Elasticity

CFA Level I
#1

Wood Company had sales of $4.5 million during 2007. However, management has plans on increasing unit sales by 5%, which would require the Company to purchase a new machine or spend additional capital to expand the capacity of the current machine. During 2007, Bonner’s price per ton was $75 with an elasticity of demand of 1.2x. The product price that Bonner can sell its products in the long-run in order to accomplish the 5% growth is closest to: (a) 69.25 (b) 70.88 © 71.88 (d) 72.15

#2

1.2 = (%Dquant) / (%DPrice) 1.2= (5/%DPrice) %DPrice = 5/1.2 price needs to go down 4.167% => 75*(1-04167) © 71.88

#3

I am getting a quadratic equation ? why is elasticity positive ??

#4

the sign doesn’t matter

#5

P2*Q2=1.05*P1*Q1 also, Q2-Q1/Q2+Q1 = -1.2*P2-P1/P2+P1 P1=75 It gives a quadratic equation in P2 —

#6

supersharpshooter Wrote: ------------------------------------------------------- > 1.2 = (%Dquant) / (%DPrice) > > 1.2= (5/%DPrice) > > %DPrice = 5/1.2 > > price needs to go down 4.167% => 75*(1-04167) > > © 71.88 NICE!!! I GOT STUCK : (

#7

neah, is not that complicated, but is tricky. supersharpshooter has the formula, but not the correct answer

#8

The key to this question is “sell its products in the long-run”. Super correctly calculated the % change in price, but that would be the short-run price at which the company would sell the product. In the long-run, everything is more elastic, so the price today should not fall as low as the price needed to sell 5% more in the short run. The answer is D.

#9

map1 Wrote: ------------------------------------------------------- > The key to this question is “sell its products in > the long-run”. Super correctly calculated the % > change in price, but that would be the short-run > price at which the company would sell the product. > > > In the long-run, everything is more elastic, so > the price today should not fall as low as the > price needed to sell 5% more in the short run. > > The answer is D. MAN YOU GUYS ARE GOOD

#10

I am getting $59, given price elasticity remains 1.2 … :slight_smile:

#11

i’m not, the question got me too

#12

so in this case we need to calculate the elasticity for the s-t and then just look for the choice with the bigger figure?

#13

crazy question

#14

gogiants Wrote: ------------------------------------------------------- > so in this case we need to calculate the > elasticity for the s-t and then just look for the > choice with the bigger figure? yes i don’t think i would have caught it on the exam unless the words long term were bold, underlined and italicized it’s crazy how they can sneak in 2 words and completely change the premise of the question…

#15

Nice question. I hope the exam is not soo soo tricky, cuz I am reading this material only now, and in 2 days i wont remember that in long term demand price becomes elastic.