9781118041581

demand curve. A change in any other economic variable shifts the

demand curve.

b. A pair of goods are substitutes if an increase in demand for one causes

a fall in demand for the other. In particular, a price cut for one good

reduces sales of the other.

c. A pair of goods are complements if an increase in demand for one

causes an increase in demand for the other. In particular, a price cut

for one good increases sales of the other.

d. A good is normal if its sales increase with increases in income.

2. The price elasticity of demand measures the percentage change in sales
   for a given percentage change in the good’s price, all other factors held
   constant:
   EP(Q/Q)/(P/P).
   a. Demand is unitary elastic if EP1. In turn, demand is elastic if
   EP1. Finally, demand is inelastic if  1 EP0.
   b. Revenue is maximized at the price and quantity for which marginal
   revenue is zero or, equivalently, the price elasticity of demand is unity.


3. The optimal markup rule is (P MC)/P 1/EP. The firm’s optimal
   markup (above marginal cost and expressed as a percentage of price)
   varies inversely with the price elasticity of demand for the good or
   service. (Remember that the firm’s price cannot be profit maximizing
   if demand is inelastic.)


4. Price discrimination occurs when a firm sells the same good or service to
   different buyers at different prices (based on different price elasticities
   of demand). Prices in various market segments are determined
   according to the optimal markup rule.

Questions and Problems

1. During a five-year period, the ticket sales of a city’s professional
   basketball team have increased 30 percent at the same time that average
   ticket prices have risen by 50 percent. Do these changes imply an
   upward-sloping demand curve? Explain.


2. A retail store faces a demand equation for Roller Blades given by:

where Q is the number of pairs sold per month and P is the price per

pair in dollars.

a. The store currently charges P $80 per pair. At this price, determine

the number of pairs sold.

b. If management were to raise the price to $100, what would be the

impact on pairs sold? On the store’s revenue from Roller Blades?

Q 180 1.5P,

110 Chapter 3 Demand Analysis and Optimal Pricing

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