Microeconomics: Private and Public Choice (MindTap Course List)
16th Edition
ISBN: 9781305506893
Author: James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher: Cengage Learning
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Textbook Question
Chapter 7, Problem 13CQ
Suppose Erin, the owner-manager of a local hotel projects the following
- a. Calculate the
price elasticity of demand between $90 and $110. - b. Is the price elasticity of demand between $90 and $110 elastic, unit elastic, or inelastic?
- c. Will Erin’s total revenue rise if she increases the price from $90 to $110?
- d. Calculate the price elasticity of demand between $110 and $130.
- e. Is the price elasticity of demand between $110 and $130 elastic, unit elastic, or inelastic?
- f. Will Erin’s total revenue rise if she increases the price from $110 to $130?
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Exercise 6
Imagine that you head production of a multinational food processing company. The ongoing uncer-
tainty about costs means that you are unsure of the future cost of one of your inputs, x2. Your firm's
production function is
y = f(x1, x2) = x²x²²
The output price p is 1000, x1 = 27, and wx₁ = 60.
1. Suppose the current input price is Wx2
=
50. Solve for the optimal choice of x2.
2. Now suppose that the probability the input price remains 50 is 0.65 and the probability that
Wx2
60 is 0.35. Solve for the optimal choice of x2. Round down to the nearest integer.
=
3. Finally, suppose the costs do actually rise, i.e., Wx2 = 60. Calculate the difference in profit from
the uncertainty in (2) vs. the certainty in (1).
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Microeconomics: Private and Public Choice (MindTap Course List)
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Elasticity of Demand- Micro Topic 2.3; Author: Jacob Clifford;https://www.youtube.com/watch?v=HHcblIxiAAk;License: Standard YouTube License, CC-BY