This Study Resource Was: Arc Price Elasticity (Change in Q / Average Q) / (Change in P / Average P)

Giovanna Lugli
Managerial Economics
(Ch. 3: 2, 10ab, Polo Golf Shirt 1-9)
(Ch. 5: 6, 8a)
9/10/17
Chapter 3
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?
-.20 * -2.2 = 44%
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The percentage increase in the quantity of computers sold is 44%.
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10. The Reliable Aircraft Company manufactures small, pleasure-use aircraft. Based on past
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experience, sales volume appears to be affected by changes in the price of the planes and by the
state of the economy as measured by consumers’ disposable personal income. The following data
pertaining to Reliable’s aircraft sales, selling prices, and consumers’ personal income were
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collected:
aC s
vi y re
Year Aircraft Sales Average Price ($) Disposable Personal

Income
2006 525 17,200 610
2007 450 8,000 610
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2008 400 8,000 590

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a. Estimate the arc price elasticity of demand using the 2006 and 2007 data.
is
Arc price elasticity = (Change in Q / Average Q) / (Change in P / Average P)

Th
[(525 - 450) / (17,200 - 8,000)] * [(17,200 + 8,000) / (525 + 450)] = 0.2107
The estimated arc price elasticity of demand from 2006 to 2007 was 0.2107.
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b. Estimate the arc income elasticity of demand using the 2007 and 2008 data.
Arc price elasticity = (Change in Q / Average Q) / (Change in P / Average P)
[(450 - 400) / (610 - 590) * (610 + 590) / (450 + 400)] = 3.5294
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The estimated arc price elasticity of demand from 2007 to 2008 was 3.5294.
Polo Golf Shirt Pricing

1. Identify the change in total revenue (the marginal revenue) from the fourth shirt per day.
What price reduction was necessary to sell four rather than three shirts?
Marginal revenue (fourth shirt) = ∆ TR / ∆Q
$176 - $135 / 4 - 3 = $41
Price reduction = $45 - $44 = $1
2. Does this fourth shirt earn an operating profit or impose an operating loss? How large is it?
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∏ = TR – TC
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= P.Q – 28Q
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4th = $44(4) – $28(4)
= $64 rs e
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3th = $45(3) - $28(3)
= $51
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aC s
This fourth shirt earn an operating profit of $64-$51 = $13

vi y re
3. What is the change in total revenue from lowering the price to sell seven rather than six shirts
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in each color each day? In what sense is the decision to sell this seventh shirt a “break
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point”?
MR from the 7th shirt per day = ∆ TR / ∆Q
is
= $268 - $240 / 7 – 6
Th
= $28
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4. Decompose the components of the $28 marginal revenue from the seventh unit sale at $38.31
—that is, how much revenue is lost per unit sale relative to the price that would sell six shirts
per color per day?
7th price = $38.31, then the marginal revenue is = $28
6th price = $40, then marginal revenue is = $30
Therefore, if they sell 7 shirts instead of 6 shirts, we will lose $30-$28 = $2 for each T-
shirts.
5. Calculate the total revenue for selling the 10th through the 16th shirt per day. Calculate the
reduced prices necessary to achieve each of these sales rates.
MR = (TR2−TR1) / (Q2−Q1)
16 = TR2 – (311 / 1)
= TR2 – 311
TR2 = 311+16
= $327
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The total revenue for selling the 10th through the 16th shirt per day is $327.
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Therefore:
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TR = Q * P
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$327= 10 * P
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P = 327 / 10
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P= $32.70
aC s
$32.70 is the reduced price necessary to achieve each of the sales rates.
vi y re
6. How many unit sales per day most pleases a sales clerk with sales- commission-based
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bonuses?
ar stu
Selling 14 shirts a day is most profitable, since it brings a profit of $361.

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7. Would you recommend lowering price to the level required to generate 15 unit sales per day?
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Why or why not? What does it mean to “sell at a negative margin”?

