Elasticity Exercise

Name Due Please show work in detail. All questions utilize the multivariate demand function for Toyotas given in C4 on text page 82, initially with: PM = $20000 Pc = $1.00 I = $15000 A = $10000 This function is: QT = 200 -.01PT +.005PM -10PG +.011 +.003A 1. Use the above to calculate the are price elasticity of demand between Pr - $15000 and PT = $10000. The arc elasticity formula is: E. = 4Q P + P AP Q +Q, 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). PT Revenue $15000 $10001 3. Marketing suggests lowering Pr from $15000 to $10000. 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 for Toyotas at Pr = $15000 (which should make QT = 320). Does this elasticity value indicate that Toyota demand is relatively responsive to changes in Toyota price? Explain why or why not. The formula is: Ep = OCT. PT OPT er 5. Calculate the point gasoline cross-price elasticity between (Po) and Toyota demand (QT). Assume the OPEC lowered petroleum production quotas and caused the price of gasoline to increase to Pa = $3.00. Calculate a new QT for PG=$3.00 and PT = $15000. Other variables and their values are given at the top, before question #1. Does this elasticity indicate that the demand for Toyotas is relatively responsive to changes in the price of gasoline (Po)? Explain why or why not. The formula is: BTG aQT . PG 6. Calculate the Income elasticity of demand for Toyotas with I - $15000, Pr = $10000, and other variables and their values as given at the top. before question #1. Does this clasticity indicate that the demand for Toyotas is relatively responsive to changes in income (I)? Explain why or why not. The formula is: E