Elasticity Exercise

ELASTICITY EXERCISE

Name __________________________ Due _________ Please show work in detail.
All questions utilize the multivariate demand function for Cuisine Tech deluxe microwave ovens on text page 170, initially with:
PC = $625 H = 10 IH = $56000 AH = $500000
This function is:
QH = 60000 -40PH + 20PC + 5H + .1IH + .0001AH
1. Use the above to calculate the arc price elasticity of demand between PH = $1500 and PH = $1000. The arc elasticity formula is:
2. Calculate the quantity demanded at each of the above prices and the revenue that will result if the quantity is sold (fill in the table below).

PH QH Revenue
$1500
$1000

3. Marketing suggests lowering PH from $1500 to $1000. The size of the elasticity coefficient in #1 should tell you what is likely to happen to revenue. Explain why this is (or is not) a good marketing suggestion from a revenue viewpoint (note: your answer in #1 and the calculations in #2 should be giving the same message). If the implications in #1 and #2 differ, does the difference make sense (or did you make a mistake in #1 or #2)?
4. Calculate the point price elasticity of demand for Cuisine Tech microwave ovens at PH = $1500 (which should make QH = 18200). Does this elasticity value indicate that Cuisine Tech oven demand is relatively responsive to changes in the oven’s price? Explain why or why not. The formula is:
 
5. Calculate the point advertising elasticity of demand, given that AH = $500000. Use QH when PH = $1000 also. Other variables and their values are given at the top, before question #1. Does this elasticity indicate that the demand for microwave ovens is relatively responsive to increases in advertising expenditures or not? Explain why or why not.
6. Calculate the point income elasticity of demand, given that IH = $56,000 and that PH = $1250. Thus QH = 28200. The point income elasticity formula is below. Does this elasticity indicate that the demand for microwave ovens is relatively responsive to increases in household income or not? Explain why or why not.
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