# Elasticity Exercise

**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:

** P _{C} = $625 H = 10 I_{H} = $56000 A_{H} = $500000**

**This function is:**

**Q**

_{H}= 60000 -40P_{H}+ 20P_{C}+ 5H + .1I_{H}+ .0001A_{H}1. Use the above to calculate the

**arc**price elasticity of demand between P

_{H}= $1500 and P

_{H}= $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).

P_{H} |
Q_{H} |
Revenue |
---|---|---|

$1500 | ||

$1000 |

3. Marketing suggests lowering P_{H} 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 P_{H }= $1500 (which should make Q_{H }= 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 A_{H} = $500000. Use Q_{H} when P_{H} = $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 I_{H} = $56,000 and that P_{H} = $1250. Thus Q_{H} = 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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