Managerial Economics: A Problem Solving Approach
5th Edition
ISBN: 9781337106665
Author: Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher: Cengage Learning
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Chapter 9, Problem 9.2IP
To determine
The responses of the beer distributors and snack food vendors on the legalization of marijuana.
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The price elasticity of demand for your product is 2.0, and your marginal cost is $30. What is your profit-maximizing price? Suppose that you can run a new advertising campaign and differentiate your product by emphasizing its unique features, thereby decreasing the price elasticity of demand to 1.8. What is your new profit-maximizing price?
Take a look at the three factors that affect elasticity in section 6.3, on pages, 205-207.
- Availability of Substitutes
- Percentage of Consumer's Budget
- Time Period of Adjustment
Explain how each of the factors would or would not affect the price elasticity of demand for a good or service that your company (or a company for which you have an interest) produces?
In an attempt to increase revenues and profits, a firm is considering a 4 percent increase in price and an 11 percent increase in advertising. If the price elasticity of demand is −1.5 and the advertising elasticity of demand is +0.6, would you expect an increase or decrease in total revenues?
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Managerial Economics: A Problem Solving Approach
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- In an attempt to increase revenues and profits, a firm is considering a 4 percent increase in price and an 11 percent increase in advertising. If the price elasticity of demand is 1.5 and the advertising elasticity of demand is +0.6, would you expect an increase or decrease in total revenues?arrow_forwardWhat price should you set for a product? This week we’re learning a useful numerical rule. You’re brought in to consult for a business that currently has a Marginal Cost of $5 for its product. It sells its product to customers for $9 per unit and the estimated price elasticity of demand is -1.5. Is the current price optimal? Should it be raised or lowered? To what? Support your answer using the markup pricing equations from the text. (MR = P*(1+(1/elasticity)) combined with the MR=MC rule).arrow_forwardThe demand curve for a product is given by QDx = 1,200 – 3Px – 0.1Pz, where Pz=$300. a) What is the own price elasticity of demand when Px = $140? Is demand elastic or inelastic at this price? What would happen to the firm’s revenue if it decided to charge a price below $140? b) What is the own price elasticity of demand when Px = $240? Is demand elastic or inelastic at this price? What would happen to the firm’s revenue if it decided to charge a price above $240? c) Are goods X and Z substitutes or complements? What is the cross-price elasticity of demand between goods X and Z when Px = $140?arrow_forward
- Explain: as an entrepreneur how can you use this concept of elasticity of demand in providing better value your customers? *Cross pricearrow_forwardThe own price elasticity of demand is the most important determinant of pricing strategy by a firm. A firm can charge a high price for its product and earn higher revenue if the demand for its product is relatively inelastic. In other words, demand inelasticity and market power go hand in hand. What strategies should a firm adopt to make the demand for its product inelastic? Explain.arrow_forwardSuppose that a new entry has decreased your demand elasticity from –5 to –6 (made demand more elastic) and that your price, before the new entry, was $10. You should adjust your price to ________ due to the new entry and decreased demand elasticity.arrow_forward
- Cikli is the manager of a firm that receives a revenue of RM3000 per month from product X and RM7000 per month from product Y. The price elasticity of demand for product X is -2.5 when original quantity (Q) for X and Y are 150 and 175 units, respectively and the cross price elasticity of demand between product X and Y is 1.1. If Cikli increases the price of good X by 1%. How much is Cikli’s new total revenue for both of the products?arrow_forwardA dog rescue operation finds when it sets its adoption fee at $140 in a month, 200 dogs are adopted, but when they drop the price to $60, 300 dogs are adopted. What does that mean about the demand elasticity in their area? Question 4 options: The elasticity of demand is 0.5 and its relatively elastic The elasticity of demand is 0.5 and its relatively inelastic none of these answers are accurate The elasticity of demand is 2 and its relatively inelastic The elasticity of demand is 2 and its relatively elasticarrow_forwardCikli is the manager of a firm that receives a revenue of RM3000 per month from product X and RM7000 per month from product Y. The price elasticity of demand for product X is -2.5 when original quantity (Q) for X and Y are 150 and 175 units, respectively and the cross price elasticity of demand between product X and Y is 1.1. If Cikli increases the price of good X by 1%. How much will Cikli’s total revenue change for product X?arrow_forward
- Cikli is the manager of a firm that receives a revenue of RM3000 per month from product X and RM7000 per month from product Y. The price elasticity of demand for product X is -2.5 when original quantity (Q) for X and Y are 150 and 175 units, respectively and the cross price elasticity of demand between product X and Y is 1.1. If Cikli increases the price of good X by 1%. How much will Cikli’s total revenue change for product X? How much is Cikli’s new total revenue for both of the products? Plot a graph for product X and another for product Y, showing the before and after change in price. Give an appropriate example for each product.arrow_forwardThe demand curve for a product is given by Qdx = 1,200 − 3Px − 0.1Pz where Pz = $300. a. What is the own price elasticity of demand when Px = $140? Is demand elastic or inelastic at this price? What would happen to the firm’s revenue if it decided to charge a price below $140? b. What is the own price elasticity of demand when Px = $240? Is demand elastic or inelastic at this price? What would happen to the firm’s revenue if it decided to charge a price above $240? c. What is the cross-price elasticity of demand between good X and good Z when Px = $140? Are goods X and Z substitutes or complemarrow_forwardAssume that you are in an interview session and the panel asks you to give a pricing decision that will maximize company’s interest (revenue maximization). Price Qd Qs 10 80 20 11 75 30 12 70 40 13 65 50 14 60 60 15 55 70 16 50 80 This is demand and supply schedule, estimate the equations, calculate the elasticity, and justify your positions based on your calculations. Based on your demand equation, what price will maximize the revenue and what would be the elasticity at the revenue maximization point.arrow_forward
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