Identify when demand is elastic or inelastic, and advise how the company should change the price to...

Question

Identify when demand is elastic or inelastic, and advise how the company should change the price to increase toMI revenue.
a. bululemon makes comfy yoga pan. The company enjoys very strong brand loyalty among its customers, who believe Nat Lululemon pants are Ne only pants for them.
b. AC TrNsit is considering Nanging its fares. It Nows that consumers ride Neir buses because of necessity, not due Neir punctuality or frequency of buses.

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David · Accepted Answer

Answer to 1: 
a. Demand is inelastic here because customers are loyal to the company. In such a case, the 
company should increase the price in order to increase the total revenue. 
b. Necessity makes the demand inelastic. So these buses will have inelastic demand. In such 
a case, AC transit should increase the fares if it wants to increase its total revenue. This is 
because % drop in ridership (as a result of increase in fare) would be less than % increase 
in fares, causing total revenue to increase. 
c. Since so many varieties are available, Santa Rosa plums will have elastic demand. This 
firm should decrease the price of plums if it wants to increase its total revenue. This is 
because % increase in demand (as a result of decrease in price) would be higher than % 
drop in price, causing total revenue to increase. 
Answer to 2:
a. Consumer surplus = area (A) =  0.5*(11-8)*12 = 18  
And producer surplus =  area (B) = 0.5*(8-(-4))*12 - 0.5*(4-0)*4 = 64 
b. Elasticity of labor supply = (dQ/dP)*(P/Q) 
At the market equilibrium; price (P) = 8 and quantity (Q) = 12 
From labor supply function: P= -4+Q, dQ/dP = 1 
So elasticity of labor supply = 1*(8/12) = 0.67 
This implies that labor supply is elastic. 
c.
New consumer surplus = area A = 0.5*(11-9)*8 = 8 
New producer surplus = Area B + area E + area G = (9-8)*(8-0) + (8-4)*8 +[0.5*(4-(-4))*8-
0.

Identify when demand is elastic or inelastic, and advise how the company should change the price to increase toMI revenue. a. bululemon makes comfy yoga pan. The company enjoys very strong brand...

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