Download MIcro Chapter 4 questions and more Exercises Economics in PDF only on Docsity!
CHAPTER 4
Key Formulae
Ep=
change in Q sum of quantities/ 2
÷
change in P Sum of prices /
Problems
- Vic's Vintage Videos
Victor Olshevski is a video buff who has just opened his own video store specialising in old movies and videos. He has had some problems determining the price to charge and has experimented with various prices for his videos. He is puzzled by the reaction of his customers to price changes he has made.
Knowing you are a NAIT business student he asks you for some help as you are renting the video "Revenge of the Killer Dandelions from Planet X". He gives you a computer printout showing the following historical data:
Price per Video ($)
Videos Rented
per Week
Total Revenue
Elasticity of Demand
Elastic/ Inelastic
1 4,000 ---------- ----------
2 2, 3 1, 4 200
a. What does elasticity of demand (Ep) measure?
b. How is it related to total revenue?
c. Complete the table above.
d. What are three factors that can affect elasticity of demand?
Dieter Ducklington Enterprises
Dieter Ducklington owns the Red Deer Ruffians, A professional rugby team. Each time the team plays in Ruffian Stadium it costs Dieter $150,000 for rent, staffing, field preparation, etc. Current ticket prices for a ruffian home game are $15 per ticket, and an average game draws 10,000 fans even though the Stadium can accommodate twice that number.
a. At current ticket prices, how much profit does Dieter make per game?
Dieter has just had a marketing survey completed that indicated if prices were raised to $20 per ticket, average attendance would drop to 9,000 fans.
b. At a price of $20 per ticket what would Dieter's average profit be per game?
c. Calculate the elasticity of demand coefficient between these two price points.
d. Between these price points, is Ep elastic or inelastic? How can you tell?
e. As price increases, what happens to Q and TR?
Solutions
- Vic’s Vintage Videos
P Q TR=PQ Ed Type* $1 4,000 $4,000 -------- -------- $2 2,000 4,000 1.00 unitary (Ep = 1.0) $3 1,000 $3,000 1.67 elastic (Ep>1.0) $4 200 $800 4.67 elastic (Ep>1.0)
a. Sensitivity of consumers to a change in price (effect of change in P on Qd)
b. If Ep is elastic, as P increases, TR decreases (consumers are very sensitive to P) if Ep is inelastic, as P increases, TR increases (consumers are not very sensitive to P)
c. See table
d. Substitutability, proportion of income, time
- Dieter Ducklington
a. TR = 15 * 10,000 = $150,000; TC= $150,000; 150,000 - 150,000 = 0 breakeven
b. TR = 20 * 9,000 = $180,000; TC = $150,000; 180,000 - 150,000 = $30,000 profit
c. Ep = 0.368 (inelastic)
d. Inelastic (Ep < 1.0) or as P increases, TR increases
e. As P increases, Q Decreases, TR increases
f. Ep = 0.818 (inelastic)
g. As P decreases, Q Increases, TR decreases (positive relationship if inelastic)
h. TR = 12 * 12,000=$144,000; TC=$150,000; 144,000 – 150,000 = $-6,000 loss
i. $
j. 4,000 tickets * $15 per ticket * 10 games = $600,
