ELASTICITY EXERCISE

Name ___________________________ Due _________ Please show work in detail.

All questions utilize the multivariate demand function for Brand X washing machines given in C2, page 81, initially with:

P_Y = $300P_L = $1.50I = $40000A = $200000

This function is:

Q_X = 197000 -100P_X +50P_Y +.025I +.02A + 10000P_L

1.Use the above to calculate the arc price elasticity of demand between P_X = $250 and P_X = $200.The arc elasticity formula is:

2.Calculate the quantity demanded at each of the above prices and revenue that will result if the quantity is sold (fill in table below).

P_X

Q_X

Revenue

$250

$200

3.Marketing suggests lowering P_X from $250 to $200.The size of the elasticity coefficient in #1 should tell you what is likely to happen to revenue.Explain why this is (or is not) a good marketing suggestion from a revenue viewpoint (note: your answer in #1 and the calculations in #2 should be giving the same message).If the implications in #1 and #2 differ, does the difference make sense (or did you make a mistake in #1 or #2)?

4.Calculate the point price elasticity of demand at P_X = $250 (which should make Q_X = 207000).Does this elasticity value indicate that the demand for Brand X washing machines is relatively responsive to changes in the price of these machines?Explain why or why not.The formula is:

5.Calculate the point"self-service" laundry cross-price elasticity of demand at P_L = $1.50.Use Qx corresponding toP_X = $250 with other variables and their values as given at the top, before question #1.Does this elasticity imply that the demand for Brand X washers is relatively responsive to changes in (P_L)?Explain why or why not.The formula is:

6.Calculate the point advertising elasticity of demand at A = $200,000.Use Q_X corresponding to P_X = $200 with other variables and their values given at the top before question #1.What does this elasticity imply about the relative responsiveness of the demand for Brand X washers with respect to advertising expenditures (A)?Explain.The formula is:

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