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Chapter 6: Problem 3

In recent years, increases in the number of visitors to national parks such as Yellowstone and Grand Canyon have resulted in over \(\$ 12\) billion in deferred maintenance costs. In response to the overcrowding that has contributed to the cost overruns, the Park Service has considered limiting the number of daily visits to the parks and soliciting corporate sponsorships. Margaret Walls, a research director and senior fellow at Resources for the Future, has offered another suggestion: Increase entrance fees. But she warned: "Figuring out an efficient and fair fee structure will not be easy. It requires detailed data on visitation, for starters, as well as analysis to shed light on price elasticities of demand for different groups of visitors at different locations." Why is it important for the Park Service to have estimates of price elasticities of demand before raising entrance fees to the national parks?

Short Answer

Expert verified
It is important for the Park Service to have estimates of price elasticities of demand before raising entrance fees because it helps them predict the change in the visitors' numbers with a raise in fees. This aids in decision-making, ultimately aiming for increased revenue without significantly impacting visitor numbers or causing unfair outcomes for different visitor groups.

Step by step solution

01

Understanding price elasticity

Price elasticity of demand measures the percentage change in the quantity demanded of a good due to a percentage change in its price. It gives an idea about how sensitive the demand for a good is to a change in its price.
02

Importance of estimates

Estimating price elasticity of demand allows the Park Services to predict how changes in the entrance fees would affect the number of visitors. If the demand is elastic (>1), a raise in the fees would result in a significant decrease in the number of visitors, which may lead to decreased overall revenue. If the demand is inelastic (<1), the number of visitors would not change significantly with an increase in price, hence, revenue would increase.
03

Considering different visitor groups

Information about price elasticities of demand for different groups of visitors is important, as the impact of an entrance fee increase may not be the same for all visitors. Some visitors may be more price-sensitive than others, which should be taken into account when considering a price increase. Lastly, the location may also affect the elasticity (e.g., some parks may have more inelastic demand than others).

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Most popular questions from this chapter

Suppose that the following table gives data on the price of rye and the number of bushels of rye sold in 2017 and 2018 : $$ \begin{array}{c|c|c} \hline \text { Year } & \begin{array}{c} \text { Price (dollars per } \\ \text { bushel) } \end{array} & \text { Quantity (bushels) } \\ \hline 2017 & \$ 3 & 8 \text { million } \\ \hline 2018 & 2 & 12 \text { million } \\ \hline \end{array} $$ a. Calculate the change in the quantity of rye demanded divided by the change in the price of rye. Measure the quantity of rye in bushels. b. Calculate the change in the quantity of rye demanded divided by the change in the price of rye, but this time measure the quantity of rye in millions of bushels. Compare your answer to the one you computed in (a). c. Assuming that the demand curve for rye did not shift between 2017 and \(2018,\) use the information in the table to calculate the price elasticity of demand for rye. Use the midpoint formula in your calculation. Compare the value for the price elasticity of demand to the values you calculated in (a) and (b).

Consider firms selling three goods: Firm A sells a good with an income elasticity of demand less than zero; Firm B sells a good with an income elasticity of demand greater than zero but less than one; and Firm \(C\) sells a good with an income elasticity of demand greater than one. In a recession when incomes fall, which firm is likely to see its sales decline the most? Which firm is likely to see its sales increase the most? Briefly explain.

What is the midpoint formula for calculating price elasticity of demand? How else can you calculate the price elasticity of demand? What is the advantage of using the midpoint formula?

Define the income elasticity of demand. How does the income elasticity of a normal good differ from the income elasticity of an inferior good? Is it possible to tell from the income elasticity of demand whether a product is a luxury good or a necessity good?

An article in the New York Times about the New York Metropolitan Opera (the Met) suggested that the popularity of opera might be increased if the Met reduced its ticket prices. But the article observed that such ticket price cuts would be possible only if the Met received a gift from "a very deep- pocketed donor." What were the authors of the article assuming would happen to the Met's revenue following the cut in ticket prices? What were they assuming about the price elasticity of demand for tickets to the Met? Briefly explain.
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