Summary 111c. Compute the point elasticity of demand first at P $80, then at
P $100. At which price is demand more price sensitive?- Management of McPablo’s Food Shops has completed a study of weekly
demand for its “old-fashioned” tacos in 53 regional markets. The study
revealed that
where Q is the number of tacos sold per store per week, A is the level of
local advertising expenditure (in dollars), Pop denotes the local
population (in thousands), and Pis the average taco price of local
competitors. For the typical McPablo’s outlet, P $1.50, A $1,000,
Pop 40, and P$1.
a. Estimate the weekly sales for the typical McPablo’s outlet.
b. What is the current price elasticity for tacos? What is the advertising
elasticity?
c. Should McPablo’s raise its taco prices? Why or why not?- Four firms have roughly equal shares of the market for farm-raised
catfish. The price elasticity of demand for the market as a whole is
estimated at 1.5.
a. If all firms raised their prices by 5 percent, by how much would total
demand fall?
b. What is the price elasticity if a singlefirm raises its price (with other
firms’ prices unchanged? Hint:Use the expression for elasticity in
equation 3.8b, EP(dQ /dP)(P/Q), and note that the individual
firm’s output Q 1 is only one-quarter as large as total output Q.
c. Suppose that the quantity supplied by the four firms is forecast to
increase by 9 percent. Assuming that the demand curve for catfish is
not expected to change, what is your forecast for the change in
market price (i.e., what percentage price drop will be needed to
absorb the increased supply)? - As economic consultant to the dominant firm in a particular market, you
have discovered that, at the current price and output, demand for your
client’s product is price inelastic. What advice regarding pricing would
you give? - A minor league baseball team is trying to predict ticket sales for the
upcoming season and is considering changing ticket prices.
a. The elasticity of ticket sales with respect to the size of the local
population is estimated to be about .7. Briefly explain what this
number means. If the local population increases from 60,000 to
61,500, what is the predicted change in ticket sales?
b. Currently, a typical fan pays an average ticket price of $10. The price
elasticity of demand for tickets is .6. Management is thinking of
raising the average ticket price to $11. Compute the predicted
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