The ECON3305 Company Was Considering A Price Increase And Wi

The ECON3305 company was considering a price increase and wished to de

The ECON3305 company was considering a price increase and wished to determine the price elasticity of demand (arc elasticity of demand). An economist and a market researcher, Sandy and you, were hired to study demand. In a controlled experiment, it was determined that at 8 cents, 100 pencils were sold while at 10 cents, 60 pencils were sold, yielding an elasticity of 2.25. However, Sandy and you were industrial spies, employed by the EF Pencil Co. and sent to ECON3305 to cause as much trouble as possible. So Sandy and you decided to change the base for their elasticity figure, measuring price in terms of dollars instead of pennies (i.e., $0.08 for 8 cents and $0.10 for 10 cents).

Paper For Above instruction

The primary objective of this analysis is to understand the implications of measuring price elasticity of demand using different units—pennies versus dollars—and how this change affects the calculation and interpretation of elasticity. Pricing strategies are crucial for companies like ECON3305, as understanding demand sensitivity can inform decisions that maximize revenue and profit. The scenario provided involves a controlled experiment, with specific data points that allow for elasticity calculations, and introduces the choice of base currency for measuring price, which can influence elasticity outcomes.

Price elasticity of demand measures the responsiveness of quantity demanded to changes in price and is a vital concept in microeconomics and business decision-making. The arc elasticity formula is typically used to measure demand responsiveness over a specific range of prices and quantities. The formula is expressed as:

\[

E_d = \frac{\% \Delta Q}{\% \Delta P} = \frac{(Q_2 - Q_1) / [(Q_1 + Q_2)/2]}{(P_2 - P_1) / [(P_1 + P_2)/2]}

\]

Where \(Q_1\) and \(Q_2\) are the initial and final quantities demanded, and \(P_1\) and \(P_2\) are the initial and final prices. Using the provided data, at initial price \(P_1 = 8\) cents (or $0.08), the quantity demanded is 100 pencils; at the higher price \(P_2 = 10\) cents (or $0.10), the quantity demanded drops to 60 pencils.

Original Elasticity Calculation in Cents

First, calculating the elasticity using cents:

1. Percentage change in quantity demanded:

   \[

   \frac{60 - 100}{(100 + 60)/2} = \frac{-40}{80} = -0.5

   \]

2. Percentage change in price:

   \[

   \frac{0.10 - 0.08}{(0.08 + 0.10)/2} = \frac{0.02}{0.09} \approx 0.2222

   \]

3. Elasticity:

   \[

   E_d = \frac{-0.5}{0.2222} \approx -2.25

   \]

The magnitude of elasticity is 2.25, indicating demand is elastic; consumers are quite responsive to price changes.

Recalculating Elasticity in Dollars

Now, if the base for measurement shifts to dollars, \(P_1 = \$0.08\), \(P_2 = \$0.10\), but still representing the same price points, the calculation remains the same since the percentage change formulas are unaffected by the units as long as the units are consistent.

However, if the problem suggests that Sandy and you modified the base to measure prices relative to dollars differently—say, using different denominators or recalculations—the core issue is whether the units are standardized or scaled differently, which can distort elasticity calculations.

Impact of Changing Units on Elasticity

Measuring prices in dollars rather than cents fundamentally does not change the elasticity calculation if consistent percentage change calculations are used. Both prices are converted into dollar terms: $0.08 and $0.10, and the percentage change is computed in the same way. The key is that elasticity is a ratio of percentage changes, which are relative measures independent of the absolute units used, provided the ratio calculations are correctly applied.

This illustrates a common misconception that changing units affects elasticity magnitude. While the numerical value of the elasticity calculated in dollar terms might appear different if not handled correctly, properly calculated percentage changes ensure consistent results regardless of units used. This consistency is critical because it maintains the measure's interpretative validity—whether in cents or dollars, an elastic demand remains elastic.

Practical Considerations for Pricing Strategies

Accurately measuring demand elasticity guides firms like ECON3305 in setting optimal prices. If demand is elastic (elasticity greater than 1), a price increase could decrease total revenue, while if demand were inelastic (elasticity less than 1), a price hike might increase revenue. Understanding the units used in measurement and ensuring consistent calculation is vital for making sound pricing decisions.

Conclusion

The experiment demonstrates the importance of proper units and consistent calculation methods when measuring price elasticity. Whether prices are expressed in cents or dollars, the elasticity magnitude remains consistent if the percentage changes are calculated correctly. For ECON3305 considering a price increase, understanding the elastic nature of demand—regardless of measurement units—is essential for effective pricing policy formulation and maximizing profitability.

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