Coffee has an elasticity of -.2 which indicates the revenue [rises or falls] as
ID: 1216706 • Letter: C
Question
Coffee has an elasticity of -.2 which indicates the revenue [rises or falls] as price is increased? When purchasing a new car, the greatest percentage mark-up is on [the basic unit or the service contract]? Why? The product's original price was $40 and the new price is $50 and sales declined from 100 units per week to 70 units. The point elasticity is______? The mid-point elasticity is_____? The new revenue is______? The old revenue was_____? The price elasticity of supply of .5 is called______? A 5% price increase will [increase or decrease] quantity supplied by_______? A supply curve with an infinite elasticity coefficient is drawn Describe the type of market for a good compiling a -.5 demand elasticity and a .5 supply coefficient. Would the above market be a likely candidate for a price floor and ceiling? Why? What factors reduce the price elasticity of demand? Price increases from $2 to $3 and the quantity supplied increased by 50%. The supply elasticity is_____? Write the formulas for both price elasticity of demand and slope of demand.Explanation / Answer
(6) Absolute value of price elasticity is o.2 which is less than 1, implying demand is inelastic. With inelastic demand, a price increase will increase total revenue.
(7) Greatest mark-up is on Service contract, since:
Mark-up = (Price - Marginal cost) / Marginal cost, and for service contracts, marginal cost is much lower in proportion to price compared to the basic unit, therefore mark-up % is higher for service contracts.
(8)
(i) Point elasticity = % Change in quantity / % Change in price
= [(70 - 100) / 100] / [(50 - 40) / 40] = (- 30 / 100) / (10 / 40) = - 0.3 / 0.25 = - 1.2
(ii) Mid-point elasticity = (Change in quantity / Average quantity) / (Change in price / Average price)
= [- 30 / (70 + 100) / 2] / [(10 / (50 + 40) / 2] = (- 30 / 85) / (10 / 45) = - 0.35 / 0.22 = - 1.59
(iii) New revenue = New price x New quantity = $50 x 70 = $3500
(iv) Old revenue = Old price x Old quantity = $40 x 100 = $4000
Note: First 3 questions are answered.