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ELASTICITY EXERCISE

Name ______________________________(10) Due _________ Please show work in detail.

All questions utilize the multivariate demand function for Advanced Consumer Electronics (ACE)

digital cameras given in Truett, # C8 on page 84. Compute all to three decimal places.

Initial values are:

PC = $700

PM = $35

I = $40000

A = $200000

The function is:

QACE = 270 -.8PACE -3PM +.4PC +.006I + .03A

1.

(a) Use the above to calculate the arc price elasticity of demand between PACE = $4500 decreasing to PACE =

$4000. The arc elasticity formula is:

1 + 2

=

•

1 + 2

(b) Judging from the computation in (1a), do you expect the revenue resulting from the price decrease to $4000 to

increase, remain the same, or decrease relative to the revenue at the price of $4500? (Hint: see the table on page 65 of

Truett). Explain your choice.

2. (a) Calculate the point price elasticity of demand at PACE = $3500 (which should make QACE = 3885). The formula is:

=

•

(b) Does this elasticity value indicate that demand is relatively responsive to changes in the price of the camera?

Explain why or why not.

3 (a) Calculate the point “memory card” cross-price elasticity of demand at PM = $35. Use QACE

corresponding to PACE = $3300. Assume other variables and their values are given at the top, before question

#1. The formula is

=

•

(b) Does this elasticity value indicate that camera demand is relatively responsive to memory card price changes?

Explain why or why not.

4. (a) Calculate the point cross price elasticity of demand at PC = $700 . Use QACE corresponding to PACE =

$3500. Assume other variables and their values are given at the top, before question #1.

=

•

(b) Does this elasticity value indicate that ACE camera demand is relatively responsive to changes in the price (P C) of

competing cameras? Explain why or why not.

5. (a) Calculate the point advertising elasticity of demand if advertising expenditures (A) are $200000. Use QACE =

3085, corresponding to PACE = $4500. Assume other variables and their values are given at the top of the

page before Question #1.

=

•

(b) Does this elasticity value indicate that camera demand is relatively responsive to changes in Advertising

expenditures (A)? Explain why or why not.

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