Topic starter
December 14, 2021 5:56 pm
ECO404 Assignment 1 Fall 2021
Apple is an American corporation that develops and sells computer electronics, software, personal computers and portable devices internationally. Apple is a leading mobile manufacturer in the world. All the products of Apple use the iOS mobile operating system and are designed by Apple Inc. It has the quality-based products, including many extrafeatures and is well-known for its creativity and smartness. People of all classes prefer to have an IPhone due to its distinguished characteristics. Apple Inc. launched a new mobile in Pakistan in year 2020 with the price of $250. Suppose that there are three classes; namely rich, upper middle and middle income groups. A rich consumer purchases 4 units at this price, upper middle consumer buys 2 units and middle income consumer buys 1 unit of the product. Suppose this firm launches the same mobile product in year 2021 with the price of $500. The demand of the product changes in the way that rich consumer purchases 6 units, upper middle consumer buys just 1 unit and middle income consumer does not buy even a single unit. All this information has been summarized in the given table.
Price of Mobile
Qd (Rich Class)
Qd Upper Middle class
Qd Middle income Group $250 4 2 1
$500 6 1 0
Requirements: Keeping in view the information given in above case:
a) Find out the price elasticity of demand for rich, upper middle and middle income consumersrespectively?
b) Interpret the economic meanings of the calculated elasticity for each income group.?
(Hint: After price increase,nature of product changes for consumers)
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Topic starter
December 15, 2021 9:48 pm
ECO404 Assignment 1 Fall 2021 solution idea:
Managerial Economics ECO 404
Assignment No: 1
Requirements:
Keeping in view the information given in above case:
a) Find out the price elasticity of demand for rich, upper middle and middle income
consumers respectively?
Solution:
Price elasticity of demand Formula:
Price elasticity= % change in quantity demand/ % change in price
%Change in price = P2-P1 x 100
= 500-250/250x100
= 100%
Price elasticity of demand for rich:
% Change in quantity demand=
Q2-Q1/Q1 x 100
6-4/4 x 100
2/4 x 100
50%
Price elasticity = 50/100
Price elasticity = 0.5
Price elasticity of demand for upper middle income;
0-1/1 x 100
-1/1 x 100
-100%
Price elasticity = -100/100
Price elasticity = -1
b) Interpret the economic meanings of the calculated elasticity for each income group?
Solution:
- For rich income group % change in quantity is (50%) less than % change in price (100%) so the product is considered to be price inelastic.
- For upper middle-income group % change in quantity is (50%) less than % change in price (100%) so the product is considered to be price inelastic.
- For middle income group % change in quantity demand is same as in % change in price so the product is considered to be unitary inelastic.
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