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C3_ReviewQuestions_2010-02-09

C3_ReviewQuestions_2010-02-09 - Review Questions for...

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Review Questions for Chapter 3 – Elasticity ECON 303 Managerial Economics, Spring 2010 Edward L. Millner , Department of Economics Copyright Millner 2009-10 Chapter 3 – Price Elasticity R3.1 (Question 3.21, p. 116, slightly revised.) The owner of a small chain of gasoline stations in a large Midwestern town read an article in a trade publication stating that the own-price elasticity of demand of gasoline in the United States is -0.2. Because of this highly inelastic demand in the United States, he is thinking about raising prices to increase revenues and profits. a. Will total revenue for the chain increase if the own-price elasticity of the demand facing the small chain of stations is -0.2 and the owner raises price? Explain why or why not briefly. b. Would you expect the demand facing the chain of stations to be more or less elastic than the demand for gasoline in the United States? Explain why briefly. c. Suppose that the owner raises price. Given your answer in part b, will total revenue increase or will it decrease or is the outcome uncertain?
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