The Texas A&M football team wants to boost revenues from ticket sales next season. You are...

The Texas A&M football team wants to boost revenues from ticket sales next season. You are hired as an economic consultant to advise the Aggies to raise or lower prices next year. If the elasticity of demand for the Aggie game tickets is estimated to be 1.6, what would you advise? If the elasticity of demand equals .4?

The city council of the great city of College Station, TX is trying to encourage 10% of their residents to switch from traditional electricity from coal fired power plants to a more environmentally friendly alternative wind generated electricity cleverly named “wind watts.” They have the following data: The Elasticity of Demand of coal generated electricity is -.8, the cross price elasticity is .675, and the income elasticity of both goods are positive.

How would the city need to change the price of coal generated electricity to achieve their goal?

What would be the resulting change in the demand of wind generated electricity?

Solutions

Expert Solution

(1)

When elasticity of demand is higher (lower) than 1, demand is elastic (inelastic). With elastic (inelastic) demand, an increase in price will decrease (increase) revenue, and a decrease (increase) in price will increase (decrease) revenue). Therefore,

When elasticity is 1.6, price should be decreased because demand is elastic.

When elasticity is 0.4, price should be increased because demand is inelastic.

(2)

(a)

Own price elasticity = % Change in number of people switching from coal-generated plant / % Change in price for coal-generated electricity

-0.8 = (-10%) / % Change in price for coal-generated electricity

% Change in price for coal-generated electricity = (-10%) / 0.8

% Change in price for coal-generated electricity = 12.5% (Increase)

(b)

Cross price elasticity = % Change in demand for wind-powered electricity / % Change in price for coal-generated electricity

0.675 = % Change in demand for wind-powered electricity / 12.5%

% Change in demand for wind-powered electricity = 0.675 x 12.5%

% Change in demand for wind-powered electricity = 8.4375% (Increase)

Rahul Sunny answered 1 year ago

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