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    Elastcity Case

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    Manish Gupta
    1. The students can convince the management that a tuition fee hike is not the best course of action by demonstrating that demand for enrollment at the university is price elastic. A journal article reveals that the price elasticity of enrollment is -1.3, meaning that a 1% increase in tuition fees would lead to more than a 1% decrease in enrollment. Therefore, a 25% tuition fee hike would significantly reduce total tuition fee revenues, not increase them as projected by the president.

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    Elastcity Case

    Uploaded by

    Manish Gupta
    57 views12 pages
    1. The students can convince the management that a tuition fee hike is not the best course of action by demonstrating that demand for enrollment at the university is price elastic. A journal article reveals that the price elasticity of enrollment is -1.3, meaning that a 1% increase in tuition fees would lead to more than a 1% decrease in enrollment. Therefore, a 25% tuition fee hike would significantly reduce total tuition fee revenues, not increase them as projected by the president.

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    1. The students can convince the management that a tuition fee hike is not the best course of action by demonstrating that demand for enrollment at the university is price elastic. A journal article reveals that the price elasticity of enrollment is -1.3, meaning that a 1% increase in tuition fees would lead to more than a 1% decrease in enrollment. Therefore, a 25% tuition fee hike would significantly reduce total tuition fee revenues, not increase them as projected by the president.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    57 views12 pages

    Elastcity Case

    Uploaded by

    Manish Gupta
    1. The students can convince the management that a tuition fee hike is not the best course of action by demonstrating that demand for enrollment at the university is price elastic. A journal article reveals that the price elasticity of enrollment is -1.3, meaning that a 1% increase in tuition fees would lead to more than a 1% decrease in enrollment. Therefore, a 25% tuition fee hike would significantly reduce total tuition fee revenues, not increase them as projected by the president.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 12

    Price Elasticity

    The Board of trustees of a leading state university is faced with a critical financial
    problem. At Present tuition rates, the University is losing $ 7.5 million per year. The
    President of the University urges that tuition be raised $750 over the present
    $3000 rate- a 25% increase. Based on the 10000 students now attending the
    school, he projects that this increase would cover the $7.5 million shortfall in
    revenues.
    Student leaders protest that they cannot afford a tuition hike; the president
    responds that the only alternative is cut back significantly on programs and faculty.
    The faculty supports the tuition increase as a means of preserving their jobs.
    The students quickly realize that any appeal that involves compassion for their
    plight is likely to fall on deaf ears. Their only hope is to demonstrate that the
    tuition hike is not in the best interest of the university.
    (A journal articles reveals that the elasticity for enrollment at state university is – 1.3 with respect to the
    tuition charges)

    1. How the students can convince the management that the fee hike is not the
    best course of action to increase the revenue?
    Elasticity of demand
    The XL Books Ltd.is a publisher of novels. The corporation hires an
    economist to determine the demand for its product. After months of hard
    work and submission of an exorbitant bill, the analyst tells the company
    that demand for the firm’s novels (Qx) is given by the following equation
    Qx =12,000 -5,000Px +5Y +500Pc

