1. A retail store faces a demand equation for Roller Blades given by: Q= 180- 1.
ID: 1230680 • Letter: 1
Question
1. A retail store faces a demand equation for Roller Blades given by:
Q= 180- 1.5P,
where Q is the number of pairs sold per month and P is the price per pair in dollars.
a. The store currently charges a price, P = $80 per pair. At this price, determine the number of pairs sold.
b. If management were to raise the price to $100, what would be the impact on pairs sold? On the store's revenue from Roller Blades?
c. Compute the price elasticity of demand first at P = $80, then at P = $100. At which price is demand more price sensitive?
2. Management of McPablo's Food Shops has completed a study of weekly demand for its "old-fashioned" tacos in 53 regional markets. The study revealed that
Q = 400 -1,200P + .8A + 55Pop + 800Po,
where Q is the number of tacos sold per store per week, A is the level of local advertising expenditure (in dollars), Pop denotes the local population (in thousands) , and Po is the average taco price of local competitors. For the typical McPablo's outlet, P = $1.50, A = $1,000, Pop = 40, and Po = $1.
a. Estimate the weekly sales for the typical McPablo's outlet.
b. What is the current price elasticity for tacos?
c. Should McPablo's raise its taco prices? Why or why not?
3. A minor-league baseball team is trying to predict ticket sales for the upcoming season and is considering changing ticket prices.
a. The elasticity of ticket sales with respect to the size of the local population is estimated to be about 0.7. Briefly explain what this number means. If the local population increases from 60,000 to 61,500, what is the predicted change in ticket sales?
b. Currently, a typical fan pays an average ticket price of $5. The price elasticity of demand for tickets is -0.6. Management is thinking of raising the average ticket price to $5.50. Compute the predicted percentage change in tickets sold. Would you expect ticket revenue to rise or fall?
c. The typical fan also consumes $4 worth of refreshments at the game. Thus, at the original $5 average price, each admission generates $5 + $4 = $9 in total revenue for team management. Would raising ticket prices to $5.50 increase or reduce total revenue? Provide a careful explanation of your finding. (Hint: Assume that current sales are 5,000 tickets per game. However, to answer the question you need not know current ticket sales.)
Explanation / Answer
Qestion 1 Answer
Parts A and B are simply arithmetic calculations.
At an $80 price, the equation is:
Q = 180 - 1.5(80) = 180 - 120 = 60 pairs
When the price is increased to $100, it's:
Q = 180 - 1.5(100) = 180 - 150 = 30 pairs (30 fewer pairs sold)
Sorry, I'm not sure how to answer part C. I'd suspect that it has to do with that 1.5 multiplier used in the basic equation since a $20 increase in price results in a 30-pair decrease in the quantity sold. (One and a half fewer pairs are sold for every dollar of price increase.)
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