How Own-Price Elasticity Impacts Product Demand and Pricing

Abstract

Problem 2 Formula used to approximate the own-price elasticity of demand (b1) Find the units demanded if the product was free (b2) Units demanded when the price is $10 (b3) Calculate price elasticity of demand for the price change from free to $10 Po=$0 while Qo=250 units P=10 while Q=200 units (b4) Own Price Elasticity interpretation An elasticity of zero implies that the demand is perfectly inelastic, suggesting there are no changes in demand when the price changes c) Using calculate own price elasticity when P=$20. P=10 while Q=200 units We get rid of the negative to have an own price elasticity of 0.25, implying that it is inelastic since the absolute value is greater than zero but less than one. In inelastic demand, it means that an increase in price leads to a decrease in the quantity by approximate the same proportion. To increase the revenue, one should decrease the price, so as to increase the quantity demanded by the consumers. d) Using calculate the consumer surplus when the price is $20. The quantity demanded at Price 20 is 150 units which is the equilibrium quantity Consumer surplus= Consumer surplus=7500-2250- (total expenditure) Consumer surplus=5250-3000=2250 Problem 3 What are the markets in which the demand is elastic and inelastic. Meat and Dairy -0.21 is inelastic and can be further be classified as complementary good which are products that are used together. Bread and Cereal 0.02 are inelastic and substitute goods, meaning that one can use cereal instead of bread. Coffee and Juice 0.07 are inelastic and can also be classified as substitute goods. Suppose that each market is expected to increase by 5%. How will this affect the sales or the quantity demanded for each market. Meat and Dairy- For complementary goods, an increase in the price of one the...