Question

1.If the price elasticity of demand for hamburgers is 1.5 and the quantity demanded of hamburgers equals 40,000, what will happened to the quantity of hamburgers demanded if the price increases by 10%? what is the change in quantity? Briefly explain your answer. 2. Sport team want to boost revenues from ticket sales next academic year and hire you to advise the team whether to raise or lower ticket prices next year. If the elasticity of demand for Tiger games is estimated to be 1.6, what should you advise? What if the elasticity of demand is 0.4? 3.If a 10% decline in the price of Wi-Fi services increases the quantity of mobile computing devices demanded by 20% and increases the quantity of Wi-Fi services demanded by 15%, calculate the cross- price elasticity of demand between Wi-Fi service and mobile computing devices? Interpret your results.

Answer 1

1)

Price elasticity of demand=Ep=-1.50 (price elasticity of demand is negative)

Percent change in prices=$\small \Delta P=$+10%

Percent change in quantity=10%*(-1.50)=-15%

PEp

Quantity demanded will decrease by 15%.

Change in quantity=Initial Quantity*percent change in quantity=40000*(-15%)=-6000

Quantity will decrease by 6000 units

2)

Case where price elasticity of demand is -1.60

Absolute value of elasticity is more than 1, we can say that demand is elastic at this point.

It means that percent decrease in quantity is 1.60 times the percent change in price.

Total Revenue will decrease as a result of price increase in this case. So, price can be lowered to increase the revenue in this case.

Case where price elasticity of demand is -0.40

Absolute value of elasticity is less than 1, we can say that demand is inelastic at this point.

It means that percent decrease in quantity is 0.40 times the percent change in price.

Total Revenue will increase as a result of price increase in this case. So, price can be hiked to increase the revenue in this case.

  3)

Percent change in price of wifi services=-10%

Pwifi

Percent change in quantity demanded of mobile computing devices=$\small \Delta Q_{m}=$+20%

Cross price elasticity of mobile computing devices with respect to wifi prices is given by

_ =-10percent =-2 AQm 20 percent Auǐji -10 percent 2.0

Coefficient of cross price elasticity of demand is negative. It means that wifi services and mobile computing devices are complement.