Question

5. When priced at $425, 10,000 robot vacuums are demanded, and at $475, 8750 are demanded.

1. What is the price elasticity of demand for robot vacuums?
2. Assuming manufacturing costs are about the same per vacuum from 5,000 to 10,000 units sold, should the firm sell the product at the lower or the higher price to maximize revenues?

1. When Susan makes $45,000 a year, she is ready to purchase 200 hotdogs a year. When her income climbs to $60,000 a year, she would purchase 180 hotdogs a year.

1. Which elasticity would you use to measure the change in Susan’s consumption behavior?
2. Calculate the appropriate elasticity that you identified in part (a)?
3. Based on your answer in Part (b), what can you say about the type of good that hotdogs are for Susan?

Answer 1

We have:
Initial Price (PI) = 425, New Price (PN) = 475,
Initial Quantity (QI) = 10000, New Quantity (QN) = 8750.

PED = ( (QN − QI) / (QN + QI) / 2 ) / ( (PN - PI) / (PN + PI) / 2 )

PED = ( (8750 − 10000) / (8750 + 10000) / 2) / ( (475 - 425) / (475 + 425) / 2)

PED = -0.0333 / 0.0278

PED = -1.2

PED > 1 ⇒ demand is elastic

quantity	price	TR	price	TR
5000	425	2125000	475	2375000
6000	425	2550000	475	2850000
7000	425	2975000	475	3325000
8000	425	3400000	475	3800000
9000	425	3825000	475	4275000
10000	425	4250000	475	4750000

when the cost are same then total revenue at price of 425 & 475 are different but higher price will yield higher revenue and higher profit will be incurred.

income elasticity of income

Income Elasticity of Demand = % Change in Demand / % Change in Income

% Change in Demand = (Demand End – Demand Start) / Demand Start

% Change in Income = (Income End – Income Start) / Income Start

20/200*100=10%

45000-60000/ 45000*100

= - 15000/45000*100

=33.33%

= 10/ 33.33%

= -0.30

A negative income elasticity of demand means that if incomes increase, demand for the good or service will fall. If incomes fall, demand will increase. Rise in income leads to decrease in comsumption of hot dog. less income elasticity would be shown in the behavior of susan. Negative Income Inelasticy, the Good is an Inferior Good