Frustrated with his Managerial Economics Grades, James decides to abandon his academic career and focus on business. He sets up a start-up business at City Market where he sells pre-packaged mealie meal packs (Pamela) as well as designer ladies's pants. At a price of K50 James manages to sell 50 pants every month, while 45 mealie meal packs are sold away every month at K60. His friend Bwalya takes advantage and ceases the opportunity to sell complementary ladies' bras in James' shop where at least 30 bras are sold away every month at K75 each. With a booming business, James' wife Sylvia advises him that he could actually increase his business sales by increasing both the price of pants and that of mealie meal packs to K75 respectively. James follows this proposal religiously, and the immediate observed effects of these price increases are reduction of monthly demand for the two goods to 30 and 40 units respectively. a) Calculate the price elasticities of demand for pants and mealie meal respectively. Are the products elastic, inelastic or unit elastic? Why? b) Use the concepts of elasticities and revenue to determine and justify whether it was worth it for James to listen to Sylvia's advice of increasing prices on Pants i) ii) Mealie meal c) After the ordeal, Bwalya developed strong hate towards Sylvia and stopped talking to her. Use the concept of elasticity learnt in class to explain why. d) Using your knowledge of factors that influence price elasticity, determine and explain the possible reasons for the observed differences in the price elasticities of mealie meal and pants.
Frustrated with his Managerial Economics Grades, James decides to abandon his academic career and focus on business. He sets up a start-up business at City Market where he sells pre-packaged mealie meal packs (Pamela) as well as designer ladies's pants. At a price of K50 James manages to sell 50 pants every month, while 45 mealie meal packs are sold away every month at K60. His friend Bwalya takes advantage and ceases the opportunity to sell complementary ladies' bras in James' shop where at least 30 bras are sold away every month at K75 each. With a booming business, James' wife Sylvia advises him that he could actually increase his business sales by increasing both the price of pants and that of mealie meal packs to K75 respectively. James follows this proposal religiously, and the immediate observed effects of these price increases are reduction of monthly demand for the two goods to 30 and 40 units respectively. a) Calculate the price elasticities of demand for pants and mealie meal respectively. Are the products elastic, inelastic or unit elastic? Why? b) Use the concepts of elasticities and revenue to determine and justify whether it was worth it for James to listen to Sylvia's advice of increasing prices on Pants i) ii) Mealie meal c) After the ordeal, Bwalya developed strong hate towards Sylvia and stopped talking to her. Use the concept of elasticity learnt in class to explain why. d) Using your knowledge of factors that influence price elasticity, determine and explain the possible reasons for the observed differences in the price elasticities of mealie meal and pants.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Frustrated with his Managerial Economics Grades, James decides to abandon his
academic career and focus on business. He sets up a start-up business at City Market
where he sells pre-packaged mealie meal packs (Pamela) as well as designer ladies's
pants. At a price of K50 James manages to sell 50 pants every month, while 45 mealie
meal packs are sold away every month at K60. His friend Bwalya takes advantage and
ceases the opportunity to sell complementary ladies' bras in James' shop where at least
30 bras are sold away every month at K75 each. With a booming business, James' wife
Sylvia advises him that he could actually increase his business sales by increasing both
the price of pants and that of mealie meal packs to K75 respectively. James follows this
proposal religiously, and the immediate observed effects of these price increases are
reduction of monthly demand for the two goods to 30 and 40 units respectively.
a) Calculate the price elasticities of demand for pants and mealie meal respectively.
Are the products elastic, inelastic or unit elastic? Why?
b) Use the concepts of elasticities and revenue to determine and justify whether it
was worth it for James to listen to Sylvia's advice of increasing prices on
i)
Pants
Mealie meal
ii)
c) After the ordeal, Bwalya developed strong hate towards Sylvia and stopped
talking to her. Use the concept of elasticity learnt in class to explain why.
d) Using your knowledge of factors that influence price elasticity, determine and
explain the possible reasons for the observed differences in the price elasticities
of mealie meal and pants.
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