How price elasticty impacts revenue (principles of Microeconomics)
Academic Questions on Elasticty and Revenue
Q. If a firm reduced the price of its product by 20%, what would be the size of the % change in the quantity sold if the demand for the product is inelastic?
Q.a. Define elasticity of supply and find the price from the given statement:
If Es of a good is 2 and a firm supplies 200 units at price of Rs 8 per unit, then at what price will the firm supply 250 units.
b. Calculate the elasticity of supply if a 15 %increase in the price of soya bean oil increases its supply from 300 to 345 units
Q. How could a firm attempt to influence the price elasticity of demand for its product? Q. Put a tick in the column to indicate which of these commodities you would expect to be price elastic or price inelastic
Product/Good, Price elastic demand, Price inelastic demand: Bread, Theatre tickets, foreign holidays, fuel and light, restaurant meals, dairy products, clothing
Q. Explain why the supply of a product becomes more price elastic as we consider longer periods of time.
Q. You are the sales manager at a shoe shop; you know that your shoes have a price elasticity of 2. Is your shoes price elastic or inelastic? a. Given above would you increase or decrease the price in order to increase revenue? Explain? Q. Southwest Airlines is a major carrier based in Texas, and has made a strategy of cutting fares drastically on certain routes with large effects on air traffic in those markets. For example on the Burbank–Oakland route the entry of Southwest into the market caused average fares to fall by 48 per cent and increased demand from 21,327,008 to 47,064,782 annually. On the Kansas City–St Louis route, however, the average fare increase in the market when Southwest entered was 70 per cent and demand fell from an annual 66,201,553 to 33,101,514.
a. Calculate the PEDs for the Burbank–Oakland and Kansas City–St Louis routes.
b. If Southwest does experience a highly elastic demand on the Burbank–Oakland route, what is the profit implication of this?
Q. RCO Manufacturing is an electronics manufacturer and retailer. Its main products are ultrabook computers, PCs and calculators. The current price of the ultrabook is £500, the PC is £800 and the calculator is £40. This year the firm sold 10,000 ultrabooks, 20,000 PCs and 1 million calculators. In an attempt to improve revenue, the managers of the firm have decided to increase all prices by 10%. Market research has suggested that the price elasticity of demand for each product is: Ultrabook: 1.5; PC: 2.5; calculator: 0.6. You have been asked to evaluate the planned price increases.
a. Comment on the planned price changes.
b. Would a 10% price reduction have been better for some or all of the products?
Q. A cinema charges £8 per ticket for evening screenings and sells 250 tickets a night on average. They estimate that the price elasticity of demand for tickets is (-) 1.6.
a. Calculate the expected number of tickets sold if they reduce the ticket price to £7. Q. A local council raises the price of car parking from £3 per day to £5 per day and finds that usage of car parks contracts from 1,200 cars a day to 900 cars per day.
a. Calculate the price elasticity of demand for this price change and calculate whether total revenue from the car park rises or falls.
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