Question

1. Suppose you are the Director of Finance of an art museum and the museum is running short of fund. a. Suppose the estimated price elasticity of demand for visits to the museum is 0.8. How should you change the price of admission in order to increase the total revenue of the museum? Explain. As there will be more art museums opening in the next few years, what would happen to the price elasticity of demand for visits to this museum? Explain. Your answer to (a) depends on the estimated value of price elasticity of demand for visits. Suggest TWO ways to estimate the price elasticity of demand for visits to the museum before the museum changes the price. 2. Suppose the market for wheat in the US is represented by: Q = 1800 + 240p Q-3550 - 266p b. Find p, Q. Ed and Es at the equilibrium. In one year, bad weather destroyed the harvest of wheat. Depict the impact on the wheat market in the US. How does it affect the price of wheat? Using the above elasticities, explain why the impact should be strong. (Hint: you should use one of the elasticities from (a)) 3. Suppose Amy always spends 10% of her monthly income on food. Suppose this month, the income of Amy doubles. i. How will this affect her total expenditure on food? ii. Other things unchanged, how will this affect the quantity of food she purchases? iii. Referring to the results in i) and (ii), what is her income elasticity of demand for food? Instead of (a), suppose the price of food increases. How will this affect her total expenditure on food? What is her price elasticity of demand for food? b. Business Economics Revision Exercise 2B

Answer 1

1 a Since the price is inelastic when price elasticity of demand is less than 1. That means any change in price will lead to a decline in 0.8 times change in price.

Price elasticity of demand= % change in quantity/% change in price. Since it is 0.8 it means it is inelastic which means % change in quantity will be smaller than % change in price. In order to increase total revenue, the % in price increase should be less than 25%. Any increase over thay would lead to a reduction in rebenue.

1 b As there would more museums, the price elasticity of demand would be more elastic than before as customers would be more sensitive to price changes. For example, any increase in price of a particular museum ticket would mean cusyomers switching to other museums. Hence, it is likely to be greater than 1 since it will be price elastic

1 c To estimate the price elasticity of demand, there are two ways. One method is through surveys wherein we try to analyse the sentiments of consumers through surveys wherein we try to gauge their reactions to certain price changes. The second method can be through Focus Group Discussions wherein we try to take a general view of the consumers.

2 a in Equillibrium, quantity demanded= quantity supplied. In the equation above, we equate the 2 equations and dind out the values of all the variables.