Question

Please do it by type not write.

1. Suppose that the publishers of a particular Economics book often used as a requirement in Economics classes raise the price from $40 to $60. Afterwards, they notice that the quantity demanded among college students dropped from 105 to 95, and the quantity demanded among casual readers dropped from 70 to 30.

a. Calculate the price elasticity of demand for students. Then calculate the price elasticity of demand for casual readers. (Note: in each case, the price change is the same).

b. Based on part a, how would you characterize demand for each group of buyers? Explain (briefly) why the elasticities differ.

c. Explain (briefly) how the publishers could use this information to maximize revenue.

Answer 1

Price	Qnty demanded by college students	Qnty demanded by casual readers
40	105	70
60	95	30
Change (∆) = -20	10	40

a. Elasticity of Demand for College Students (Using Mid Point Method)

Changes in Quantity/Changes in Price * Sum of Both Prices / Sum of both Quantities

10/-20*100/200 = -.25 or .25

Elasticity of Demand for Casual Readers (Using Mid Point Method)

Changes in Quantity/Changes in Price * Sum of Both Prices / Sum of both Quantities

40/-20*100/100 = -2 or 2

b. Based on part a, how would you characterize demand for each group of buyers? Explain (briefly) why the elasticities differ.

The demand for college students in inelastic (Ed less than one). Since the book doesn’t have any substitute for the college students the demand will be inelastic. The Economics book often used as a requirement in Economics classes they have to buy and use it. Hence, the demand is inelastic.

The demand for casual readers is elastic ( Ed is greater than one). They are not students and bound to buy the book. They are casual readers. If the price increases they will suspend or stop the reading of such books. Hence the demand will be inelastic.

c. Explain (briefly) how the publishers could use this information to maximize revenue.

This is very important information for the publisher to maximize the profit. Now the publisher knows that for college students it is a requirement, he will concentrate on the areas where college students purchase the book. The price can further increased for the college students so that the revenue can be maximized. The publisher will not bother about the demand for casual readers. To maximize the profit he will concentrate on the demand for college students.