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Assignment 2 on Principles of Microeconomics | ECON 206, Assignments of Microeconomics

Material Type: Assignment; Class: Prin of Microeconomics; Subject: Economics; University: Shepherd University; Term: Spring 2009;

Typology: Assignments

Pre 2010

Uploaded on 08/19/2009

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THE PROBLEMS BELOW ARE DUE FOR HOMEWORK ON TUESDAY, FEBRUARY 3
You may write your answers in the spaces provided on this sheet. If you need extra space, use
the backs of pages.
TOTAL POINTS = 40
NAME_________________________________
1. TheNile.com, the online bookseller, wants to increase its total revenue.
Currently, every book it sells is priced at $10.50. One suggested strategy is
to offer a discount that lowers the price of a book by $9.50, a 10%
reduction in price using the midpoint formula. TheNile.com knows that
its customers can be divided into two distinct groups (Group A and Group B)
according to their likely responses to the discount.
Group A Group B
Volume of sales before
10% discount (in
millions)
1.55 1.50
Volume of sales after
10% discount (in
millions)
1.65 1.70
a. Using the midpoint formula, calculate the price elasticities of
demand for Group A and for Group B. SHOW WORK. (10 points)
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THE PROBLEMS BELOW ARE DUE FOR HOMEWORK ON TUESDAY, FEBRUARY 3

You may write your answers in the spaces provided on this sheet. If you need extra space, use the backs of pages. TOTAL POINTS = 40 NAME_________________________________

  1. TheNile.com, the online bookseller, wants to increase its total revenue. Currently, every book it sells is priced at $10.50. One suggested strategy is to offer a discount that lowers the price of a book by $9.50, a 10% reduction in price using the midpoint formula. TheNile.com knows that its customers can be divided into two distinct groups (Group A and Group B) according to their likely responses to the discount. Group A Group B Volume of sales before 10% discount (in millions)

Volume of sales after 10% discount (in millions)

a. Using the midpoint formula, calculate the price elasticities of demand for Group A and for Group B. SHOW WORK. (10 points)

b. How will the discount affect total revenue from each group (i.e. in what direction will the price discount move total revenue)? Explain intuitively why total revenue for each group will move in the direction it does. (10 points) c. Suppose TheNile.com knows which group each customer belongs to when he or she logs on and can choose whether or not to offer the 10% discount. If TheNile.com wants to increase its total revenue, should discounts be offered to customers in Group A or to those in Group B, to neither group, or to both groups? Explain your reasoning intuitively. (8 points)