Assignment
1. It is an important tradition in the Santos family that that they eat the same meal at their favorite restaurant every Sunday. By contrast, the Chen family spends exactly $50 for their Sunday meal at whatever restaurant sounds best.
a) Which family has a more elastic demand for restaurant food?
b) Which family has a unit elastic demand for restaurant food? (Hint: How would each family respond to an increase in food prices?)
2. The Nile.com wants to increase its total revenue. Currently every book it sells is priced at $10.50. One suggested strategy is to offer a discount that lowers the price of a book to $9.50, a 10% reduction in price using the midpoint method. TheNile.com knows that its customers can be divided into two distinct groups according to their likely responses to the discount. The accompanying table shows how the two groups respond to the discount.
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Group A
(sales per week)
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Group B
(sales per week)
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Volume of sales before the 10% discount
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1.55 million
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1.50 million
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Volume of sales after the 10% discount
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1.65 million
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1.70 million
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a) Using the midpoint method, calculate the price elasticity of demand for Group A and Group B.
b) Explain how the discount will affect total revenue from each group (use elasticity values to determine your answers).
c) Suppose the Nile.com knows which group each customer belongs to when he or she logs on and can choose whether or not to offer the 10% discount. If the Nile.com wants to increase its total revenue, should discounts be offered to Group A or to Group B, to neither group, or to both groups?
3. Many economists have estimated that the short-run and long-run elasticities of oil demand. Let us see if a rise in the price of oil hurts oil revenues in the long run. Cooper, one such economist, found that the long-run price elasticity of oil demand is -0.5.
a) If the price of oil rises by 10%, how much will the quantity of oil demanded fall?
b) Does a 10% rise in oil prices, increase or decrease total revenue to the oil producers?
c) Some policymakers and environmentalists would like to see the United States cut back on its use of oil in the long run. We can use this elasticity estimate to get a rough measure of how high the price of oil would have to rise in order to get people to make big cuts in oil consumption. How much would the price of oil have to permanently rise to get people to make cuts in oil consumption by 50%?
d) France has the largest long-run elasticity of oil demand (-0.6) of any of the large, rich countries, according to Cooper's estimates. Does this mean that France is better at responding to long-run price changes than other rich countries or does it mean France is worse at responding?
Format your assignment according to the following formatting requirements:
1. The answer should be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides.
2. The response also include a cover page containing the title of the assignment, the student's name, the course title, and the date. The cover page is not included in the required page length.
3. Also Include a reference page. The Citations and references should follow APA format. The reference page is not included in the required page length.