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Chapter 6: Problem 8

The elasticities reported in this Apply the Concept were calculated using price data for many brands of beer. Why might price elasticity estimates be less reliable if they use data for only one brand of beer?

Short Answer

Expert verified
Price elasticity estimates might be less reliable with data from only one brand as it can't represent the comprehensive market behavior or capture substitution effects between brands. Using many brands provides a richer, more nuanced understanding of how price changes affect overall demand in the market, leading to more reliable estimates.

Step by step solution

01

Understanding Price Elasticity

Price elasticity of demand measures the change in quantity demanded in response to a change in price. When price elasticity is calculated for many brands of beer it means that, the change in quantity demanded in response to change in price is aggregated or averaged over many brands – hence reflecting a more comprehensive picture even if individual brands may behave differently.
02

Single brand data

When considering price elasticity for a single brand of beer, it is likely to be less reliable as it doesn't account for competition or substitution effects between different brands. For example, if the price of one brand rises, consumers may switch to another brand. This feedback wouldn't be captured if we were considering only one brand, leading to misestimation of the price elasticity.
03

Diversification and broader market perspective

Calculating elasticity over many brands takes into account a broader market variation, more diversified consumer-base and deals with the multiple price points from different brands. This gives an overall better representation of the beer market elasticity, making the estimate more reliable.

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Most popular questions from this chapter

The publisher of a magazine gives her staff the following information: $$ \begin{array}{l|l} \hline \text { Current price } & \$ 2 \text { per issue } \\ \hline \text { Current sales } & 150,000 \text { copies per month } \\ \hline \text { Current total costs } & \$ 450,000 \text { per month } \\ \hline \end{array} $$ The publisher tells the staff, “Our costs are currently \(\$ 150,000\) more than our revenues each month. I propose to eliminate this problem by raising the price of the magazine to \(\$ 3\) per issue. This will result in our revenue being exactly equal to our cost." Do you agree with the publisher's analysis? Explain. (Hint: Remember that a firm's revenue is calculated by multiplying the price of the product by the quantity sold.)

If a 10 percent increase in the price of Cheerios causes a 25 percent reduction in the number of boxes of Cheerios demanded, what is the price elasticity of demand for Cheerios? Is the demand for Cheerios elastic or inelastic?

The price elasticity of demand for crude oil in the United States has been estimated to be -0.06 in the short run and -0.45 in the long run. Why would the demand for crude oil be more price elastic in the long run than in the short run?

What are the key determinants of the price elasticity of demand for a product? Which determinant is the most important?

According to a news story about the bus system in the Lehigh Valley in Pennsylvania, "Ridership fell 14 percent ... after a 33 percent increase" in bus fares. Based on this information, is the demand for bus trips price elastic or price inelastic? Explain your answer in terms of the five determinants of price elasticity.
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