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Applications of the Price Elasticities

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1.- The price elasticity of demand for imported whiskey is estimated to be -0.20 over a wide interval of prices. The federal government decides to raise the import tariff on foreign whiskey, causing its price to rise by 20%. Will sales of whiskey rise or fall, and by what percentage amount?

2.- In an article about the financial problems of the USA today, Newsweek reported that the paper was losing about $20 million a year. A Wall Street analyst said that the paper should raise its price from .50 to .75, which he estimates would bring in an additional 65 million a year. The paper's publisher rejected the idea, saying that the circulation could drop sharply after the price increase, citing that the wall street journal's experience after it increased its price to .75.What implicit assumptions are the publisher and the analyst making about price elasticity?

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1. Price elasticity of demand for imported whiskey=Ep=-0.20
Change in price=+20% (positive sign indicates an increase in prices)
Change in demand=Change in sales of imported whiskey=Ep*change in prices=-0.20*20%=-4%
Negative sign indicates fall in sales. Sales of imported whiskey will fall by 4%.

2. ...

Solution Summary

There are two problems. Solution to first problem predicts the change in sales of whiskey as a result of raise in import tariff. Solution to second problem lists the assumptions made by analyst and publisher about price elasticity of demand of news paper.

$2.19
See Also This Related BrainMass Solution

Price elasticity and its applications

Over the last year your boss has noticed that it would be useful for your firm to understand how consumers behave when variables in the market change and how these changes affect the total revenue for your product. You have been asked to do an analysis for your product, Good A, by addressing the following questions and reporting the results to your boss in a formal paper.

Questions:

Define the price elasticity of demand? What information does it provide? How is it calculated?

Define the income elasticity of demand? What information does it provide? How is it calculated?

Define the cross-price elasticity of demand? What information does it provide? How is it calculated?

What is total revenue? How is it calculated?

Define elastic, inelastic, and unitary elasticity means. How are these related to total revenue? Explain your answers.

With respect to the price elasticity of demand, construct a graph using the data in Figure1. Illustrate the ranges on the demand curve that indicate elastic, inelastic, and unitary elasticity. Explain your answers. Enter non-numerical responses in the same worksheet using textboxes.

Calculate the total revenue for each level of demand and post into the table, Figure 1. (Copy and paste this table into the Microsoft Word document that will form part of your submission.)

Using the midpoints formula presented in the textbook, calculate the price elasticity coefficient for each price level, starting with the coefficient for the $4 to $6 level. For each coefficient, indicate each type of elasticity: elastic demand, inelastic demand, or unitary demand. Post your answers into the table, Figure 1.

Assume that the income of consumers changes by 10%, and as a result the quantity demanded for Good A changes by 8%. What is the income elasticity of demand for Good A? What does this mean for your company?

Assume that the price of competing Good B decreases by 5% and as a result, the quantity demand for Good A decreases by 8%. What is the cross-price elasticity for your product? What type of goods are Good A and Good B?
Figure 1: The Demand Schedule for Barbeque Dinners

price quantity Total Revenue Elasticity Elastic or Inelastic
demanded coheficient

$4 100 XXXX XXXX
6 80
8 60
10 40
12 20
14 1

Required:

Prepare an analysis by answering the above-noted questions. Your analysis will consist of two documents as follows:

Microsoft Word document: Questions 1-5, 7-10.
Microsoft Excel worksheet: Question 6

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