Assignment 2

Question: 1
ABC Sports, a store that sells various types of sports clothing and other sports items, is planning to
introduce a new design of Arizona Diamondbacks' baseball caps. A consultant has estimated the
demand curve to be
Q = 2,000 - 100P
Where Q is cap sales and P is price.
a. How many caps could ABC sell at $6 each?
𝑄 = 2000 − 100(6)
𝑄 = 1400 𝑐𝑎𝑝𝑠

b. How much would the price have to be to sell 1,800 caps?

1800 = 2000 − 100(𝑃)

𝑃 = $2

c. Suppose ABC were to use the caps as a promotion. How many caps could ABC give away
free?
𝑄 = 2000 − 100(0)
𝑄 = 2000 𝑐𝑎𝑝𝑠

d. At what price would no caps be sold?

𝑄 = 2000 − 100(𝑃)
0 = 2000 − 100(𝑃)
𝑃=$

e. Calculate the point price elasticity of demand at a price of $6.

𝑄 = 2000 − 100(𝑃)
𝑄 = 2000 − 100(6)
𝑄 = 1400 𝑐𝑎𝑝𝑠

6
𝐸𝑝 = −100 ∗
1400
𝐸𝑝 = −0.43

Question: 2
The equation for a demand curve has been estimated to be Q = 100 - 10P + 0.5Y. Assume P = 7 and Y
= 50.
a. Interpret the equation.
There is an inverse relationship between quantity demanded and price and there is a direct
relationship between income and quantity demanded.
 b. At a price of 7, what is price elasticity?
𝑄 = 100 − 10𝑃 + 0.5𝑌
𝑄 = 100 − 10(7) + 0.5(50)
𝑄 = 55

7
𝐸𝑑 = −10 ∗
55
𝐸𝑑 = −1.27

c. At an income level of 50, what is income elasticity?

𝑄 = 100 − 10(7) + 0.5(50)
𝑄 = 55

0.5 ∗ 50
𝐸𝑖 =
55
𝐸𝑖 = 0.45

d. Now assume income is 70. What is the price elasticity at P = 8?

𝑄 = 100 − 10(8) + 0.5(70)
𝑄 = 55

−10 ∗ 8
𝐸𝑖 =
55
𝐸𝑖 = −1.45

Question: 3
Mr. Smith has the following demand equation for a certain product: Q = 30 - 2P.
a. At a price of $7, what is the point elasticity?
𝑄 = 30 − 2𝑃
𝑄 = 30 − 2(7)
𝑄 = 16

7
𝐸𝑑 = −2 ∗
16
𝐸𝑑 = −0.875
b. Between prices of S5 and $6, what is the arc elasticity?
𝑄 = 30 − 2𝑃
𝑄 = 30 − 2(5)
𝑄 = 20

𝑄 = 30 − 2𝑃
𝑄 = 30 − 2(6)
 𝑄 = 18

(18 − 20) (6 + 5)
𝐸𝑑 = ∗
(6 − 5) (18 + 20)
−2 11
𝐸𝑑 = ∗
1 38

𝐸𝑑 = −0.579
c. If the market is made up of 100 individuals with demand curves identical to Mr. Smith's, what will
be the point and arc elasticity for the conditions specified in parts a and b?
The arc and point elasticity for the given conditions will be the same.

Question: 4
The Teenager Company makes and sells skateboards at an average price of $70 each. During the past
year, they sold 4,000 of these skateboards. The company believes that the price elasticity for this
product is about -2.5. If it decreases the price to $63. What should be the quantity sold? Will revenue
increase? Why?
Answer:
First: percentage change in price:
$70 − $63
∗ 100 = 10%
$70
New quantity sold: (apply elasticity formula):
𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦
= −2.5
10%
𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 = −2.5 ∗ 10%
𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 = −25%

As the quantity decreases by 25%, the new quantity is:

𝑛𝑒𝑤 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦: 4000 ∗ 25% = 1000
𝑛𝑒𝑤 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦: 4000 − 1000 = 3000 𝑠𝑘𝑎𝑡𝑒𝑠𝑏𝑜𝑎𝑟𝑑

Total revenue table:

Price of skateboard Quantity Total Revenue
$70 4000 280000
$63 3000 189000
As price decreases, quantity sold also decreases which leads to less revenue as compared to the
previous revenue when skateboard were being sold at price $70.
Question: 5
The ABC Company manufactures digital clock radios and sells on average 3,000 units monthly at $25
each to retail stores. Its closest competitor produces a similar type of radio that sells for $28.
a. If the demand for ABC's product has an elasticity coefficient of -3, how many will it sell per month if
the price is lowered to $22?
b. The competitor decreases its price to $24. If cross-price elasticity between the two radios is 0.3, what
will ABC's monthly sales be?

Answer: (a)
𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑
𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 =
𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒
(𝑄2 − 3000)⁄(3000 + 𝑄2) ÷ 2
−3 =
(22 − 25)
⁄(25 + 22) ÷ 2

𝑄2 = 4421 𝑢𝑛𝑖𝑡𝑠 𝑚𝑜𝑛𝑡ℎ𝑙𝑦

Answer: (b)
𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 𝑜𝑓 𝐴𝐵𝐶
𝐶𝑟𝑜𝑠𝑠 𝑝𝑟𝑖𝑐𝑒 𝑒𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 =
𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑐𝑜𝑚𝑝𝑒𝑡𝑖𝑡𝑜𝑟𝑠
(𝑄2 − 3000)⁄(3000 + 𝑄2) ÷ 2
0.3 =
(23 − 28)
⁄(28 + 23) ÷ 2

𝑄2 = 2828 𝑢𝑛𝑖𝑡𝑠 𝑚𝑜𝑛𝑡ℎ𝑙𝑦

Question: 6
The Mesa Redbirds football team plays in a stadium with a seating capacity of 80,000. However, during
the past season, attendance averaged only 50,000. The average ticket price was $30. If price elasticity
is 1. What price would the team have to charge in order to fill the stadium? If the price were to be
decreased to $27 and the average attendance increased to 60,000, what is the price elasticity?
a. If price elasticity is -4, what price would the team have to charge in order to fill the stadium?
b. If the price were to be decreased to $27 and the average attendance increased to 60,000, what
is the price elasticity?
Answer: (a)
𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑
𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 =
𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒
(50000 − 80000)⁄(50000 + 80000) ÷ 2
−4 =
(𝑃2 − 30)
⁄(30 + 𝑃2) ÷ 2

𝑃2 = $33.6
Answer: (b)
(60000 − 50000)⁄(50000 + 60000) ÷ 2
=
(27 − 30)
⁄(30 + 27) ÷ 2

𝑃𝑟𝑖𝑐𝑒 𝑒𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 = −1.73

If price elasticity is 1. What price would the team have to charge in order to fill the stadium?
(50000 − 80000)⁄(80000 + 50000) ÷ 2
1=
(𝑃2 − 30)
⁄(30 + 𝑃2) ÷ 2

𝑃2 = $18.75

Question: 7
The Efficient Software Store had been selling a spreadsheet program at a rate of 100 per month and a
graphics program at the rate of 50 per month. In September 2012, Efficient’s supplier lowered the price
for the spreadsheet program, and Efficient passed on the- savings to customers by lowering its retail
price from $400 to $350. The store manager then noticed that not only had sales of the spreadsheet
program risen to 120, but also the sales of the graphics program increased to 56 per month. Explain
what has happened. Use both arc price elasticity and arc cross-elasticity measures in your answer.
Answer: