Elasticity of Demand: Numerical Questions (Assignment 2)

1. Demand for Managerial Economics text is given by

Q = 20,000 – 300P.
The book is initially priced at $30.
a. Compute the point price elasticity of demand at P = $30
b. If the objective is to increase total revenue, should the price be increased or decreased? Explain.
c. Compute the arc price elasticity for a price decrease from $30 to $20.
d. Compute the arc price elasticity for a price increase from $30 to $40.
2. Himal Tobacco is currently selling 5,000 pounds of pipe tobacco per year. Due to competitive pressures, the
average price of a pipe declines from Rs.15 to Rs.12. As a result, the demand for Himal pipe tobacco increases to
6,000 pounds per year.
a. What is the arc cross elasticity of demand for pipes and pipe tobacco?
b. Assuming that the cross elasticity does not change, at what price of pipes would the demand for pipe
tobacco be 3,000 pounds per year? Use Rs.15 as the initial price of a pipe.
3. Suppose Tribhuvan University decides to raise tuition fee from Rs. 3,000 per annum to Rs. 4,000 per annum of
MBS first year students. The number of students getting admission is 5,000. The price elasticity of demand for the
students is 0.2.
a. Find out the number of students getting admission after the increase in tuition fee.
b. Find out the total revenue before and after the increase in tuition fee.
c. Explain whether the increase in tuition fee is a wise decision or not on the basis of total revenue findings.

4. After a careful statistical analysis, the Childester Company concludes that the demand function for the product
is, Q = 500 - 3P + 2Pr + .1I
Where Q is the quantity demanded of its product, P is the price of its product, P r is the price of its rival's
product, and I is the per capital disposable income (Rs.). At present, P = Rs. 10, P r = Rs. 20, and
I = Rs. 6,000.
(a) What is the price elasticity of demand for firm's product?
(b) What is the income elasticity of demand for firm's product?
(c) What is the cross elasticity of demand between its product and its rival's product?
5. The Johnson Robot Company's marketing officials report to the company's chief executive officer that the
demand curve for the company's robot in 2005 is, P = 3,000 - 40Q,
Where P is the price of the robot, and Q is the number sold per month.
(a) Derive the marginal revenue curve of the firm.
(b) If the firm wants to maximize its rupee sales volume, what price should it charge?
6. The Hanover manufacturing company believes that the demand curve for its product is P = 5 - Q
Where P is the price of the product (Rs.) and Q is the number of units sold per day. It is currently charging a
price of Re. 1 per unit.
(a) Evaluate the Wisdom of the firm's pricing policy.
(b) A marketing specialist says that the price elasticity of demand for the firm's product is 1.0. Is this correct?
7. The marketing manager of the Summers Company must formulate a recommendation concerning the price to
be charged for a new product. According to the best available estimates, the marginal cost of the new product
will be Rs. 18, and the price elasticity of demand for this product will be 3.0.
(a) What recommendation should she make, if Summers wants to maximize profit?
(b) If her recommendation is accepted, what will be the new product's marginal revenue?

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8. A retailer has noticed from the past several months, sales of product x has been close to 200 units per week.
On two occasions, however, sales declined to 120 units per week. The retailer notes that during these two
periods, the store has reduced Y's price from Rs. 5 to Rs. 4.
(a) What is the arc cross-price elasticity between x and y?
(b) What level of sales for x would you predict if the price of y is increased to Rs. 6?
9. The demand for shirts produced by Pramila's Apparel has been estimated to be P = 30 – Q / 200.
(a) Compute the point elasticity at P = Rs. 10, at P = Rs. 15.
(b) How does the point elasticity vary with the price?
10. A market consists of two individuals. Their demand equations are
Q1 = 16 - 4P and Q2 = 20 - 2P, respectively.
(a) What is the market demand equation?
(b) At a price of $2, what is the point price elasticity for each person and for the market?

11. The price elasticity for rice is estimated to be - 0.4 and the income elasticity is 0.8. At a price of $0.40 per
pound and a per capita income of $20,000, the demand for rice is 50 million tons per year.
(a) Is rice an inferior good, a necessity, or a luxury? Explain.
(b) If per capita income increases to $20,500, what will be the quantity demanded of rice?
(c) If the price of rice increases to $0.41 per pound and income per capita remains at $20,000, what will be
the quantity demanded?
12. The advertising elasticity of a firm is 1.5 as advertising expenditure increases from $10 to $12 million. If
demand is 50 at an advertising expenditure of $12 million, what will be the demand at an advertising
expenditure of $10 million?
13. The demand equation is estimated to be 50 - 3P + 2P 0, where P0 is the price of some other good. Assume the
average value of P is $3 and the average value of P 0 is $6.
(a) What is the price elasticity at the average values of P and P 0? How should the price of the good be
changed to increase total revenue?
(b) What is the cross elasticity at the average values of P and P o? What is the relationship between the two
goods?
14. The Inquiry Club at Jefferson University has compiled a book that exposes the private lives of many of the
professors on campus. Economics majors in the club estimate that total revenue from sales of the book is
given by the equation. TR = 120Q - 0.1Q3
Initially, the price is set at $71.60. To maximize total revenue, should the price be increased or decreased?
15. Samsung Electronics Ltd. manufactures and sells LCD monitors. The current price of a monitor is Rs. 5,000 and
quantity sold is 1,000 units per year. The company believes that the price elasticity of demand is –1.5. The
company decides to increase the price to Rs. 6,000.
(a) How many monitors the company will be able to sell at new price?
(b) What will be the effect on total revenue due to the increase in price?
(c) Explain whether the increase in price is desirable or not from the viewpoint of its effect on sales and total
revenue?
16. The demand equation faced by Mercantile Communication for its personal computer is given by P = 10,000 –
4Q.
a. Write the marginal revenue equation.
b. At what price and quantity will marginal revenue be zero?
c. At what price and quantity will total revenue be maximized?
d. If price is increased from Rs.6,000 to Rs.7,000, what will be the effect on total revenue? What does this
imply about price elasticity?

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17. The demand for pens produced by a Nepalese manufacturer has been estimated to be P = 30 – .
Compute the point price elasticity at P = Rs.10 and at P = Rs.15
18. Sailright Company manufactures and sells sailboards. Management believes that the price elasticity of demand
is –3. Currently, boards are priced at Rs. 500 and the quantity demanded is 10,000 per year.
a. If the price is increased to Rs.600, how many sailboards will the company be able to sell each year?
b. How much will total revenue change as a result of the price increase?
19. Thompson Steel is a major producer of steel. Management estimates that the demand for the company’s
steel is given by the equation
QS = 5,000 – 1,000PS + 0.1I + 100 Pa
Where, QS is steel demanded in thousands of tons per year, P S is the price of steel in dollars per pound, I is the
income per capita, and Pa is the price of aluminum in dollars per pound. Initially, the price of steel is $1 per
pound, income per capita is $20,000 and the price of aluminum is $0.80 per pound.
a. How much steel will be demanded at the initial prices and income?
b. What is the point income elasticity at the initial values?
c. What is the point cross elasticity between steel and aluminum? Are steel and aluminum substitutes or
complements?
d. If the objective is to maintain the quantity of steel demanded as computed in part (a), what reduction in
steel prices will be necessary to compensate for $0.20 reduction in the price of aluminum?
20. Suppose your university decides to raise tuition fee from Rs. 60,000 per semester to Rs. 80,000 per semester
of MBA students. The number of students getting admission is 100. The price elasticity of demand for the
students is 0.4.
a. Find out the number of students getting admission after the increase in tuition fee.
b. Find out the total revenue before and after the increase in tuition fee.
c. Explain whether the increase in tuition fee is a wise decision or not on the basis of total revenue findings.

21. A firm has the demand function as Q = 1000 – 20P.Currenty the firm charges Rs. 30 for this product. By how
much should the price be increased or decreased in order to maximize total revenue?