Summary 1191.Q 24 12 40 52 seats.- The facts in the second part of the statement are correct, but this does
not mean that auto demand is less elastic. Elasticity measures the effect of
a percentage change in price, not an absolute change. The change in any
good’s sales is given by Q /Q EP(P/P); that is, it depends both on
the elasticity and the magnitude of the percentage price change. After all,
a $50 auto price cut is trivial in percentage terms. Even if auto demand is
very elastic, the change in sales will be small. By contrast, a $50 price cut
for a CD player is large in percentage terms. So there may be a large jump
in sales even if player demand is quite inelastic. - EP(dQ /Q)/(dP/P) (dQ /dP)(P/Q). With dQ /dP 4, the
elasticity at P$200 and Q800 is EP(4)(200)/8001. - Since costs are assumed to be fixed, the team’s management should set a
price to maximize ticket revenue. We know that Q 60,000 3,000P or,
equivalently, P 20 Q /3,000.Setting MR 0, we have 20 Q /1,500
0, or Q 30,000 seats. In turn, P $10 and revenue $300,000 per
game. Note that management should notset a price to fill the stadium
(36,000 seats). To fill the stadium, the necessary average price would be
$8 and would generate only $288,000 in revenue. - Before the settlement, the cigarette company is setting an optimal price
called for by the markup rule: P 2/( 2 1) $4.00. The
settlement payment takes the form of a fixed cost (based on past sales).
It does not vary with respect to current or future production levels.
Therefore, it does not affect the firm’s marginal cost and should not
affect the firm’s markup. Note also that the individual firm faces elastic
demand (because smokers can switch to other brands if the firm
unilaterally raises prices), whereas industry demand (according to
Table 3.1) is inelastic. If all firms raise prices by 10 percent, total
demand will decline by only 7 percent. - The new seat allocations satisfy MRBMRTand QBQT270. The
solution is QB155 and QT115. In turn, PB$175, PT$135, and
total revenue is $42,650—approximately $6,000 greater than current
revenue ($36,800). Since the extra cost of the “second day” flight is only
$4,500 (90 $50), this expansion is profitable. Note, however, that the
common value of marginal revenue has dropped to $20. (To see this,
compute MRB 330 2(155) $20.) Because the marginal revenue
per seat has fallen below the marginal cost ($50), any further expansion
would be unprofitable.
CHECK STATION
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