A Minimum Of 100 Words Each Question And References1 Elasticity Is Re ✓ Solved
A minimum of 100 words each question and References 1- Elasticity is related to a firm's total revenue and changes as you move up and down the demand curve. Suppose you are a marketing manager charged with deciding whether to increase the price of goods. The company's goal in considering that decision is to increase total revenue. If you were facing elastic demand, would a price increase be a good way to increase total revenue? If you were facing inelastic demand, would a price increase be a good way to increase total revenue?
Since elasticity changes as you move up and down the demand curve, how can the marketing manager know whether demand for a product is elastic or inelastic? 2- Jane spends all her income on hot dogs and caviar. Her demand curve for caviar is inelastic at all prices for caviar. Unfortunately, the accident at Chernobyl has caused the supply of caviar to fall and the price to rise. What has happened to Jane's consumption of hot dogs?
Explain. (Note: You should assume that the accident at Chernobyl had no effect on the price of hot dogs or Jane's preference for caviar.) 3- In February 2015, Wal-Mart announced that it would increase the pay rate for all its lowest paid workers. Is this wage increase a growth in fixed costs or variable costs? Would it be affected by output? If Wal-Mart's sales drop off, how might the store adjust its labor costs? 4- In fall 2013, Apple loaned its sapphire glass supplier 8 million to set up a manufacturing plant to produce the glass for the new iPhone 6.
In November 2014, Apple's glass supplier lost the contract and promptly filed for bankruptcy. What happened to cause bankruptcy? How did the loss of the Apple contract affect fixed cost for the glass supplier? How might this have affected Average Total Cost (ATC)? Compare this situation to economies of scale?
Paper for above instructions
1. Elasticity of Demand and its Impact on Total Revenue
As a marketing manager, understanding the concept of elasticity is crucial for making strategic pricing decisions that align with a company’s goal of maximizing total revenue. If the demand for a product is elastic, an increase in price would lead to a disproportionately large decrease in the quantity demanded. This means that the total revenue would decrease if prices are raised, since the reduction in sales volume outweighs the gain from higher prices. Conversely, if the demand is inelastic, raising the price will result in a relatively smaller decrease in the quantity demanded, thus leading to an increase in total revenue (Mankiw, 2018).
To determine whether demand is elastic or inelastic, the marketing manager can analyze historical sales data, conduct market research, and use surveys to understand consumers' responsiveness to price changes. Additionally, observing competitive pricing and economic indicators can provide insights into demand elasticity (Arnold, 2019). Tools like price elasticity of demand calculations, derived from the percentage change in quantity demanded divided by the percentage change in price, can quantitatively indicate how consumers will react to pricing strategies (Varian, 2014).
References
- Arnold, R. A. (2019). Economics. Cengage Learning.
- Mankiw, N. G. (2018). Principles of Economics. Cengage Learning.
- Varian, H. R. (2014). Intermediate Microeconomics: A Modern Approach. W.W. Norton & Company.
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2. Jane's Consumption of Hot Dogs after Price Increase of Caviar
Jane's demand for caviar is characterized as inelastic, meaning that her consumption of caviar does not significantly decrease with an increase in price. Following the Chernobyl incident, the supply of caviar declined, leading to a rise in its price. Given the inelastic nature of her demand for caviar, Jane will continue to purchase it, albeit at a higher price. However, since she allocates her entire income to hot dogs and caviar, the increase in expenditure on caviar will necessitate a reduction in her consumption of hot dogs to accommodate the higher cost of caviar (Parkin, 2018).
This phenomenon illustrates the income effect, where an increase in the price of one good limits the overall quantity of goods that can be consumed. As Jane spends more on caviar, she will have less disposable income available to spend on hot dogs, thus leading to a decline in their consumption even though the price of hot dogs remains unchanged (Alfred, 2017). This situation also reflects the concept of a budget constraint, which highlights how changes in pricing can influence consumer behavior despite preferences remaining constant.
References
- Alfred, J. (2017). Principles of Microeconomics. Wiley.
- Parkin, M. (2018). Microeconomics. Pearson Education.
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3. Labor Cost Considerations Following Wal-Mart's Wage Increase
Wal-Mart's decision to raise the pay rate for its lowest-paid workers can be classified as a growth in fixed costs. Fixed costs do not fluctuate with the level of output produced, which means that the increased wage expense will remain constant regardless of how much or how little the store sells (Frank, 2019). While variable costs, like those associated with materials and utilities, change with production volume, wage increases for employees are considered fixed in this context, as they are incurred regardless of the number of customers or sales.
In the event that Wal-Mart's sales drop, the company may need to adjust its labor costs. This could involve strategies such as cutting back on employee hours, implementing more part-time positions, or even laying off some workers to align wages with a tighter budget (Rochelle, 2016). These actions would allow the company to maintain a sustainable operational model despite fluctuations in sales, while also considering employee welfare and job satisfaction.
References
- Frank, R. H. (2019). Microeconomics and Behavior. McGraw-Hill Education.
- Rochelle, M. (2016). The Economics of Labor Markets. Cengage Learning.
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4. The Financial Implications of the Sapphire Glass Supplier's Bankruptcy
The bankruptcy of the sapphire glass supplier can be attributed to the loss of the contract with Apple, which likely constituted a significant portion of its revenue stream. When the supplier secured the initial funding from Apple, it may have incurred substantial fixed costs to establish manufacturing capabilities. Following the termination of the contract, these fixed costs remained, while the cash inflow from the Apple contract became nonexistent, precipitating financial distress and eventual bankruptcy (Teece, 2018).
With the loss of the Apple contract, the glass supplier's average total cost (ATC) also likely increased. This increase occurs as fixed costs are distributed over a smaller output. Given that fixed costs are invariant to output in the short term, they can cause ATC to rise, rendering the supplier's operations less economically viable (Pindyck & Rubinfeld, 2017). This scenario contrasts with economies of scale, where lowering average costs is achieved through expanding production and spreading fixed costs over a larger output. Thus, the loss of a large client not only strained operational viability but also introduced inefficiencies in cost management.
References
- Pindyck, R. S., & Rubinfeld, D. L. (2017). Microeconomics. Pearson Education.
- Teece, D. J. (2018). Business Models and Dynamic Capabilities. Long Range Planning.
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The plethoric implications of pricing and labor decisions highlight the intricate relationships between elasticity, consumer behavior, costs, and the market dynamics companies navigate daily. Understanding these economic principles enables managers to make informed decisions in aligning company strategy with market realities.