Problem set 5 - 1. Songs R Us.com, an online retailer of...

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1. Songs R Us.com, an online retailer of CDs, wants to increase its total revenue. Currently, every CD is priced at $16.50. One suggestion is to offer a discount of $3. Songs R US.com knows that they have two types of customers and market research shows that Type I would increase their purchases of CDs from 850,000 to 1,150,000, whereas Type II customers would increase their purchases of CDs from 1,850,000 to 2,150,000. a. Using the midpoint method, calculate the price elasticities of demand for the two types of customers. b. Explain how the discount will affect revenue from each group. Who should the discount be offered to? 2. A recent report by the U.S. Centers for Disease Control and Prevention (CDC), published in the CDC?s Morbidity and Mortality Weekly Report, studied the effect of an increase in the price of beer on the incidence of new cases of sexually transmitted disease in young adults. In particular, the researchers analyzed the responsiveness of gonorrhea cases to a tax-induced increase in the price of beer. The report concluded that "the . . . analysis suggested that a beer tax increase of $0.20 per six-pack could reduce overall gonorrhea rates by 8.9%." Assume that a six- pack costs $5.90 before the price increase. Use the midpoint method to determine the percent increase in the price of a six-pack, and then calculate the cross-price elasticity of demand
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This note was uploaded on 10/27/2011 for the course ECON 125 taught by Professor Diannelabert during the Spring '11 term at Hamilton College.

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Problem set 5 - 1. Songs R Us.com, an online retailer of...

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