Mica put a question in her blog. She also attempted to answer it.
Several others then commented.
After all, that's how we learn.
Mica then deleted the whole question.
So a lot of what had been learned was lost.
Now Mica has put the same question up - but with a different answer.
I am reproducing it here.
Please put your comments.
Question:
The economy is heading into a recession and the company is running at a loss. the rail fares is increasing.
a. How do you use the information below to inform your decision on price?
b. Do you raise or lower price?
1)Price elasticity of demand: -1.58
Explanation:
Because the PED is -1.58, we can know that the demand is elastic but the demand and price are not changing in the same direction..It means that when the price of bus goes up, the quantity demanded will go down at a big scale. Therefore,on the contrary, if we want to increase the demand we should lower the price .It is better to lower the price in my opinion.
2)Income elastic of demand: -2.43
Explanation:
Because of the negative YED which is estimated as -2.43, we can know that the demand is elastic which means that demand falls as income rises. So we can conclude that taking a bus is inferior. Therefore, the company should lower the price.
3)Cross elasticity of demand: +2.21
Explanation:
Because the XED is greater than 1, we can know that it is elastic which means that the quantity demanded of taking a bus goes up with the increasing price of rail fares and they have close relationship. Therefore, the company does not need to change the price.
4)Price elasticity of supply: 1.15
Explanation:
Because the PES is greater than 1, the price of bus is elastic which means that the quantity supplied goes up along with the increasing price of taking bus.
In conclusion, it is better for the company to raise the price.
Again there are serious errors - place your comments here........
2)(we can know that the demand is elastic which means that demand falls as income rises):If income rises,how can demand fall???Income falls,so demand must fall.
ReplyDelete3)(Because the XED is greater than 1, we can know that it is elastic):It's sustitute.If it's substitute goods,we must lower the price,so that demand of that good will increase.
Mr Lex, it's not necessary that if income falls , demand falls. she is talking about inferiour goods . so if your income have fallen , you' re now buying more cheaper things that you used to do before.
ReplyDeletefor example, if the average people's income was high, people used to travel by taxi or private cars. but then the level of salaries went down, and people are now more likely to travel by bus - so the demand for this service rises
Mr Chris,I will check again,thx for lex and Anastasia.
ReplyDeleteand Mr Chris,the picture is not very beautiful........++