# Worksheet

## Elasticity Worksheet: The Case of the Missing Money

Mickey operates a small business that produces 3 products.  We will call these products A, B, and C. Mickey’s costs of production have recently increased by approximately \$5,000.  Since his total revenue (his sales) was just a little over \$100,000, Mickey figured he would pass on the increased costs of production to his customers by raising his prices 5%.  But, after raising the price of all three products by 5%, Mickey found himself with LESS money than he had before.  He has asked you to find out what happened and has supplied the following data. Complete the blank spaces for total revenue by product, both before and after the price hike, and also calculate the price elasticity of demand.

 Before Mickey Raises Price Units Price Total Revenue Product A 531 \$78.00 Product B 1,025 \$39.00 Product C 1,010 \$19.50 Sum Total Revenue All Products
 After Mickey Raises Price Units Price Total Revenue Product A 469 \$82.00 Product B 975 \$41.00 Product C 990 \$20.50 Sum Total Revenue All Products
 % chg using a midpoint formula Price Elasticity of Demand % chg Q % chg P Product A 12.5% 5.0% Product B 5.0% 5.0% Product C 2.0% 5.0%

1. What is the price elasticity of demand for Product A?
2. What is the price elasticity of demand for Product B?
3. What is the price elasticity of demand for Product C?
4. Which product (A, B, or C) has inelastic demand?
5. Which product (A, B, or C) has elastic demand?
6. Which product (A, B, or C) has unit elastic demand?
7. Which product (A, B, or C) generated less revenue after the price was increased?
8. Which product generated the same revenue even though it’s price was increased?
9. The purchasers of product B have an income elasticity of demand of 1.2. If their income increases by 10%, then by how much should Mickey’s sales from product B increase? (in %, not dollars or units)
10. Another store sells a product (let’s call it product D) to most of the same people who buy Product C from Mickey. Product C has a cross-price elasticity of demand with Product D of +0.9. Mickey understands that the price of Product D will be increased soon. Will this help Mickey generate more revenue? Select one of these options (options may be in different order when viewed in your learning management system):
1. Yes, since D and C are obviously complements.
2. No, since D and C are obviously complements.
3. Of course not. Product D is sold by a different store and they are unlikely to share the increased revenue with Mickey.
4. Yes, since D and C are obviously substitutes.
5. No, since D and C are obviously substitutes