A. Suppose you are an economic consultant for a large company that produces and sells lollipops that are shaped like the faces of Hollywood celebrities. The company has shops in the major cities around the country and also sells by mail order catalog. As an economic consultant, you have estimated the elasticity of demand for store-bought lollipops to be 0.75 and the elasticity of demand for mail order lollipops to be 3.
1. What advice would you give to the president of the company if she wanted to increase revenue from the shops?
2. What advice would you give to the president of the company if she wanted to increase revenue through mail orders?
B) LATER, suppose that the price of sugar increases causing a 20% reduction in the supply of celebrity lollipops. What information would you need to compute the effect of the reduction in supply on the equilibrium price?
The elasticity of demand tells us how the quantity demanded will change when price in changed. A value less than one indicates that demand is inelastic, and that a quantity demanded will change by less than the change in price. Since elasticity is only .75 in the shops, it indicates that for every 1% ...