# Interpreting the elasticity values

For each of the following cases, calculate the arc price elasticity of demand, and state whether demand is elastic, inelastic, or unit elastic.

a. When the price of milk increases from $2.25 to $2.50 per gallon, the quantity demanded falls from 100 gallons to 90 gallons.

b. When the price of paperback books falls from $7.00 to $6.50, the quantity demanded rises from 100 to 150.

c. When the rent on apartments rises from $500 to $550, the quantity demanded decreases from 1,000 to 950.

You have the following information for your product:

The price elasticity of demand is -2,0

The income elasticity of demand is 1.5

The cross-price elasticity of demand between your good and a related good is -3.5

What can you determine about consumer demand for your product from this information?

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#### Solution Preview

Please refer attached file for complete solution.

You have the following information for your product:

The price elasticity of demand is -2,0

The income elasticity of demand is 1.5

The cross-price elasticity of demand between your good and a related good is ...

#### Solution Summary

Solution depicts the steps to estimate the arc price elasticity value for each of the given cases.

Golden Star Winery Case

Golden Star Winery produces mid level wines consumed primarily in North America. Given below is the projected income statement for the company for 2011.

Projected Income Statement (2011)

Sales (100,000 cases at $7 per case) $700,000

Cost of goods sold:

Materials $180,000

Labor $225,000

Fixed manufacturing expenses $45,000

Administrative and selling expenses:

Delivery $30,000

Commissions $50,000

Advertising $10,000

Travel $5,000

Fixed administrative and selling expenses $15,000

Total expenses $560,000

Net income before taxes $140,000

Using Excel, prepare a graph showing the breakeven point and any profit or loss at the current price of $7. Explain to the Golden Star management the implications of this analysis.

What is the elasticity coefficient for each price between $6.50 and $7.50? Is the demand elastic or inelastic at these points? How can this information be useful to management in its pricing and output decisions?

On the basis of your calculations and the information above, what recommendations would you make to Golden Star in terms of price and output levels?

Complete the following table in a Microsoft Excel spreadsheet.

Price Quantity Total Revenue Total Variable Cost Total Fixed Cost Total Cost Profit

$8.00 65,000 - - - - -

$7.75 75,000 - - - - -

$7.50 80,000 - - - - -

$7.25 90,000 - - - - -

$7.00 100,000 - - - - -

$6.75 115,000 - - - - -

$6.50 120,000 - - - - -