Answer to Question #184057 in Microeconomics for Samuel

Question

Suppose you are the economic adviser of a company producing three brands of mobile phones; Nokia 10 , Samsung X and iPhone Z. Suppose further that, your company currently sells 120 units of iPhone Z at ¢800 per unit, 150 units of Samsung X at ¢800 per unit and 200 units of Nokia 10 at ¢100 per unit, but in a bid to maximize profit, the company’s managing director proposes an increase in price of Samsung X from ¢800 to ¢1000 per unit for which quantity demanded is anticipated to fall from 150 to 100 units; iPhone Z from ¢800 to ¢1200 per unit for which quantity demanded is anticipated to fall from 120 to 100 units; and Nokia 10 from ¢100 to ¢200 per unit for which quantity demanded is expected to fall from 200 to 100 units. i. Using the mid-point formula, compute the price elasticity of demand for each brand. (6 marks) ii. From your answer in i, what is the type and economic interpretation of each brand’s value of elasticity. (4 marks)

Answer 1

Midpoint elasticity formula is

$${(q2-q1)\over (q1+q2)/2}\over{{\over p2-p1}\over(p1+p2)/2}$$

For Nokia 10, the elasticity is

P1is 100

P2is 200

q1 is 200

q2 is 100

$${(100-200)\over (200+100)/2}\over{{\over (100-200)}\over(100+200)/2}$$

$$=-1$$

elasticity for Nokia 10 is inelastic, meaning that good is perfectly responsive to a change in price

Samsuzng x

p1 is 800

P2 is 1200

q1 is 150

q2 is 100

$${(100-150)\over (150+100)/2}\over{{\over (800-1200)}\over(800+1200)/2}$$

elasticity for samsung that is I inelastic, meaning that good is perfectly responsive to a change

Iphone z

p1 is 800

P2 is 1000

q1 is 120

q2 is 100

$${(100-120)\over (120+100)/2}\over{{\over (1000-800)}\over(1000+800)/2}$$

$$=-0.8181$$

For iPhone z the elasticity is inelastic because the change in price is responsive to the quantity of goods demand.