Question

The relationship between the E_D and total revenue

            You are the manager of Autoquest Industries. Singing Bobbleheads that are placed on a car’s dashboard is    one of the products that your firm manufactures and sells to car dealers. Currently Autoquest is charging             $10.00 per Bobblehead and selling 1,000 per month. Billy Bob, the owner of the firm, “C’mon, let’s change         the price to rake in a huge amount of dough.” As a first step you, the manager, estimates that the price             elasticity of demand for the Singing Bobbleheads is 3.0 over the relevant price range.

            a.         The demand for Singing Bobbleheads is (circle one): elastic / inelastic / unit elastic

                  Must show calculations for 3b & c and 4a & b

            b.         A 10% decrease in the price of Singing Bobbleheads would

                        _________________ the quantity of Singing Bobbleheads demanded by _________%

                        For the 3b calculation use: E_D = % Δ Q /  % Δ P

   

            c.         Total Revenue = Price × Quantity

                        A 10% decrease in the price of Singing Bobbleheads would   

                        ____________________ total revenue from $10,000 to $____________ per month

                        P                      Q                     TR

                        $10                  1,000               $10,000

                        $________    ________            $________

Answer 1

a ) Ans: The demand for Singing Bobbleheads is  elastic.

Explanation:

If the elasticity of demand is greater than 1 . then the demand will be elastic.

b ) Ans: A 10% decrease in the price of Singing Bobbleheads would increase the quantity of Singing Bobbleheads demanded by 30 %.

Explanation:

E_D = % Δ Q /  % Δ P

3 = % Δ Q /  10%

% Δ Q = 30%

c ) Ans:  A 10% decrease in the price of Singing Bobbleheads would increase total revenue from $10,000 to $11,700 per month.

P	Q	TR
$10	1000	$10,000
$9	1300	$11,700

Explanation:

New price after 10% decrease in price = $10 - ( 10% of $10) = $10 - $1 = $9

New quantity after 30% increase in quantity = $1000 + ( 30% of $1000) = $1000 - $300 = 1300