A major PC producer lowers the price of its desktop PC from $1,000 to $800. The...

A major PC producer lowers the price of its desktop PC from $1,000 to $800. The sale of desktops increases by 25 percent. The sales manager notices that sales of the company’s laser printers increase by 15 percent.

Calculate the arc price elasticity of desktop PC. Explain what it means.
Why have the sales of laser printers increased? Calculate the arc cross price elasticity of laser printers. Based on your calculation, is a laser printer a substitute or complement? Why?
Was the new policy beneficial for increasing the revenues of the producer? Explain.
If you were to estimate a demand equation for desktop computers, which variables would you choose as explanatory variables?

Solutions

Expert Solution

a. Arc price elasticity = %change in quantity/ %change in price = 25%/ -20% = -1.25.
This means that demand for desktop is elastic (value is greater than 1).

b. Arc cross price elasticity of laser printers = 15%/ -20% = -0.75
The cross price elasticity of laser printers is negative. It means that desktop and laser printers are complements. When the price of desktop is decreased, its demand increases; so does the demand for its complement, laser printers.

c. Yes, the new policy is beneficial for producers. The demand is elastic. So, according to the property of elasticity, when price decreases, revenue increases. So, producers of desktop will have increased revenue when they decrease the price.

d. Explanatory variable would be price of desktop. Response variable would be the quantity demanded.
When price decreased, the quantity demanded increased. So, explanatory variable is the price which the producers manipulated in order to increase the revenue.

Rahul Sunny answered 1 year ago

Next > < Previous

Related Solutions

A major PC producer lowers the price of its desktop PC from $1,000 to $800. The...

A major PC producer lowers the price of its desktop PC from $1,000 to $800. The sale of desktops increases by 25 percent. The sales manager notices that sales of the company’s laser printers increase by 15 percent. Calculate the arc price elasticity of desktop PC. Explain what it means. Why have the sales of laser printers increased? Calculate the arc cross price elasticity of laser printers. Based on your calculation, is a laser printer a substitute or complement? Why?...

1. A major PC producer lowers the price of its desktop PC from $1,000 to $800....

1. A major PC producer lowers the price of its desktop PC from $1,000 to $800. The sale of desktops increases by 25 percent. The sales manager notices that sales of the company’s laser printers increase by 15 percent. a. Calculate the arc price elasticity of desktop PC. Explain what it means. b. Why have the sales of laser printers increased? Calculate the arc cross price elasticity of laser printers. Based on your calculation, is a laser printer a substitute...

A company offers bonds at a discount price of $800 for a 4% $1,000 bond that...

A company offers bonds at a discount price of $800 for a 4% $1,000 bond that matures in 20 years with a dividend payable semiannually. What is the closest effective interest rate per year, compounded semiannually is ?

1) If a firm lowers the price of its product and as a result total revenue...

1) If a firm lowers the price of its product and as a result total revenue falls, we can conclude that the product's price is above the midpoint of its demand curve other things constant, the firm's profits will increase a demand is elastic in this price range the product is inferior goods demand is inelastic in this price range 2) According to Table below, what is the price elasticity of demand (using Midpoint method) when price rises from $8.50...

A bond's market price is $800. It has a $1,000 par value, will mature in 6...

A bond's market price is $800. It has a $1,000 par value, will mature in 6 years, and has a coupon interest rate of 9 percent annual interest, but makes its interest payments semiannually. What is the bond's yield to maturity? What happens to the bond's yield to maturity if the bond matures in 12 years? What if it matures in 3 years?

1. A local supermarket lowers the price of its T-bone steak from $6.00.lb to $5.00/lb. Sales...

1. A local supermarket lowers the price of its T-bone steak from $6.00.lb to $5.00/lb. Sales increase by 15 percent. The store manager notices that chicken breast sales decrease by 10 percent. a. Calculate the arc price elasticity of T-bone steak. Explain what it means. b. Calculate the arc cross-price elasticity of chicken breast. Based on your calculation, chicken breast a substitute or complement? Why? c. Was the pricing decision good or bad for the supermarket? Explain. d. If you...

Aranguez Corporation produces a molded plastic casing, LX20A, for desktop computers. Summary data from its 2013...

Aranguez Corporation produces a molded plastic casing, LX20A, for desktop computers. Summary data from its 2013 income statement are as follows: Revenues $ 8,000,000 Variable costs (4,800,000) Fixed costs (3,000,000) Operating income $ 200,000 Jane Dall, Aranguez’s president, is very concerned about Aranguez Corporation’s poor profitability. She asks Giselle James, production manager, and Lester Saline, controller, to see if there are ways to reduce costs. After two weeks, James returns with a proposal to reduce variable costs to 50% of...

The common-size balance sheets from five companies follow: Alcoa, a major producer of aluminum products; Delta...

The common-size balance sheets from five companies follow: Alcoa, a major producer of aluminum products; Delta Air Lines, a major airline; Duke Energy, a leading energy company focused on electric power and gas distribution; JCPenney, a national retailer; and Pfizer, Inc., a global research-driven pharmaceutical company. Required: Based on your general business knowledge, the economic activities of these five firms, and information derived from the following balance sheet analysis, match the company with its respective balance sheet. Explain your reasoning...

If Company A’s selling price of its product is $1,000, variable cost is 80% of the...

If Company A’s selling price of its product is $1,000, variable cost is 80% of the selling price, and fixed cost is $100,000. What will be the total sales in dollars and units for the company to break even? Also, what is sales mix and what role does contribution margin play when a company is evaluating it’s sales mix?

Suppose that the US economy is down by exactly 800 billions from its February 2020 level.

Suppose that the US economy is down by exactly 800 billions from its February 2020 level. Assume that the marginal propensity to consume is 0.75, and the government decides to actively interne in order to move back the economy to its February level. a) By how much should he government increase both government spending and taxes to move the economy by exactly 800 billions with a balanced budget? b). By how much should the government increase government spending to reach...

Subjects