2. Newspaper vending machines are designed so that once you have paid for one pa
ID: 1140771 • Letter: 2
Question
2. Newspaper vending machines are designed so that once you have paid for one paper, you have access to all the papers in the machine and could take multiple papers at a time. However, other vending machines dispense only one item (the item you bought). You do not have access to all the goods (sodas, candy, snacks, etc.) at one time. Using the concept of marginal utility, explain why these vending machines differ.
3. The accompanying table shows the price and monthly demand for barrels of gosum berries in Gondwanaland.
Price of gosum berries per barrel
Demand for gosum berries per month
$100
0
$90
100
$80
200
$70
300
$60
400
$50
500
$40
600
$30
700
$20
800
$10
900
$0
1000
a. Using the midpoint method (show your work), calculate the price elasticity of demand when the price of a barrel of gosum berries rises from $10 to $20. What does this estimate imply about the price elasticity of demand of gosum berries? If producers want to increase revenue in this price range, should they increase or lower prices? Explain why.
b. Using the midpoint method (show your work), calculate the price elasticity of demand when the price of a barrel of gosum berries rises from $70 to $80. What does this estimate imply about the price elasticity of demand of gosum berries? If producers want to increase revenue in this price range, should they increase or lower prices? Explain why.
c. Notice that the estimates from (a) and (b) above are different. Why do price elasticity of demand estimates change along the demand curve?
Price of gosum berries per barrel
Demand for gosum berries per month
$100
0
$90
100
$80
200
$70
300
$60
400
$50
500
$40
600
$30
700
$20
800
$10
900
$0
1000
Explanation / Answer
2. In the case of newspaper, after reading first paper, the consumer is not interested in reading the same copy of paper again as it does not provide any new knowledge.First paper gives you maximum utility while second paper provides zero marginal utility to the cosnumer. So, consumer will not take another paper even if it is free.
Whereas. a consumer can consume pepsi one after the other. With each drink marginal utility declines but it is not zero. So, consumer will definitely take out another can. Therefore, machines are developed in this manner so that consumer has to pay for every new item.
3. a. Mid point elasticity of demand = {(Q2-Q1) /(Q2 + Q1)/2 } /{(P2-P1) /(P2 + P1)/2 }
Q1 = 900, Q2 = 800, P1 = 10, P2 = 20
E = {(800- 900) /(900 + 800)/2 } /{(20 - 10) /(20 + 10)/2 }
Ed =( -100/850) / (10/15)
Ed = -0.175
Elasticity is less than one and thus demand is inelastic.
To increase revenue, producers should increase price as quantity will decrease by a small amout in this case.
b. Q1 = 300, Q2 = 200, P1 = 70, P2 = 80
E = {(200- 300) /(200 + 300)/2 } /{(80 - 70) /(80 + 70)/2 }
Ed = (-100/250) / (10/75)
Ed = -3
Price elasticity of demand is more than 1, hence it is elastic.
To increase revenue, producers should decrease price as quantity will increase by a large amout in this case.
c. Along the same demand curve elasticity is more than one above mid - point and it is less than one below mid-point. At mid-point, elasticity is equal to one. For a linear demand curve, slope is ratio of change in two variables while elasticity is ratio of percentage change in two variables. Elasticity shows responsiveness of change in quantity to change in price. At low price levels, quantity is not so responsive to change in price and hence demand is inelastic. Whereas at high price levels, demand becomes very sensitive and becomes ealstic.
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