The demand curve for productXis given by:

QdX= 1;2003PX

(a) Consider a case wherePX= 140 and then falls toPX= 126. What is the own-price

elasticity of demand when measured at initial price? Label your answer \_X;P" and draw a

box around it.

(b) Continue to assume thatPX= 140 and then falls toPX= 126. What is the own-price

elasticity of demand when calculated using the arc formula? Label your answer \_X;P" and

draw a box around it.

(c) What is _rm revenue before and after the price change? Label your answers and draw boxes

around them.

(d) What is the revenue-maximizing price in this situation? Label your answer and draw a box

around it.

(e) Show your answer to (d) graphically withPXon the vertical axis andXon the horizontal

axis. Include the inverse demand curve and the marginal revenue curve. Label all curves,

intercepts, and slope.

2. You work for a high-end stroller company that is trying to gain traction in

the local market. You currently price your stroller at $1;000 and sell 200 strollers per year. An

analyst has called in sick and asks you to present for her. She sends the following notes:

\I've done an extensive analysis and am con_dent in the following:

.We face a linear demand curve

.Our own-price elasticity of demand is5

.The cross-price elasticity of demand with respect to Uppababy Strollers+3

.The income elasticity of demand of our customer base is+1:5

Thanks - you'll do great! -Sara"

How do you handle the following questions that you get during the presentation? Be as speci_c

as possible with the information given.

(a) Jim proposed decreasing our price by 1%. How will that a_ect our revenue?

(b) Is Uppababy's stroller a complement or a substitute for our stroller? Did Sara's analysis

tell us this? How do I see that?

(c) Did you hear that Uppababy is increasing prices by 1% this summer? How will that a_ect

our revenue?

(d) Is our product a luxury good? What is a luxury good, anyway?

(e) I'm worried about a recession. If the average income of our customer base falls by 1%, how

will that a_ect our revenue?

3. Verizon Wireless ran a pricing trial in order to estimate the elasticity

of demand for its services. The manager selected three states that were representative of its entire

service area and increased prices by _ve percent to customers in those areas. One week later,

the number of customers enrolled in cellular plans only decreased by two percent in the testing

areas. Enrollment remained unchanged in states where price did not increase. The manager used

this to support a decision to increase prices by _ve percent everywhere. One year later, revenues

had fallen by ten percent. Whoops!

(a) What was the own-price elasticity of demand that the manager calculated? Label your

answer \_Q;P" and draw a box around it.

(b) How could the manager have gotten this wrong? Was the manager to blame? Answer in

four sentences or less.

4. The owner of a small chain of gasoline stations in a large Midwestern town

read an article in a trade magazine stating that the own-price elasticity of demand for gasoline

in the United States is -0.2. Because of this highly inelastic demand in the United States, he is

considering increasing his prices to increase revenues and pro_ts.

(a) Do you recommend that he raise prices based o_ of this trade publication? Why or why

not?

(b) What might be the issue with the information from the trade publication?

(c) How might the owner gather more information that could help him decide?