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Price Elasticity of Demand and Cutting Costs

Short Discussion 1
* Name one good where your price elasticity of demand is greater than one (that is, your demand is elastic). If you were the manager of the company that sells this good, what considerations would you make before changing the price?
* Name two goods where your cross-price elasticity of demand is greater than one (that is, your demand is elastic for Good A when the price of Good B changes).
What would you do if you were the manager of the company that sells Good A?
* Name one good where your income elasticity of demand is greater than one (that is, when your income changes, your demand is elastic). What would you do if you were the manager of the company that sells this good?

Short Discussion 2
* Why do you think the stores wouldn't raise prices to increase revenue in this case?
* Why would the stores wage price wars in a declining economy?
* Do you think cost cutting is a good strategy during a recession? Why or why not?

Short Discussion 3
* Haven't there always been "knowledge" workers, people who do more than what a robot could do? Why, then, has such a big deal been made of the "knowledge economy" and the "knowledge worker" in recent years?
* According to some management experts, mechanisms will have to be created for harnessing the wisdom of crowds. Change, innovation, and adaptability are crucial. How might markets inside the firm answer these challenges?

Solution Preview

Discussion 1
One good where the price elasticity of demand is greater than one is fish and chips. Before changing the price, I will know that increasing the price will reduce my revenues. Also reducing the price will increase the sales revenues, however, since the margins are low reducing prices may lead to lower profits.
The two goods where the cross price elasticity of demand is greater than one are tea and coffee. If I were a seller of Good A, tea and I expect the prices of coffee to increase; I will hold the prices of tea at a stable level. I will not increase the price of tea and I will get more customers and my revenues will increase. On the other hand if the price of coffee declines. I will also reduce the price of tea so that my market share is maintained. My customers should not start drinking coffee.
One good whose income elasticity of demand is greater than one is a luxury car. if I were the manager of the company that sells luxury cars, I will target segments ...

Solution Summary

The answer to this problem explains three discussion questions in economics. The references related to the answer are also included.

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