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Application of elasticity concepts

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Think of a good that you have purchased recently. Be specific (e.g. is it breakfast cereal in general or Cheerios cereal specifically).

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1. If the price of this item increases, how would this affect the quantity of the good that you consume?

2. Is the demand for this good price elastic or price inelastic? Justify your classification by talking about the determinants of elasticity as they apply to this product.

3. Say price is on the rise for this product and you are the manager of a store, would you be thrilled to be selling this product? Under what circumstances would you want to own a business that sells this product? In other words, how does an increase in price for this good affect your Total Revenue?

4. Using specific examples, relate the concepts of Cross Elasticity and Income Elasticity to this product.

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Solution Preview

Suppose I bought Cheerios cereal for breakfast.

1. If the price of Cheerios cereal increases, I can always find cereals of others brands that are cheaper or any other cheaper option for breakfast. So, quantity of consumption of this good is expected to decrease due to an increase in price.

2. Demand for Cheerios cereal is price elastic. This is because of the following facts:

a. There are plenty of close substitutes available in the market for this product. A product which has many close substitutes tends to be price elastic. In case of increase in price of such good, consumers can easily switch over to other cheaper substitutes available in the market. In the case of a product that does not have many close substitutes available, consumers do not option to switch over to other substitutes. That is why products with lesser substitutes tend to be price inelastic. Cheerios cereal has many competing brands in the market which are close ...

Solution Summary

Solution discusses the demand behavior of a particular product in the light of elasticity concepts.

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See Also This Related BrainMass Solution

Application of elasticity concepts

Questions 1 through 6, refer to the following table showing a demand schedule:

Price Quantity Demanded
$200 1000
$150 1400
$100 1800

1. If price falls from $200 to $150, what is the elasticity of demand over this range?
A. -0.625
B. -1.0
C. -1.17
D. -2.5
E. -3.0

2. As output increases from 1,000 to 1,400 what is marginal revenue?
A. $25
B. $50
C. -$400
D. -$25
E. -$75

3. If price falls from $200 to $150,
A. Arrows representing the price and quantity affects both point down.
B. An arrow representing the price effect points down and is longer than an arrow for the quantity effect.
C. An arrow representing the price effect points down and is shorter than an arrow for the quantity effect.
D. Arrows representing the price and quantity effects both point up.
E. Total revenue moves in the same direction as the arrow representing the price effect.

4. If price falls from $150 to $100, what is the elasticity of demand over this range?
A. -0.625
B. -1.0
C. -1.17
D. -2.5
E. -3.0

5. As output rises from 1,400 to 1,800, what is marginal revenue?
A. $25
B. $50
C. -$400
D. -$50
E. -$75

6. If price falls from $200 to $150,
A. Arrows representing the price and quantity affects both point down.
B. An arrow representing the price effect points down and is longer than an arrow for the quantity effect.
C. An arrow representing the quantity effect points up and is shorter than an arrow for the price effect.
D. Arrows representing the price and quantity effects both point up.
E. Total revenue moves in the same direction as the arrow representing the quantity effect.

7. If price falls from $150 to $100,
A. Arrows representing the price and quantity affects both point down.
B. An arrow representing the price effect points down and is shorter than an arrow for the quantity effect.
C. Total revenue moves in the same direction as the arrow representing the price effect.
D. The arrow representing the price effect points down and the arrow representing the quantity effect points up.
E. Both c and d

8. Suppose that the Tennessee Titans' owner, Bud Adams, is considering a plan in which fans who donate blood get a $20 reduction in their ticket price. If both ticket REVENUES and blood donations (i.e., number of pints donated) rise with this plan, which of the following is true?
A. The demand for Tennessee Titans' tickets is price elastic.
B. The demand for Tennessee Titans' tickets is price inelastic.
C. The demand for blood donations is price elastic.
D. The demand for blood donations is price inelastic.

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