How useful are elasticity estimates, and how easy are they to make?…

Question Answered step-by-step How useful are elasticity estimates, and how easy are they to make?… How useful are elasticity estimates, and how easy are they to make?Clearly price, output and advertising decisions each require someassessment of the impact of relevant variables upon demand, which isprecisely what we mean by elasticity.The numerical parts of the question are the straightforward matter ofsubstituting numbers into the demand equation, and using theresulting answers. Note that revenue is maximised either whenmarginal revenue equals zero, or when price elasticity equals minusone.6. The relationship between advertising and profitability is a complexmatter of sorting out causation. It is equally possible that increasingprofitability leads to increased advertising. Basically a good answerwould look at why advertising may increase profits (by shifting thedemand curve), and note that advertising may be carried on beyondthis point (so that the marginal cost of the last advert exceedsmarginal revenue). Note also that other objectives may be important,for e.g. the sales maxiiniser advertises more than the profit maximiser. Finally the empirical evidence is less than clear, but should beoutlined.7. This question relates to Alchian’s definition of the dimensions ofoutput and the impact of each upon costs. A greater contemplatedvolume of output may be associated with different technologies,methods of production, etc., although not without limit. A fulldiscussion of economies of scale is only tangentially relevant to thisquestion.8. These market-entry situations differ in the amount of production andmarket knowledge available, and the likely extent of economies ofscale, differing elasticities, etc. Basically the market situation is suchthat a skimming price policy is likely in the competition motorcyclemarket, whilst a penetration price policy is more likely in the volumesmall car market.9. This is a simple ‘newboy problem’, and is readily answered using thetechniques of Chapter 4. Note that the expected cost of overhaul is£200. Part (c) is concer Business Economics Microeconomics ECO 123 Share QuestionEmailCopy link Comments (0)