Question

9. Generic Cable Company has determined that the price elasticity of demand for cable in Generic Town is -1.6. a. What does this imply about the nature of demand for cable television? Why might this be the case? b. If the company finds that it must raise monthly cable rates 10% to cover costs, by how much can it expect subscriptions to decline? Choose from below and explain your choice. (assume everything else remains constant) . . . . The number of subscriptions will decline by exactly 10% The number of subscriptions will decline by more than 10% The number of subscriptions will decline by less than 10% The number of subscriptions will rise by 10% c. What would happen to the total revenue generated by Generic Cable if it raises rates by 10%? Why? (assume everything else remains constant) d. Now suppose that income elasticity for cable television is found to be 2.1. Interpret this elasticity and discuss what it implies about how changes in income affect the market for cable television.

Answer 1

Generic cable company has determined that the price elasticity of demand for cable in generic town is -1.6

That indicate the elastic price elasticity of demand and – sign show the relationship between price and quantity % changes.

1. Ans : Price elasticity of demand for cable in Generic Town is -1.6 is imply about the nature of demand is elastic means when the quantity changes 1% then demand changes -1.6%. This be the case because of relationship between price and demand, when the price rise demand will be decrease at elastic price elasticity of demand.

2. Ans: if the Company finds that it must raise monthly cable rate 10% to cover cost, by how much can it expect subscriptions to decline?

• The number of subscription will decline by more than 10%.

Reason : price elasticity of demand = % change quantity /% change price

                                                            1.6= %change subs./ 10%

                              % change subs.       = 1.6*10% = 16%.

3. Ans:     The total revenue generated by Generic Cable if it raises rates by 10% decline because of decline subscription is more (16%) then the raises price (10%) (where every things else remains constant )

Price elasticity of demand = % change in demand / 10% change in price

                             10% * 1.6 = % change in demand

        % change in demand = 16 % decline

So, total revenue = demand * new price (increase price)

                                  = (100-16)* 110%

                                 = 92.40% only

4.    Ans: Income elasticity for cable television is found to be 2.1 that implies when income consumer increases 1% then demand increases 2.1% at scenario. When people’s incomes is increase then people demanded more or vise-versa.