Chapter 3: Q2LO (page 114)
Illustrate the relationship between the elasticity of demand and total revenues.
Total revenue is inversely related to the elasticity of demand.
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Revenue at a major cellular telephone manufacturer was billion for the nine months ending March , up 85 percent over revenues for the same period last year. Management attributes the increase in revenues to a percent increase in shipments, despite a drop in the average blended selling price of its line of phones. Given this information, is it surprising that the company’s revenue increased when it decreased the average selling price of its phones? Explain
The demand function for good is ln, where is the price of good X and M is income. Least squares regression reveals that
a. If , compute the own price elasticity of demand based on these estimates. Determine whether demand is elastic or inelastic.
b. If , compute the income elasticity of demand based on these estimates. Determine whether is a normal or inferior good
Recently, Pacific Cellular ran a pricing trial in order to estimate the elasticity of demand for its services. The manager selected three states that were representative of its entire service area and increased prices by percent to customers in those areas. One week later, the number of customers enrolled in Pacific’s cellular plans declined percent in those states, while enrolments in states where prices were not increased remained flat. The manager used this information to estimate the own price elasticity of demand and, based on her findings, immediately increased prices in all market areas by percent in an attempt to boost the company’s annual revenues. One year later, the manager was perplexed because Pacific Cellular annual revenues were percent lower than those in —the price increase apparently led to a reduction in the company’s revenues. Did the manager make an error? Explain.
Apply various elasticities of demand as a quantitative tool to forecast changes in revenues, prices, and/or units sold.
If Starbucks’s marketing department estimates the income elasticity of demand for its coffee to be , how will the prospect of an economic boom (expected to increase consumers’ incomes bypercent over the next year) impact the quantity of coffee Starbucks expects to sell?
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