No, I would not recommend lowering the price to the level required to generate 15
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unit sales per day. Total revenue from selling 14 shirts is $361. If we lower the price
to the level required to sell 15 shirts per day, total revenue will be $361. Since, total
revenue does not change, it is inefficient to lower the price and sell 15 shirts per day.
8. At 14 shirts per day, the margin is positive. But what is the operating profit or loss on the
14th? The 12th? The 10th shirt?
Operating profit / loss (14th) = TR – VC (Q)
= TR (14) – VC (14) * 14
= $361 - $28(14)
= $-31 (loss)
= TR (12) – VC (12) * 12
= $350 - $28(12)
= $14 (profit)
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= TR (10) – VC (10) * 10
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= $327 - $28(10)
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= $47 (profit)
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9. How many shirts do you recommend selling per color per day? What then is your
aC s
recommended dollar markup and markup percentage? What dollar margin and percentage
vi y re
margin is that?
TR - VC (Q)
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I recommend selling 6 shirts per color per day. The company earns a $72 profit. The
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profit for 7 unit shirts is the same as the profit earned for 6 unit shirts, however, the
marginal revenue for the 6 unit is $4 higher ($34 - $30) compared to the 7 unit shirt
marginal revenue, which is $2 ($30 - $28).
is
Th
Chapter 5
6. The economic analysis division of Mapco Enterprises has estimated the demand
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function for its line of weed trimmers as

QD 1⁄4 18;000 þ 0:4N − 350PM þ 90Ps
where N = number of new homes completed in the primary market area
PM = price of the Mapco trimmer
PS = price of its competitor’s Surefire trimmer
In 2010, 15,000 new homes are expected to be completed in the primary market area. Mapco
plans to charge $50 for its trimmer. The Surefire trimmer is expected to sell for $55.
a. What sales are forecasted for 2010 under these conditions?
QD= 18,000 +0.4N – 350PM+ 90PS
Sales forecast for 2010 = 18,000 + 0.4(15,000) – 350(50) + 90(55) = $11,450
b. If its competitor cuts the price of the Surefire trimmer to $50, what effect will
this have on Mapco’s sales?
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Sales forecast under the new scenario =
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18,000 + 0.4(15,000) – 350(50) + 90(50) = $11,000
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Therefore, Mapco’s sales will fall by $450.
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c. What effect would a 30 percent reduction in the number of new homes
completed have on Mapco’s sales (ignore the impact of the price cut of the
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Surefire trimmer)?
aC s
vi y re
A thirty percent reduction in new homes bring 15,000 down to .7(15,000) or

10,500.
QD = 18,000 + 0.4(10,500)  350(50) + 90(55) = 9,650 is the forecast.

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8. Bell Greenhouses has estimated its monthly demand for potting soil to be the following:
is
N = 400 + 4X
Th
where N = monthly demand for bags of potting soil

X = time periods in months (March 2006 = 0)
sh
Assume this trend factor is expected to remain stable in the foreseeable future. The
following table contains the monthly seasonal adjustment factors, which have been
estimated using actual sales data from the past five years:
a. Forecast Bell Greenhouses’ demand for potting soil in March, June, August, and
December 2007.
N = (1 + a) (400 + 4X)
March 2007 (X = 24): (1.02) (400 + 4(24)) =506
June 2007 (X = 27): (1.15) (400 + 4(27)) =584
August 2007 (X = 29): (1.10) (400 + 4(29)) =568
December 2007 (X = 33): (0.88) (400 + 4(33)) =468
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Giovanna Lugli

Year Aircraft Sales Average Price ($) Disposable Personal

2008 400 8,000 590

Arc price elasticity = (Change in Q / Average Q) / (Change in P / Average P)

[(525 - 450) / (17,200 - 8,000)] * [(17,200 + 8,000) / (525 + 450)] = 0.2107

Polo Golf Shirt Pricing

This fourth shirt earn an operating profit of $64-$51 = $13

Selling 14 shirts a day is most profitable, since it brings a profit of $361.

Why or why not? What does it mean to “sell at a negative margin”?

function for its line of weed trimmers as

A thirty percent reduction in new homes bring 15,000 down to .7(15,000) or

QD = 18,000 + 0.4(10,500)  350(50) + 90(55) = 9,650 is the forecast.

where N = monthly demand for bags of potting soil

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