Questions -
Q1. a. Calculate the price elasticity of demand for Nutella based on the price decrease from $5.85 to $1.75, which resulted in a 300% increase in the quantity of Nutella demanded.
b. Is the price elasticity of demand identified in (a) considered elastic or inelastic? Describe at least three factors that might influence the price elasticity of demand for Nutella.
c. Calculate the income elasticity of demand if a 10% increase in the French consumer's income translates into a 20% increase in the quantity demanded of Nutella. Describe your income elasticity for Nutella in terms of inferior/normal and luxury/necessity goods.
Q2. Municipal parking is often priced much lower than private parking lots and garages because private lots pay close attention to what drivers are willing to pay for parking. Unfortunately, the low price of publicly provided parking encourages consumers to cruise for low-priced street parking, which leads to increased traffic congestion, accidents, and higher levels of pollution. Somerville is considering increasing parking meter fees for their 3,000 metered parking spaces from $1 to $2 per hour in an effort to both reduce congestion and increase city revenue. Currently, parking in Somerville is estimated to be at 100% capacity, while the optimal level of demand that would eliminate cruising is generally considered to be around 85% of capacity. The price elasticity of demand for parking in Somerville is e= -0.2, or very inelastic.
a. If Mayor Curtatone succeeds in implementing his plan to increase parking prices, predict the percentage decline in the quantity demanded of public parking based on the information provided above.
b. Given the fact that the price elasticity of demand for public parking is believed to be highly inelastic, what sort of impact would you expect the price increase to have on municipal revenue?
c. Is the price increase enough to achieve the optimal level of demand (85% of capacity)? If not, should they charge more or less than $2 to reach the desired parking capacity? (9 points) Hint: Figure out the number of parking spaces at 100% (current) and 85% (optimal) capacity and use these numbers to determine the % quantity decline needed to reach the optimal level. Then compare your answer to (a).