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Ch. 5 End Problems

# Ch. 5 End Problems - chapter 5 > Elasticity PROBLEMS 1...

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>> Elasticity chapter 5 1. TheNile.com, the online bookseller, wants to increase its total revenue. Currently, every book it sells is priced at \$10.50. One suggested strategy is to offer a discount that lowers the price of a book to \$9.50, a 10% reduction in price using the midpoint method. TheNile.com knows that its customers can be divided into two distinct groups according to their likely responses to the discount. The accompanying table shows how the two groups respond to the discount. P R O B L E M S Group A Group B ( sales per week) ( sales per week) Volume of sales before the 10% discount 1.55 million 1.50 million Volume of sales after the 10% discount 1.65 million 1.70 million

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a. Using the midpoint method, calculate the price elasticities of demand for Group A and Group B. b. Explain how the discount will affect total revenue from each group. c. Suppose TheNile.com knows which group each customer belongs to when he or she logs on and can choose whether or not to offer the 10% discount. If TheNile.com wants to increase its total revenue, should discounts be offered to Group A or to Group B, to neither group, or to both groups? 2. Do you think the price elasticity of demand for Ford sport-utility vehicles (SUVs) will increase, decrease, or remain the same when each of the following events occurs? Explain your answer. a. Other car manufacturers, such as General Motors, decide to make and sell SUVs. b. SUVs produced in foreign countries are banned from the American market. c. Due to ad campaigns, Americans believe that SUVs are much safer than ordinary pas- senger cars. d. The time period over which you measure the elasticity lengthens. During that longer time, new models such as four-wheel-drive cargo vans appear. 3. U.S. winter wheat production increased dramatically in 1999 after a bumper harvest. The supply curve shifted rightward; as a result, the price decreased and the quantity demanded increased (a movement along the demand curve). The accompanying table describes what happened to prices and the quantity demanded of wheat. a. Using the midpoint method, calculate the price elasticity of demand for winter wheat. b. What is the total revenue for U.S. wheat farmers in 1998 and 1999? 2 C H A P T E R 5 P R O B L E M S 1998 1999 Quantity demanded (bushels) 1.74 billion 1.9 billion Average price (per bushel) \$3.70 \$2.72
c. Did the bumper harvest increase or decrease the incomes of American wheat farmers? How could you have predicted this from your answer to part a? 4. The accompanying table gives part of the supply schedule for personal computers in the United States. a. Calculate the price elasticity of supply when the price increases from \$900 to \$1,100 using the midpoint method. b. Suppose firms produce 1,000 more computers at any given price due to improved tech- nology. As price increases from \$900 to \$1,100, is the price elasticity of demand now greater than, less than, or the same as it was in part a?

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Ch. 5 End Problems - chapter 5 > Elasticity PROBLEMS 1...

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