Michael Scott from the Dunder-Miflin Paper Company sells paper in bulk to a vari
ID: 1159572 • Letter: M
Question
Michael Scott from the Dunder-Miflin Paper Company sells paper in bulk to a variety of customers in the Scranton region. Normally the paper sells for $110 a unit and he sells 800 units per week at this price. He has been wondering how price sensitive his customer base is and in an effort to get a fix on the degree of price sensitivity he gets authorization to offer the paper for $90 per unit for the next month. During this experimental period Michael's sales increase to 1200 units per week. a. Calculate the are price elasticity of demand for paper sales in this problem. Are Michael's customers price sensitive or not price sensitive? Explain. Why should the are price elasticity (as opposed to some other measure of elasticity) be used in the situation described in this problem? b. The elasticity of demand for Google Play apps is estimated to be e -3.7. If the price of Google Play apps increases by 5%, will sales revenue from Google Play apps increase. decrease, or remain unchanged? Explain your reasoning.Explanation / Answer
a. The arc elasticity demand formula
= Change in Q/average (Q1,Q2)/Change in P/average(P1,P2)
= ((1200-800)/((1200+800)/2))/((90-110)/((90+110)/2))
= -2
Since the price elasticity is -2, which means customer is price sensitive as it is more than 1 in absolute terms
b. Point elasticity= %change in Q/%change in P
=((1200-800)/800)/((90-110)/110) = -2.75
As the elasticity is more than 1, the revenue would decrease with the increase in prices as it would reduce the quantity demanded