Here are some elasticity exercises to practice calculations with. Display each on the whiteboard and have students work in pairs to work out the answers, before showing them the correct solutions.
Here are some elasticity exercises to practice calculations with. Display each on the whiteboard and have students work in pairs to work out the answers, before showing them the correct solutions.
Question 1
During the summer, Iris sets up a lemonade stall on her street. On day one she sells 43 glasses of lemonade at a price of 20p each. That night, her father tells her to increase her price to 50p as she will make money that way. She takes his advice but on day two she only sells 26 glasses.
(a) Calculate the PED.
% change in price = +150%. % change in demand = -17/43X100 = -39.5% therefore PED is -39.5/150 = 0.26.
(b) What was Iris’ revenue before the price change?
43 x 20p = £8.60
(c) What was Iris’ revenue after the price change?
26 x 50p = £13
(d) What was the percentage increase/decrease in Iris’ revenue from day one to day two.
4.4/8.6 x 100% = 51.2%
(e) Explain why revenue did what it did.
Revenue rose because when the price rose, demand fell less than proportionally.
Here are some elasticity exercises to practice calculations with. Display each on the whiteboard and have students work in pairs to work out the answers, before showing them the correct solutions.
Question 2
Nintendo have seen falling sales in their new console and they are losing ground to their rivals Sony and Microsoft. They reduce the price of the console from £400 to £320. As a result, sales increase from 500,000 to 550,000.
(a) Calculate the PED.
Demand: +10% Price -20% PED = -1/2
(b) What was Nintendo’s revenue before the price cut?
£400 x 500,000 = £200m
(c) What was Nintendo’s revenue after the price cut?
£320 x 550,000 = £176m
(d) What was the percentage increase/decrease in Nintendo’s revenue after the price cut?
-24/200 x 100% = -12%
(e) Explain why revenue did what it did.
Price fell and demand rose less than proportionally, therefore revenue fell.
Here are some elasticity exercises to practice calculations with. Display each on the whiteboard and have students work in pairs to work out the answers, before showing them the correct solutions.
Question 3
An Oxford-based publishing firm are considering their pricing strategy for children’s books. Currently, their range of children’s books sells for an average of £5. However, due to increasing costs they may have to raise this to £6 in the near future. Previous research has shown that the likely PED for children’s books is -1.5. Last year the firm sold 20,000 children’s books.
(a) What will be the likely number of children’s books that the firm can sell this year if they increase the price to £6 as suggested?
14,000. Price rises by 20%, PED =-1.5 therefore sales fall by 30%.
(b) What was the firm’s revenue last year?
20,000 x £5 = £100,000
(c) What will be the firm’s likely revenue this year?
14,000 x £6 = £84,000
Here are some elasticity exercises to practice calculations with. Display each on the whiteboard and have students work in pairs to work out the answers, before showing them the correct solutions.
Question 4
A new manager has started at Sainsbury’s and she is considering lowering the price of the own-brand range of shampoo. She knows that last year a cut in price from 80p to 70p increased annual sales from 10,000 units to 12,000 and therefore she is considering a further 10p cut this year.
(a) What was the PED for Sainsbury’s own-brand shampoo last year?
Price falls by 12.5%. Demand rises by 20%. PED is therefore -1.6
(b) How much did revenue increase by after the 10p cut?
80p x 10,000= £8000 then 70p x 12,000 = £8400 Therefore +£400.
(c) Will cutting a further 10p off the price of the shampoo result in an even greater sum of revenue?
This depends on whether PED stays the same. If it does then demand will rise more than proportionally, so revenue should rise.