Imagine that you own a vending machine.You are trying to figure out how much to charge for candy bars.After spending a few weeks experimenting, you find that different quantities are sold at different prices.You use this information to construct the demand curve below.

Curve : Picture - 1

Answer the following questions to help you determine the best price to charge.

1.You want to find how total revenue is affected when you drop the price from $1.00 to .80 cents.Find the price elasticity of demand when moving from point A to point B.Over this range, is the demand elastic, inelastic, or neither (unit elastic)

2.Find the price elasticity of demand when moving from point B to point C.Over this range, is the demand elastic, inelastic or unit elastic?

3.Find the price elasticity of demand when moving from point C to point D.Over this range, is the demand elastic, inelastic or unit elastic?

4.If your goal is to maximize total revenue, over which range do you think you should set your price?

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Suppose the following table describes Jocelyn's weekly snack purchases, which vary depending on the price of a bag of chips:

Picture -2

Remember: in ALL elasticity formulas, % chg in Quantity goes on top.% chg in Price goes on the bottom.The bottom (% chg in price) will be the same in all of these.The sign matters on these.If the two variables (price and quantity) move in the same direction (i.e,. both increase or decrease together), then the sign will be positive.But if one increases while the other decreases, the sign will be negative.For example, as the price of chips increases from $1 to $1.50, bags FALL from 2 to 1.They move in opposite directions, so this will be a negative sign.In my opinion, this is the easiest way to keep track of the sign and not get mixed up with the calculations.

5.Compute the cross-price elasticity of salsa with respect to the price of a bag of chips.Are chips and salsa substitutes or complements? How do you know?

6.Compute the cross-price elasticity of pretzels with respect to the price of a bag of chips.Are chips and pretzels substitutes or complements? How do you know?

7.Compute the cross-price elasticity of soda with respect to the price of a bag of chips.Are chips and soda substitutes or complements? How do you know?

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There are other vending machine owners in the area.When doing your experiment, you also wanted to know how much competition there would be at different price levels.You spoke with the owners of the other vending machines, and collected data on the number of candy bars that they were willing and able to sell at different prices. At a price of $0.80 cents, they were willing to sell 80 units.At a price of $1.00, they were willing to sell 120. With this information, you were able to construct a rough sketch of a supply curve.

Picture - 3

8.You can use this curve to determine how responsive the other suppliers are to a price change.This should give you an idea about how much competition to expect if demand increases.What is the price elasticity of supply?Use points A and B and the elasticity formula.Is it elastic or inelastic? (note: the calculation should look very similar to #1.Pay attention to the direction of the slope and the sign of the elasticity)

9.To get even more data, you gave a group of people free candy bars for filling out a survey.It asked them their income, and how many candy bars they would be willing to buy each week at 90 cents per bar.

At an income of $30,000, people buy about 4 candy bars per month on average. At an income of $40,000, people buy about 6 candy bars per month on average.

Are your candy bars a normal or inferior good?If the candy bars are inferior, explain why using their income elasticity.If the candy bars are a normal good, are they a luxury or a necessity?You can do the calculations, or you could also just look at the direction of the changes (together=normal/opposite=inferior), and the magnitudes (quantity changes by larger % = luxury, income changes by larger % = necessity)

10.Given that each row on the vending machines can only hold chips or candy bars, if a new research study suggests that eating chocolate will make you healthier, then candy bars will become more popular.This will increase the demand for candy bars (and also the price you can charge).If people are willing to pay more for candy bars, what do you think should happen to the supply of chips? Do you think that the cross price elasticity of supply between chips and candy bars should be positive or negative?(i.e., If you own vending machines and the sales price of candy can go up, what do you do to the supply of chips in your vending machine?Slots in your machine can only hold one or the other.)

