Nicky Joe runs a satellite television subscription service for a rural customer base is considering a sale on his satellite dishes Using monthly data he estimates the demand for the dishes to be Log Q = log 11 –- 0.70 Log P + 1.4 Log I. R² = 0.85, SER= 2.33 (0.50) |(3.12) (0.10) At an approximate 95% level of confidence, can you say that a price reduction will increase profits? Why? a. Yes, a 95% confidence interval for the price elasticity of demand is [-0.50 to - 0.90] so the firm is on the inelastic portion of the demand curve, and a price reduction will increase profits. b. No, a 95% confidence interval for the price elasticity of demand is [-0.50 to - 0.90] so the firm is on the inelastic portion of the demand curve, and a price reduction will reduce profits. c. Yes, a 95% confidence interval for the price elasticity of demand is [0.50 to 0.90] so the firm is on the elastic portion of the demand curve, and a price reduction will increase profit. d. No, a 95% confidence interval for the price elasticity of demand is [0.50 to 0.90] so the firm is on the elastic portion of the demand curve, and so the effects of a price reduction cannot be determined.

Nicky Joe runs a satellite television subscription service for a rural customer base is considering a sale on his satellite dishes Using monthly data he estimates the demand for the dishes to be Log Q = log 11 –- 0.70 Log P + 1.4 Log I. R² = 0.85, SER= 2.33 (0.50) |(3.12) (0.10) At an approximate 95% level of confidence, can you say that a price reduction will increase profits? Why? a. Yes, a 95% confidence interval for the price elasticity of demand is [-0.50 to - 0.90] so the firm is on the inelastic portion of the demand curve, and a price reduction will increase profits. b. No, a 95% confidence interval for the price elasticity of demand is [-0.50 to - 0.90] so the firm is on the inelastic portion of the demand curve, and a price reduction will reduce profits. c. Yes, a 95% confidence interval for the price elasticity of demand is [0.50 to 0.90] so the firm is on the elastic portion of the demand curve, and a price reduction will increase profit. d. No, a 95% confidence interval for the price elasticity of demand is [0.50 to 0.90] so the firm is on the elastic portion of the demand curve, and so the effects of a price reduction cannot be determined.

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter2: Fundamental Economic Concepts

Section: Chapter Questions

Problem 5E

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