing industry is highly competitive, so Ironside's demand is also very
price-sensitive. During the past year. Ironside sold 30 million square yards (units) of
carpeting at an average wholesale price of $15.50 per unit. This year, household income
is expected to surge from $55500 to $58500 per year in a booming economic recovery.
a. Without any price change. Ironside's marketing director expects current-year sales
to soar to 50 million units because of rising income. Calculate the implied income arc
elasticity of demand.
I1 =55.500
I2 =58.500
Q1 = 30 million
Q2 = 50 million
50−30 58.500+55.500
E= x
58.500−55.500 50+30
 Eric Stevanus-2201756600-LA28
20 114.000
= x
3.000 80
= 9.5 = elastic

b. Given the projected rise in income, the marketing director believes that a volume of
30 million units could be maintained despite an increase in price of $1 per unit. On
this basis, calculate the implied arc price elasticity of demand.
P1 = 15,50
P2 = 16,50
Q1 = 30 million
Q2 = 50 million
50−30 15,50+16,50
E= x
16,50−15,50 50+30
20 32
= x
1 80
= 8 = elastic

c. Holding all else equal, would a further increase in price result in higher or lower total
revenue?
Since Price is elastic, then an increase in price would lower the revenue

5. Cross-Price Elasticity.
The South Beach Cafe recently reduced appetizer prices from $12 to $10 for afternoon
'early bird' customers and enjoyed a resulting increase in sales from 90 to 150 orders
per day. Beverage sales also increased from 300 to 600 units per day.
a. Calculate the arc price elasticity of demand for appetizers.

%ΔQ X (150−90)
d
× 100 %
EQ , P = 120
X X %ΔP X =
(10−12)
× 100 %
11
50 %
= - 18,18 %
= -2,75

b. Calculate the arc cross-price elasticity of demand between beverage sales and
appetizer prices.
(600−300)
%ΔQ X × 100 %
d
450
EQ , P =
X Y %ΔP Y = (10−12) ×100 %
11
 Eric Stevanus-2201756600-LA28
66,67 %
= - 18,18 %
= -3,67

c. Holding all else equal, would you expect an additional appetizer price decrease to $8
to cause both appetizer and beverage revenues to rise? Explain.

Appetizers
Before : $10 x 150 orders = $1.500
After : $8 x 162 orders = $1.296
−22,22 %
-2,75 =
x
x = 108% x 150 orders
= 162 orders
We can conclude that Appetizers Revenue would fall even though the orders may
rise. The selling price of $8 might not be reasoneable for the appetizers, but if the
rising revenue of bevarages can cover it up than its consider to be safe enough.
Beverages
Before : 600 units
After : 622 units
−22,22 %
-6 =
x
x = 103,7% x 600 units
= 622 units
As long as 22 units profits of beverages are more than $204 than its safe to do it.

6. Optimal Pricing.
In an effort to reduce excess end-of-the-model-year inventory,
Harrison Ford offered a 1 per cent discount off the average price of 4WD Escape Gas
Electric Hybrid SUVs sold during the month of August. Customer response was wildly
enthusiastic, with unit sales rising by 10 per cent over the previous month's level.
a. Calculate the point price elasticity of demand for Harrison Ford 4WD Escape Gas-
Electric Hybrid SUVs sold during the month of August.

10 %
Price elasticity: =-10
−1 %
Price Elasticity of demand for Harrison Ford 4WD Escape Gas-Electric Hybrid SUVs
sold during the month of August is -10

b. Calculate the profit-maximizing price per unit if Harrison Ford has an average
wholesale (invoice) cost of $23500 and incurs marginal selling costs of $350 per unit.
 Eric Stevanus-2201756600-LA28
MC = 23500+350 = 23850
Profit Maximizing Price:
MC=MR
Marginal Cost = Marginal Revenue

1
MC = P ×( 1+ )
ep
1
P= MC :(1+ )
ep
1
P=23850 :(1+ )
−10
P =$26.500