Price Elasticity

QUESTION 1

Mr. Danny is the owner of Company SEAGAT and his monthly profit is RM 200 thousand approximately. However, his company is having the problem of scarcity in production. As an economist / financial consultant in his company, you are required to explain to him the reason of scarcity and the ways to solve it. (Sketch the Production Possibility Curve / Frontier) to show Mr. Danny the different between points lie in PPC, on PPC, and outside PPC). The products are motherboard and hard disc.

[25 marks]

QUESTION 2

Amazon.com, the online bookseller, wants to increase its total revenue. One strategy is to offer a 10% discount on every book it sells. Amazon.com knows that its customers can be divided into two distinct groups according to their likely responses to the discount. The accompanying table shows how the two groups respond to the discount.

1. Using the price elasticity formula, calculate the price elasticities of demand for group A and group B.

(10 marks)

2. Explain how the discount will affect total revenue from each group.

(5 marks)

3. Suppose Amazon.com knows which group each customer belongs to when he logs on and can choose whether or not to offer the 10% discount. If Amazon.com wants to increase its total revenue, should discounts be offered to group A or to group B, to neither group, or to both groups?

(10 marks)

[25 marks]