Practice Questions for Microeconomics

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Practice Questions and Answers from Lesson I-7: Elasticity Practice Questions and Answers from Lesson I-7: Elasticity The following questions practice these skills:  Use the midpoint method for calculating percent change.  Compute price elasticity of demand.  Identify elastic and inelastic demand according to the price elasticity of demand.  For elastic demand, apply the negative relation between price and revenue.  For inelastic demand, apply the positive relation between price and revenue.  Remember demand is more elastic when there are more substitutes or closer substitutes.  Compute the price elasticity of supply.  Compute cross-price elasticities of demand.  Relate cross-price elasticities of demand to gross substitutes and gross complements.  Identify elastic and inelastic portions of a linear demand curve.  Compute income elasticity of demand. Question: Amazon.com, the online bookseller, wants to increase its total revenue. One strategy is to offer a 10% discount on every book it sells. Amazon.com knows that its customers can be divided into two distinct groups according to their likely responses to the discount. The accompanying table shows how the two groups respond to the discount. Group A (sales per week) 1.55 million 1.65 million Group B (sales per week) 1.50 million 1.70 million

Volume of sales before the 10% discount Volume of sales after the 10% discount

a. Using the midpoint method, calculate the price elasticities of demand for group A and group B. b. Explain how the discount will affect total revenue from each group. c. Suppose Amazon.com knows which group each customer belongs to when he logs on and can choose whether or not to offer the 10% discount. If Amazon.com wants to increase its total revenue, should discounts be offered to group A or to group B, to neither group, or to both groups? Answer to Question: a. Using the midpoint…...

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