Solution
Elasticity
1.
Nile.com, the online bookseller, wants to increase its total revenue. One strategy is
to offer a 10% discount on every book it sells. Nile.com knows that its customers
can be divided into two distinct groups according to their likely responses to the dis
count. The accompanying table shows how the two groups respond to the discount.
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 Nile.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 Nile.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?
1.
a.
Using the midpoint method, the percent change in the quantity demanded by
group A is
×
100
=×
100
=
6.25%
and since the change in price is 10%, the price elasticity of demand for group A is
=
0.625
Using the midpoint method, the percent change in the quantity demanded by
group B is
×
100
100
=
12.5%
and since the change in price is 10%, the price elasticity of demand for group B is
=
1.25
For group A, since the price elasticity of demand is 0.625 (demand is inelastic),
total revenue will decrease as a result of the discount. For group B, since the price
elasticity of demand is 1.25 (demand is elastic), total revenue will increase as a
result of the discount.
c.
If Nile.com wants to increase total revenue, it should definitely not offer the dis
count to group A and it should definitely offer the discount to group B.
12.5%
10%
0.2 million
1.6 million
1.7 million
−
1.5 million
(1.5 million
+
1.7 million)/2
6.25%
10%
0.1 million
1.6 million
1.65 million
−
1.55 million
(1.55 million
+
1.65 million)/2
Group A
Group B
(sales per week)
(sales per week)
Volume of sales before the
1.55 million
1.50 million
10% discount
Volume of sales after the
1.65 million
1.70 million
10% discount
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chapter:
S87S100_Krugman2e_PS_Ch06.qxp
9/16/08
9:20 PM
Page S87
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Solution
S88
CHAPTER 6
ELASTICITY
2.
Do you think the price elasticity of demand for Ford sportutility 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
passenger cars.
d.
The time period over which you measure the elasticity lengthens. During that
longer time, new models such as fourwheeldrive cargo vans appear.
2.
a.
The price elasticity of demand for Ford SUVs will increase because more substi
tutes are available.
The price elasticity of demand for Ford SUVs will decrease because fewer substi
tutes are available.
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 Price Elasticity, Supply And Demand, Electricity demand

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