Question

Please answer all four questions, thanks!!

1. Assuming a downward-sloping (not vertical) demand curve, as one moves down the demand curve describe the relationship involving price elasticity of demand, total revenue, and marginal revenue.

2. Itemize and briefly describe the determinants of price elasticity of demand.

3. Congratulations! You have just become the sole owner of a NFL (National Football League) franchise. Assuming that your goal is to maximize revenues, do you necessarily want to sell out the stadium on game days? Explain.

4. You have just become a powerful, forceful, yet benevolent union leader. Assuming you have the clout to do so, do you want to raise wages to the highest level you possibly can? As the representative of many workers, and particularly concerned with their best interest, what might be your goal in this regard? Explain.

Answer 1

2) The determinants are:
The availability of close substitutes - If a product has many close substitute, then price elasticity of demand for that product is high.
The importance of the product’s cost in one’s budget - If the cost of the product is relatively low compared to one's budget, the price elasticity of demand is low, for eg. a 10% rise in the price of salt will have much less impact than a 10% rise in price of car
The period of time under consideration - The greater the period under consideration, the greater is the effect of price changes and the higher the price elasticity.

3) Not necessarily, it depends upon the demand function. It is possible that by selling the tickets at a higher price and not selling the stadium, the revenues are greater than pricing low and selling the stadium.

4) Wages can be increased such that marginal productivity equals the wage rate. In such a case, workers will get their share of revenue productivity. Increasing the wage beyond this might lead to inefficient production costs, losses for the firm and might not be beneficial for long-term.