Estimate the Elasticity of Demand and Cost Schedule question 14A 4. (12 points)

Question

Estimate the Elasticity of Demand and Cost Schedule question 14A 4. (12 points) Boeing estimates the elasticity of demand for new commercial jets is -1.25. Explain why the following statements are either true or false (i.e., state whether true or false and explain why.) a. The quantity effect dominates the price effect" ec 3 b.A 5 percent increase in the number of jets sold will require a 6 percent decrease in the price of jets TX c. "A 6 percent decrease in the price of jets will increase Boeing's total revenue."

Explanation / Answer

Q4

a)         The quantity effect does not dominates the price effect only in the case of goods which do not have elastic demand i.e. have inelastic demand (when an increase in the unit price of the Boeing jets will cause a lesser number of the jets to be sold in the market and a decrease in the price will lead to a higher number of jets to be sold in the market). In the present case the demand for the jets is -1.25 ( - < Ed < -1) so the quantity effect does not dominate the price effect.

b)         As the quantity effect does not dominate the price effect. A 5 percent increase in the number of jets sold will require a six percent decrease as the elasticity o f demand is quite elastic

c)         As the price elasticity is relatively elastic ( - < Ed < -1), the percent variation in the quantity demanded is more than the price and the rise in price will cause the total revenue falls, and vice versa.

Q5)

a AFC for Q=100

At Q=0 the TC=500

So the TFC=100

AFT=TFC/Q           500/100=5

b ATC for Q=200

ATC=TC/Q

TC at Q=200 is 560 (Because MC=4 and TC at Q 100=560)

560/200=2.82

c MC for Q=300

MC=TC2-TC1

564-1700

Because at Q=200AVC=4 so TVC=1200

And TC=1200+500

d   TC for Q=400

TC=ATC*Q

7.00*400=2800

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