Assignment 3

docx

School

Michigan State University *

*We aren’t endorsed by this school

Course

PHY 481

Subject

Economics

Date

Nov 24, 2024

Type

docx

Pages

3

Uploaded by ngenobrian

Report
Assignment 3 1. George has been selling 5,000 T-shirts per month for $8.50. When he increased the price to $9.50, he sold only 4,000 T-shirts. What is the demand elasticity? If his marginal cost is $4 per shirt, what is his desired markup and what is his initial actual markup? Was raising the price profitable? Price elasticity of demand = % change in quantity demanded / % change in price % change in quantity demanded = (4000 – 5000) / ((4000 + 5000) / 2) = -0.2222 % change in price = (9.5 – 8.5) / (( 9.5 + 8.5) / 2) = 0.1111 Price elasticity of demand = -0.2222 / 0.1111 = -2 Initial markup = (Price – Marginal Cost) / Price = (8.5 – 4) / 8.5 = 0.5294 Desired markup = -1 / elasticity = -1 /-2 = 0.5 Since the initial markup is greater than his desired margin, raising the price was not profitable. 2. To conduct an experiment, AMC increased movie ticket prices from $9.00 to $10.00 and measured the change in ticket sales. Using the data over the following month, they concluded that the increase was profitable. However, over the
subsequent months, they changed their minds and discontinued the experiment. How did the timing affect their conclusion about the profitability of increasing prices? In this case, after the increase of ticket prices there was no change in demand of ticket prices. This can be attributed to the demand being inelastic. This is because AMC continued to realize profits even after increasing prices for the tickets. This was due to their consumers lacking other products to change to. Consequently, some of the consumers usually take time to change their preferences. This can be seen that after some months, AMC discontinued the experiment because they started incurring losses. Their consumers had found other cheaper substitutes and switched to those products thus resulting in the demand for AMC product to decrease. 3. An end-of-aisle price promotion changes the price elasticity of a good from –2 to – 3. If the normal price is $10, what should the promotional price be? (1 / Elasticity) = (Price – Marginal Cost) / Price 0.5 = (10 – MC) / 10 MC = 5 Therefore, substitute MC of 5 when E is -3 We have, (P – 5) / P = 1 / 3 3P -15 = P P = $7.5 4. Why do bars offer free peanuts?
This is because alcohol and peanuts are complementary goods. Therefore, by offering free peanuts, it increases the demand for alcohol.
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help