    Where Px is the price charged for the Hind Books novels ,Y is income per
    capita , and Pc is the price of books from competing publishers .
    Assume that the initial values of Px , Y and Pc are Rs. 5, Rs.10,000 and rs.6 respectively
    You being a manager ,using this information, address the following:
    1. Determine what effect a price increase would have on Total revenues
    2. Evaluate how sale of the novels would change during a period of raising
    incomes
    3. Assess the probable impact if competing publishers raise their prices
    Price Elasticity of demand
    • The IPL team plays in a stadium with a average
    seating capacity of 180000. However, during
    the past season, attendance averaged only
    150000. The average ticket price was Rs.3000.
    If the price elasticity is -5, what price would
    the Stadium has to charge in order to fill the
    stadium?
    • Caterpillar Tractor, one of the largest
    producers of farm machinery in the world, has
    hired you to advise it on pricing policy. One of
    the things the company would like to know is
    how much a 5 % increase in price likely to
    reduces sales. What would you need to know
    to help the company with this problem?
    Explain why these facts are important?
    Suppose that a study has found that the price
    elasticity of demand for flyover rides is 0.7 in
    Bangalore Electronic city to Silk Board junction.
    The company wants to cut the operating deficit
    of the Elevated Highway System. Should the
    manager contemplate increasing or decreasing
    the price of a flyover ride? Explain the
    importance of price elasticity of demand in
    pricing decision.
    • Vera has decided to upgrade the operating system on
    her new PC. She heard that the new Linux operating
    system is technologically superior to Windows and
    substantially lower in price. However, when she asks
    her friends, it turns out that they all use PCs with
    Windows. They agree that Linux is more appealing
    but add that they see relatively few copies of Linux
    on sale at local stores. Vera chooses Windows. Can
    you explain her decision?
    • A certain town in Kerala obtains all of its electricity
    from one company, South Electric. Although the
    company is a monopoly, it is owned by the citizens of
    the town, all of whom split the profits equally at the
    end of each year. The CEO of the company claims
    that because all of the profits will be given back to
    the citizens, it makes economic sense to charge a
    monopoly price for electricity. True or false? Explain.
    Elasticity of Demand
    Current demand for apples in a city is 1000
    boxes per week. In the city, price elasticity of
    demand for apples is –1.25 and income
    elasticity of demand is 2.00. For the next
    period, if per capita income is expected to
    increase by 7% and price of apples is expected
    to increase by 10%.
    What would be the expected demand for
    apples ?
    Elasticity of demand
    • Alok, a premier toy manufacturer, recorded an
    increase sales by 10 percent. During the year,
    Alok reduced the prices by 10 percent. Per capita
    income in the economy increased by 2.5 percent
    and the competitor, Blok, reduced the prices of
    his toys by 5 percent. Income elasticity of
    demand for the toys is estimated to be 2 and
    cross-price elasticity between Alok toys and Block
    toys is estimated to be 0.5. Given the situation,
    what is the price elasticity of demand for toys?
    Elasticity of Demand
    • In a year, the number of motor vehicles sold
    decreased by 25%. During the year, the price
    of motor vehicles increased by 7.5%, per
    capita income decreased by 3% and the price
    of petrol increased by15%. Income elasticity of
    demand for motor vehicles is estimated to be
    +2 and cross price elasticity of petrol and
    motor vehicles is estimated to be –0.25.
    Calculate the impact of increase in price of
    petrol on the demand for cars.
    • Suppose that you are the consultant to an agricultural
    cooperative that is deciding whether members should
    cut their production of cotton in half next year. The
    cooperative wants your advice as to whether this
    action will increase members’ revenues. Knowing that
    cotton (C) and watermelons (W) both compete for
    agricultural land in the South, you estimate the
    demand for cotton to be
    • C = 3.5 – 1.0PC + 0.25PW + 0.50I,
    • where PC is the price of cotton, PW the price of watermelon, and I income.
    Should you support or oppose the plan? Is there any
    additional information that would help you to
    provide a definitive answer?
    • If production of cotton is cut in half, then the price of cotton will increase, given that we
    • see from the equation above that demand is downward sloping. With price increasing
    • and quantity demanded decreasing, revenue could go either way. It depends on
    • whether demand is elastic or inelastic. If demand is elastic, a decrease in production
    • and an increase in price would decrease revenue. If demand is inelastic, a decrease in
    • production and an increase in price would increase revenue.
    • You need a lot of
    • information before you can give a definitive answer. First, you must know the current
    • prices for cotton and watermelon plus the level of income; then you can calculate the
    • quantity of cotton demanded, C.
    • Next, you have to cut C in half and determine the
    • effect that will have on the price of cotton, assuming that income and the price of
    • watermelons are not affected (which is a big assumption). Then you can calculate the
    • original revenue and the new revenue to see whether this action increases members’
    • revenues or not.

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