09HWS4 - Economics 104A Solution for Problem Set#4 Winter...

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Economics 104A Solution for Problem Set #4 Winter 2009 1. Suppose that a company hires you to advise them on their pricing policy. One of the things the company would like to know is how much a 5% increase in their price is likely to reduce sales. a) What types of information would you need to help the company with their prob- lem. Answer: To figure out the percentage reduction in sales, you would need infor- mation about the price elasticity of demand. To figure out the absolute change, you would also need the price the company is currently charging and the quantity it is currently selling. b) Explain why each of these types of information would be important to you. Answer: Notice that R = P × Q is the total revenue (sales). By taking total differential on both sides, we have dR = QdP + PdQ dR R = dP P + dQ Q . The price elasticity of demand together with the given percentage change in price determines the percentage in quantity sold. Using the percentage changes
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