1. South Central Louisiana State University sold 5,000 tickets to Mud Dog footba
ID: 1112464 • Letter: 1
Question
1. South Central Louisiana State University sold 5,000 tickets to Mud Dog football games when they charged a price of $5 per ticket. When they lowered the price to $3, they sold 7,000 tickets. Compute the price elasticity of demand for Mud Dog Football tickets (using the midpoints formula). Be sure to show your work.
2. Interpret the number you just calculated (i.e. what does this number mean…elastic or inelastic?).
3. Suppose South Central Louisiana State University wanted to know if tickets to Mud Dog football games were a normal or inferior good. Which elasticity would they need to calculate?
4. (Circle the best answer in the parentheses given below.)
The owner of a jewelry store wants to increase total revenue. Since the demand for jewelry is elastic, the owner should (increase, decrease, not change) the price of jewelry. This is because the percentage change in quantity demanded is (the same as, greater than, less than) the percentage change in price.
Explanation / Answer
(1) Price elasticity = (Change in tickets sold / Average tickets sold) / (Change in price / Average price)
= [(7,000 - 5,000) / (7,000 + 5,000) / 2] / [$(3 - 5) / $(3 + 5) / 2]
= [2,000 / (12,000 / 2)] / [- 2 / (8 / 2)]
= (2,000 / 6,000) / (- 2 / 4)
= - 1.33
(2) Since absolute value of price elasticity is higher than 1, demand is elastic.
(3) Income elasticity should be calculated to know whether a good is normal or inferior. If income elasticity is positive, the good is normal and if income elasticity is negative, the good is inferior.
(4) Since demand is elastic, owner should Decrease price [Reason: With elastic demand, a fall in price increases revenue]. This is because percentage change in quantity demanded is greater than the percentage change in price.
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