Imagine that you own a vending machine. You are trying to figure out how much to charge for candy bars. After spending a few weeks experimenting, you find that different quantities are sold at different prices. You use this information to construct the demand curve below. Price. $1 20 $1.00 C+ D+ 40 20 2 12 14 20 74 28 10 16 22 26 Cantity Sold er david Answer the following questions to help you determine the best price to charge.. 1. You want to find how total revenue is affected when you drop the price from $1.00 to .80 cents. Find the price elasticity of demand when moving from point A to point B. Over this range, is the demand elastic, inelastic, or neither (unit elastic)?.. 2. Find the price elasticity of demand when moving from point B to point C. Overthis range, is the demand elastic, inelastic or unit elastic?.. .I 3. Find the price elasticity of demand when moving from point C to point D. Over this range, is the demand elastic, inelastic or unit elastic?.. 4. If your goal is to maximize total revenue, over which range do you think you should set your price?.. . ISuppose the following table describes Jocelyn's weekly snack purchases, which vary depending on the price of a bag of chips:+ Quantities+ Price of bag of chips+ Bags of chips+ Containers of salsa Bags of pretzels+ Cans of soda+ $1.00+ 2+ 1+ 4+ + $1.50+ 1+ 2+ 2+ 4+ Remember: in ALL elasticity formulas, % chgin Quantity goes on top. % chy in Price goes on the bottom The bottom (% chgin price) will be the same in all of these. The sign matters on these. If the two variables (price and quantity) move in the same direction (ie., both increase or decrease together), then the sign will be positive. But if one increases while the other decreases, the sign will be negative. For example, as the price of chips increases from $1 to $1.50, bags FALL from 2 to 1. They move in opposite directions, so this will be a negative sign. In my opinion, this is the easiest way to keep track of the sign and not get mixed up with the calculations. + 5. Compute the cross-price elasticity of salsa with respect to the price of a bag of chips. Are chips and salsa substitutes or complements? How do you know?+ 6. Compute the cross-price elasticity of pretzels with respect to the price of a bag of chips. Are chips and pretzels substitutes or complements? How do you know?+ 7. Compute the cross-price elasticity of soda with respect to the price of a bag of chips. Are chips and soda substitutes or complements? How do you know?+ (hint: don't actually do calculations here. Think-what is the % change in cans of soda? That will give you the answer.)+There are othervending machine owners in the area Whendoing your experiment, you also wanted to know how much competition there would be at different price levels. You spoke with theowners of the other vending machines, and collected data on the number of candy bars that they were willing and able to sell at different prices. At a price of $0.80 cents, they were willing to sell 80 units. At a price of $1.00, they were willing to sell 120. With this information, you were able to construct a rough sketch of a supply curve.. . Price+ $1 20 $100 40 20 260 280 40 60 20 100 120 140 160 180 200 220 240 Cantitu Sunnlied (ner david 8. You can use this curve to determine how responsive the other suppliers are to a pricechange. This should give you an idea about how much competition to expect if demand increases. What is the price elasticity of supply? Use points A and Band theelasticity formula Is it elastic or inelastic? (note: the calculation shouldlook very similar to #1. Pay attention to the direction of the slope and the sign of the elasticity).. 9. To get even more data, you gave a group of people free candy bars for filling out a survey. It asked them their income, and howmany candy bars they would be willing to buy each week at 90 cents par bar... At an income of $30,000, people buy about 4 candy bars per month on average. At an income of $40,000, people buy about 6 candy bars permonth on average. Are your candy bars a normal or inferior good? If the candy bars are inferior, explain why using their income elasticity. If the candy bars are a normal good, are they a luxury or a necessity? You can do the calculations, or you could also just look at the direction of the changes (together-normal opposite-inferior), and the magnitudes (quantity changes by larger % = luxury, income changes by larger % = necessity).. . I . I 10. Given that each row on the vending machines can only hold chips or candy bars, if a new research study suggests that eating chocolate will make you healthier, then candy bars will becomemore popular. This will increase the demand for candy bars (and also the price you can charge). If people are willing to pay more for candy bars, what do you think should happen to the supply of chips? Do you think that the cross price elasticity of supply between chips and candy bars should bepositive or negative? (i.e., If you own vending machines and the sales price of candy can go up, what do you do to the supply of chips in your vending machine? Slots in your machine can only hold one or the other.)