Determining the cross-price elasticity

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Reference no: EM131441657

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  • The purpose of the assignment is to assess skills in critical thinking and communication, core objectives mandated by the State of Texas   Quality of English writing  (grammar, punctuation, capitalization, spelling, etc.) will be part of the grading criteria.  In addition, the grading basis will include how well instructions are followed, as well as demonstrated knowledge of economics.
  • This is not a full-length paper.  Questions should be answered in up to a few sentences each.  (In fact, most can be answered in only one sentence, but I will allow you a little leeway.)   I will be looking in particular for key terminology (certain words and facts).   Note:  often, when students write long answers they inadvertently get in too deep and make mistakes which actually reveal lack of knowledge, resulting in deduction of points.
  • Part I is answerable from studying Chapter 3 and Part II from from Chapter 20 material before "Cross-Price Elasticity" (p.444).
  • Due, in its entirety (all together in one submittal),  by 10:55 p.m., March 27.

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(Please read the instructions for the assignment above then answer the questions below)

Part I. News article: "Coca-Cola has developed a soft-drink vending machine that adjusts the price according to the weather.  Price rises during warm weather and decreases during cooler weather."

Think of a Coke machine in terms of market economics, that is, as having demand and supply. (You may find it helpful to illustrate for yourself.) Assume the supply curve is vertical to reflect that the machine gets refilled on some frequency, such as weekly. In other words, price does not affect quantity supplied.

a) In terms of economics, what  the benefit to consumers of price increasing in hot weather? (Tip: imagine you and another person walked up to a machine and there was only one can left in it.)

b) Which core (basic) economic question is being resolved by price increasing in hot weather in soda machines?

c) The prevailing system of machines having just a fixed price, although not set by government, has what effect on pricing (causes the fixed price to effectively act as a what) during hot weather ?

Note: this section (Part I) is not concerned with effects on the CocaCola company (such as sales, costs, profits, etc.), so do not address these. And, as mentioned above, assume that quantity supplied does not change with price.

Part II. In 2004 the Harris County Toll Road Authority raised basic car tolls by 25 cents to $1.25 for cash payment and $1 for EZ TAG users.  Six months later, there was a 23.8 percent increase in revenue compared with the same period the previous year.  There were also 0.6 percent fewer motorists using the tollways than in the same six-month period the year before.

Is usage of the toll roads elastic, unitary, or inelastic?: 

Explain 2 ways the 6-month quantitative information (data) in the article back up your answer. 

When calculating elasticity, use:

  • the cash data
  • the general (definitional) formula, not the midpoint formula

Show your calculation (e.g., numbers used).

Reference no: EM131441657

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