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Econ112_Spr08_021108

Econ112_Spr08_021108 - It's a Stretch Demand and Supply...

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It’s a Stretch… Demand and Supply Elasticities 2-11-08
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On the spot… Your boss wants to boost the firm’s total revenue (R = P x Q). Currently, P = 4 and Q = 10, so R = 40. Should you advise an increase, decrease, or no change in the price? Correct answer requires more info about demand for the firm’s product.
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Two (of many) possibilities… A:   P = 8 - .4Q      or      Q = 20 - 2.5P B:   P = 6 - .2Q      or      Q = 30 - 5P 8 6 4 2 P Q 5 10 15 20 25 30 TR = PxQ = 40 A B Point could lie on either demand curve
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Let’s see how R varies with p… CASE A CASE B P Q A R A P Q B R B 8 0.0 0.0 8 0.0 0.0 7 2.5 17.5 7 0.0 0.0 6 5.0 30.0 6 0.0 0.0 5 7.5 37.5 5 5.0 25.0 4 10.0 40.0 4 10.0 40.0 3 12.5 37.5 3 15.0 45.0 2 15.0 30.0 2 20.0 40.0 1 17.5 17.5 1 25.0 25.0 0 20.0 0.0 0 30.0 0.0 Best to leave P = 4, Best to set P = 3, where TR = 40 where TR = 45
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The revenue functions… 0 5 10 15 20 25 30 35 40 45 50 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 B A Q
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Why the different effects on R? In Case A, P = 4 maximizes R, so any price change reduces R.
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