Question

Vacations-R-Us.com, the online cruise seller, wants to increase its total revenue. One strategy is to offer a 10% discount on every cruise it sells. Vacations-R-Us.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. Group A Group B (sales per week) (sales per week) Volume of sales before the 10% discount 1.55 million 1.50 million Volume of sales after the 10% discount 1.65 million 1.70 million a. Using the midpoint method, calculate the price elasticities of demand for group A and B.

Answer 1

The price elasticities of demand for groups A and B of Vacations-R-Us.com are calculated using the percentage change in quantity divided by a 10% price change using the midpoint method.

Step-by-step explanation:

The student has asked to calculate the price elasticities of demand for two customer groups at Vacations-R-Us.com using the midpoint method, in response to a 10% discount strategy on cruise sales. To find the elasticity, we use the formula of percentage change in quantity divided by percentage change in price.

For Group A:

• Initial quantity (Q1) = 1.55 million
• New quantity (Q2) = 1.65 million
• Percentage change in quantity = ((Q2 - Q1) / ((Q2 + Q1)/2)) * 100

For Group B:

• Initial quantity (Q1) = 1.50 million
• New quantity (Q2) = 1.70 million
• Percentage change in quantity = ((Q2 - Q1) / ((Q2 + Q1)/2)) * 100

Since the price discount is constant at 10%, the percentage change in price is -10% for both groups. We can then compute the elasticity for each group by dividing the percentage change in quantity by -10%.