The Los Angeles Galaxy soccer team is considering lowering ticket prices to increase sales. Their estimate...

The Los Angeles Galaxy soccer team is considering lowering ticket prices to increase sales. Their estimate demand curve is log(Q D) = 5.56 − 1.484 log(P).

(a) What is the estimated elasticity of demand for LA Galaxy tickets?

(b) Will the Galaxy lose revenue if they decrease ticket prices? Explain.

(c) What assumption is made about demand when we use the above equation to represent consumers’ demand for LA Galaxy tickets?

Solutions

Expert Solution

(a)

It shall be noted that the estimated demand equation log(Q D) = 5.56 − 1.484 log(P) as provided is log-log form

The slope-coefficient of this regression equation is the estimated elasticity of demand for LA Galaxy tickets.

Hence, the correct answer is -1.484

(b)

The absolute value of the estimated elasticity of demand for LA Galaxy tickets is 1.484, indicating that the demand for LA Galaxy tickets is elastic.

Thus, when the ticket price is decreased, the Galaxy will increase the revenue.

This is because, with the elastic demand, the % increase in the quantity demanded would be higher than the % decrease in the price. As a result of this, the total revenue collection would increase.

(c)

The assumption is made about demand when we use the above equation to represent consumers’ demand for LA Galaxy tickets that the quantity demanded is only a function of the price. Also, the price elasticity of demand is constant over all the levels of demand.

The quantity demanded and the price is always positive.

The errors of the given regression model are normally distributed and have constant variance.

Rahul Sunny answered 1 year ago

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