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Chapter 4: Demand
SETTING TUITION AND FINANCIAL AID AT URSINUS COLLEGE
Discussion Question Answer
The Law of Demand states that demand curves slope downward. Managers should be very
skeptical of analysis that is based on an assumption that demand curves slope upward. Point out
A likely explanation for the data presented about price and demand for colleges is that the stated
price conveys information about quality to prospective students. For example, a customer with
little knowledge of wine is likely to be correct in inferring that a $100 bottle of wine is of better
quality than the $5.00 bottle of wine. Holding the assessed quality of the wine constant,
however, the customer’s demand curve for a wine is likely to be downward sloping. Wine stores
Upon closer inspection of the data, the President and the Director of Admissions would find that
the colleges that raised their tuition in this example (e.g., University of Notre Dame)
Therefore, the President should not expect that an increase in price and a reduction and aid will
increase the quantity demanded for your college. The data suggests, however, that the President
might want to consider a stated tuition that is on par with the college’s primary rivals and where
appropriate to use financial aid to reduce the actual price paid by students. [This policy also
Economists have shown that it is theoretically possible for demand curves to slope upward over
some range. However, in actuality this event is unlikely, if ever, to occur. If managers assume
DEMAND CURVE FOR AN ELECTRONICS PRODUCT
Discussion Question Answers
1. A linear demand curve takes the general form P = a - bQ. Begin by calculating the slope (rise
over run) from the two points: (3,000 – 4,000)/(150,000 – 100,000) = -.02. Now calculate the
2. Demand is elastic up to the midpoint of a linear demand curve and inelastic beyond that point.
It has unitary elasticity at the midpoint. The midpoint of your demand curve occurs at the price
3. Your compensation plan rewards you based on revenue (not profits, which are equal to total
revenue minus total costs). You maximize your bonus by maximizing revenue which occurs at
the midpoint of the demand curve. Thus you would like to charge a price of 3,000 INR.
Maximizing revenue, however, is not the same as maximizing profits. To maximize profit, you
PERSONAL VIDEO RECORDERS (PVRs)
Discussion Question Answers
1. PVRs and the increased use by consumers to clip ads from broadcast TV shows will lower the
demand from advertisers. The value of a TV ad depends on the number of viewers of that ad, not
2. a. Begin by substituting V= 1. This yields a demand of Q = 56 - .0002P. Solve for P to
obtain the demand curve (“inverse demand curve): P = 280,000 – 5,000Q. Total revenue is
maximized at the quantity where MR = 0. MR has the same intercept but twice the slope of the
b. You are asked to calculate an arc elasticity that displays the sensitivity of quantity to
viewers. The starting point is Q1 = 28 and V1 = 1. Holding price constant at $140,000 and
allowing V to change to .5 produces the second point: Q2 = 15 and V2 = .5. The arc elasticity is
4. Clearly, the major broadcasters will have less revenue unless they make some major changes.
5. The major commercial networks can start building “ads” directly into their programming. For
example, the actors can be drinking Coke or driving a particular type of car. The problem with
Another solution is to shift to programming, such as sporting events where consumers are less
