ECO 550 Anielli Eugenia de Padua Guimaraes Week 2 - Check Your Understanding

If the transit authority reduces the fare back to 50 cents, I would expect a small increase because it would be the price that people were used to pay. However, customers would have probably found an alternative way to travel because of the increase in cost. We already know that by increasing the price that ridership decrease 30% so if the price goes back to original price, there will be a significant change of demand.

Problem 7. In an attempt to increase revenues and profits, a firm is considering a 4 percent increase in price and an 11 percent increase in advertising. If the price elasticity of demand is −1.5 and the advertising elasticity of demand is +0.6, would you expect an increase or decrease in total revenues?

%Q = %P(ED) + %A (EA) = (4%)* (-1.5) + (+11%)*(0.6) = 0.6%

Change in advertising = 11% * 0.6 = 6.6%

We would expect a small total revenue increase because price and quantity increase.
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