Elasticity question

a. How could a firm benefit from understanding the Total Revenue Test? i. How might the info help the firm make better decisions?

b. Given a downward sloping demand curve, explain why we see the 3 sections: elastic demand, unit elastic demand, and inelastic demand? i. A little high school math should help with this one.

c. List and explain the determinants of price elasticity of demand and give 2 examples for each one (do not use examples from the slides). i. There are

d. Relative to Elasticity of Supply, please explain the importance of time to a tomato farmer. i. How does time impact elasticity and the input utilization choices available to the tomato farmer?

e. Explain why a PepsiCo Sales Executive would benefit from understanding cross elasticity of demand and elasticity of demand when evaluating a recommendation to lower the price of Doritos. i. How does understanding cross elasticity of demand and elasticity of demand support better decision-making?

f. Explain why an Analyst working for the Anti-Trust Division of the Justice Dept. would benefit from understanding cross elasticity of demand when evaluating the proposed merger of Coca Cola Company and Pepsi. i. How does understanding cross elasticity support better decision-making by the analyst?

a. The total revenue test states that for a good with an elastic demand, when price goes increases, total revenue decreases, and vice versa. For a good with an inelastic demand, when the price increases, total revenue increases, and vice versa. Knowing this, and what type of demand curve your product faces, can help a business decide which will increase their total revenue--raising the price or lowering it.

b. We see three different sections because although the slope of the line is constant, the elasticity is not. The absolute value of the price elasticity falls as you move right along the curve.

c. The determinants of price elasticity of demand are the availability of substitutes, the time horizon, and whether the good is a necessity or a luxury. If the price of apple juice increases, I could buy grape juice, orange juice, cranberry juice, or any other number of juices. If the price of gasoline increased, on the other hand, there are no viable substitutes. In the short run, if the price of gas increases I have to pay for it. In the long run, however, I could purchase a different car or become a part of a carpool. If a good is a luxury, when the price increases we will consume quite a deal less of it. For example, Disney World tickets are a luxury, while insulin for a diabetic is a necessity.

d. If the price of a tomatoes increases, the law of supply says that the farmer would increase the quantity supplied. There is only so much the farmer can do in the short run. If planting has already taken place, he may have to wait until next season. In the long-run, however, the farmer could buy more land or switch land from one crop to tomatoes.

e. Cross price elasticity of demand is beneficial in this scenario. Assuming that Doritos and Pepsi are complements, when one of them has a change in their price, the quantity demanded of the other will change as well. PepsiCo would benefit from understanding this and paying attention to what is happening in the markets for its complements and substitutes.

f. If the goods are substitutes, or competitors with one another, by merging the firms there would be a decrease in the level of competition. Cross price elasticity can help us understand what will happen in this scenario because it can help us determine if the goods are complements or substitutes.