Question

Problem III The demand for tennis rackets can be characterized by the following point elasticities: price elasticity = 1.5, cross-price elasticity with tennis club membership fees= 2.0, and income elasticity = 3.0. Indicate whether each of the following statements is true or false, and explain your answer.

A. A price increase for tennis rackets will decrease both the number of units demanded and the total revenue of sellers.

B. The cross-price elasticity indicates that a 2% reduction in the price of tennis rackets will cause a 4% increase in tennis club membership demand.

C. Tennis rackets are cyclical normal goods.

D. Falling tennis club membership fees will definitely increase revenues received by sellers of both tennis rackets and tennis club memberships.

E. A 2% price reduction in tennis racket prices would be necessary to overcome the effects of a 1.5% decline in income.

Answer 1

Part A ) True

A negative price elasticity states as the price increases by 1 unit, the demand reduces by 1.5 units. Also the total revenue would also fall in this case.

Part B) True

The data states the cross price elasticity = -.2

This means a 1unit reduction in club membership fee, the demand of racket demand would rise by 2times. So, a 2% reduction in prices of tennis racket would increase the membership by 2*2 = 4%

Part C ) False

Since the demand is not based on business or economic cycles, it is not a cyclical good.

Part D ) True

Fall in membership fee will increase revenue of supplier of tennis membership as well as tennis rackets.

Part E) False

A 1.5% decline in income would lead to a fall in demand by 4.5%. And a 2.5% price reduction will lead to a 3% change in demand. This does not offset change in income.

Pls Upvote. Thanks :)