At the yearly meeting, you attended a talk by renowed economist, Prof. Glenn Dutcher. His talk was about pricing. You decided to see if you could...
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3. At the yearly meeting, you attended a talk by renowed economist, Prof.
Glenn Dutcher. His talk was about pricing. You decided to see if you could
increase profits by altering various pricing schemes.

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a. You are selling some of your largest rocks for $300. At this price, you are
selling 400. You run a sale where each rock is $50 off and sell 500. Calculate
price elasticity. Provide an explanation for what this number represents.
b. Was the old price or new price better for you? Why? Explain in terms
of elasticity and revenue.
c. You noticed that once you dropped the price for the best rocks, cus-
tomer's bought fewer medium-sized rocks. In fact, the number went from 200
to 100. Calculate cross-price elasticity. Is this a substutite or complement good?
Provide an explanation for what this number represents.
d. If the price of the medium sized rocks was $200, was it optimal (in terms
of revenue gained/lost) to lower the price on the large rocks? Explain.
e. Assume a customer would like to buy a rock for their house and values the
rocks, in terms of utility, as U = .5L + .25M where L represents the number of
large rocks and M represents the number of medium rocks the customer buys.
Given the initial prices of $300 and $200 for the large and medium rocks, what
budget must the consumer set asside to get the most utility value for her money,
or "most bang for her buck" (assume rocks cannot be divided)?
f. How does your answer change if the price of the large rock were increased
to $500?

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