Question

please show math work

HECO 202 Homework 2 Name: Suppose Best Buy believes it has devised a way to increase revenue : by offering a price markdown of 10% on all of its laptops. Using consumer data, Best Buy has identified two types of consumers (Type 1 and Type 2) who purchase its laptops and has projected how each type of consumer is likely to respond to a markdown. The tables below show actual (before markdown) and estimated (after markdown) volume of purchases (in millions) for each consumer type prior to and after a price markdown. Type 1 5.5 6.5 Type 2 5 Before markdown After markdown Before markdown After markdown Estimate the price elasticities of demand for each consumer type using the midpoint method and use that information to determine which of the two types of consumers should be given a markdown. For full credit be sure to show all your work and have clear explanations for your reasoning.

Answer 1

For type 1 price elasticity of demand let the price be x new price would be 0.9x after 10% mark down, Price elasticity of demand=((6.5-5.5)/((6.5+5.5)/2)/((0.9x-x)/((0.9x+x))/2=-1.58

For type 2- (2/6)/(0.2/1.9)=-3.17

Since Type 2 is highly elastic when compared to Type 1 hence demand for type 2 will increase more rapidly with decrease in prices Hence, Type 2 should be chosen to provide the markdown