The Electronics Warehouse, Inc. is a leading retailer of home theater systems. Demand for home theater systems is sensitive to changes in national income. Electronics retailing is highly competitive, so retail demand for home theater systems is also very price-sensitive. During the past year, the Electronics Warehouse sold 520,000 home theater systems at an average retail price of $4,000 per unit. This year, GDP per household is expected to fall from $58,800 to $53,200 as the nation enters a steep recession. Without any price change, the Electronics Warehouse expects current-year sales to fall to 440,000 units. Calculate the implied arc income elasticity of demand. Given the projected fall in income, the sales manager believes that current volume of 520,000 units could only be maintained with a price cut of $500 per unit. On this basis, calculate the implied arc price elasticity of demand. Holding all else equal, would a further decrease in price result in higher or lower total revenue? The Fireside Café recently reduced appetizer prices from $12 to $9 for "early bird" customers and saw an increase in sales from 90 to 150 orders per day. Beverage sales also increased from 300 to 600 units per day. Calculate the price elasticity of demand for appetizers. Calculate the cross-price elasticity of demand between beverage sales and appetizer prices.

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Answered: he Electronics Warehouse, Inc. is a…

Macroeconomics: Private and Public Choice (MindTap Course List)

16th Edition

ISBN:9781305506756

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Chapter7: Taking The Nation's Economic Pulse

Section: Chapter Questions

Problem 1CQ

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The Electronics Warehouse, Inc. is a leading retailer of home theater systems. Demand for home theater systems is sensitive to changes in national income. Electronics retailing is highly competitive, so retail demand for home theater systems is also very price-sensitive. During the past year, the Electronics Warehouse sold 520,000 home theater systems at an average retail price of $4,000 per unit. This year, GDP per household is expected to fall from $58,800 to $53,200 as the nation enters a steep recession. Without any price change, the Electronics Warehouse expects current-year sales to fall to 440,000 units.

Calculate the implied arc income elasticity of demand.
Given the projected fall in income, the sales manager believes that current volume of 520,000 units could only be maintained with a price cut of $500 per unit. On this basis, calculate the implied arc price elasticity of demand.
Holding all else equal, would a further decrease in price result in higher or lower total revenue?
The Fireside Café recently reduced appetizer prices from $12 to $9 for "early bird" customers and saw an increase in sales from 90 to 150 orders per day. Beverage sales also increased from 300 to 600 units per day. Calculate the price elasticity of demand for appetizers. Calculate the cross-price elasticity of demand between beverage sales and appetizer prices.

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