2. (10 points) Barnes & Noble has ascertained that when the price of a certain c

Question

2. (10 points) Barnes & Noble has ascertained that when the price of a certain calculator is $45, sales are 22 per month. When the price is $35, they sell 34 per month. a. Calculate the elasticity of demand. [Use midpoint method. Show your work. b. Is demand for this calculator elastic, inelastic, or unit elastic ? 3. (15 points) Management at a clothing store has calculated demand elasticity for hooded sweatshirts at three different prices, as shown in this table. Elasticity Price S50 36 25 Of demand 1.4 1.0 0.8 a. If the current price is $50, will total expenditure increase, decrease, or stay the same when the price is reduced slightly? b. If the current price is $25, will total expenditure increase, decrease, or stay the same when the price is raised slightly? c. At what price would total expenditure on hooded sweatshirts be greatest? 4. (10 points) Do you think the price elasticity of demand for Ford sport-utility vehicles (SUVs) will increase, decrease, or remain the same when each of the following events occurs? Explain your answer. a. Other car manufacturers, such as General Motors, decide to make and sell SUVs b. SUVs produced in foreign countries are banned from the American market. c. Due to ad campaigns, Americans believe that SUVs are much safer than ordinary passenger cars. d. The time period over which you measure the elasticity lengthens. During that longer time, new models such as four-wheel-drive cargo vans appear 5. (10 points) U.S. winter wheat production increased dramatically in 2017 after a bumper harvest. The supply curve shifted rightward; as a result, the price decreased and the quantity demanded increased (a movement along the demand curve). The accompanying table describes what happened to prices and the quantity of wheat demanded. Quantity demanded (bushels) Average price (per bushel) 2017 2.00 billion $4.40 2018 2.40 billion $3.20 a. Using the midpoint method, calculate the price elasticity of demand for winter wheat. b. What is the total revenue for U.S. wheat farmers in 2017 c. What is the total revenue for U.S. wheat farmers in 2018? d. Did the bumper harvest increase or decrease the total revenue of American wheat farmers? How could you have predicted this from your answer to part a?

Explanation / Answer

Question 2.

a) Q1 = 22 P1 = $45

    Q2 = 34 P2 = $35

The price elasticity of demand using the mid-point method is calculated as -

Price elasticity of demand = (Q2 – Q1) / [(Q2 + Q1) / 2] / (P2 – P1) / [(P2 + P1) / 2]

= (34-22)/ [(34+22)/2] / (35-45)/[(35+45)/2]

= -1.71

b) The demand in the given case is Elastic. As the price declines, there is significant impact (increase) on the quantity demanded.

Question 3.

a) Since the elasticity of demand is greater than 1, a fall in price would translate into an increase in expenditure on hooded sweatshirts.

b) Since the elasticity is less than 1, an increase in price will translate into an increase in expenditure on hooded sweatshirts.

c) Till the point demand is inelastic, an increase in price results in an increase in total expenditure. When demand becomes elastic, an increase in price results in decline in total expenditure. Therefore, with demand remaining inelastic upto $35, this is the point (price) where the total expenditure is the greatest.

Question 4.

a) The price elasticity of demand will increase (PED>1). Since competition increases in the market, any reduction in price of SUV will translate into significant change in quantity demanded.

b) The price elasticity of demand will decline (PED=<1). Since foreign SUVs are banned, there are lesser options available. As a result, an incease in price will translate into an increase in demand as well.

c) The price elasticity of demand will decline (PED=<1). With the perception of SUVs being safer, consumers will be willing to pay more and quantity demanded will not decline even as price increases.

d) The price elasticity of demand will increase (PED>1). Since alternatives are available, the market is more competitive and price factor becomes important. A decline in price will result in ssignificant increase in quantity demanded.

Question 5.

a) Q1 = 2.0 P1 = $4.4

    Q2 = 2.4 P2 = $3.2

The price elasticity of demand using the mid-point method is calculated as -

Price elasticity of demand = (Q2 – Q1) / [(Q2 + Q1) / 2] / (P2 – P1) / [(P2 + P1) / 2]

= (2.4-2.0)/ [(2.4+2.0)/2] / (3.2-4.4)/[3.2+4.4)/2]

= -0.58

b) Total revenue for US wheat farmers in 2017 = 2*4.4 = $8.4 billion

c) Total revenue for US wheat farmers in 2018 = 2.4*3.2 = $7.7 billion

d) Even with the bumer crop, the total revenue for US wheat farmers declined. This could have been predicted from the price elasticity of demand. Since the PED is less than 1, the demand is inelastic. A change in price causes a small change in quantity demanded.

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