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Economics #4

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Submitted By kellyme
Words 369
Pages 2
Kelly, Maureen June 20, 2011 Dr. Muehlig

Boston Cellular Corporation

1. The type of demand in a market such as this case, is elastic. Elastic demand is a type of demand that will rise or fall depending on the price of the good. Products that people don’t need to survive are usually of elastic demand. They also have several close substitutes and are sensitive to price changes. This was demonstrated when the new manager increased prices to customers in the firm’s service area, the demand for the cellular plans decreased.

2. I believe the manager’s findings should have made her realize that this is an elastic demand market and raising the prices would only decrease the demand. The case states that “the number of customers enrolled in the Boston’s cellular plans declined 4 percent in those states, while the enrollments in states where the prices were not increased remained flat as did the prices of her competitors.” I also believe she overlooked that fact that there are many cellular companies out there and competition and/or substitutes affect elasticity. The more substitutes there are, the more elastic you can expect demand to be. Additionally, the amount of income available to spend on the good also affects demand elasticity. If there is an increase in price and no change in the amount of income available to spend on the good, there will be an elastic reaction in demand. Demand will be sensitive to a change in price if there is no change in income.

3. The answer to the question of whether or not the new manager’s contract should be renewed is really a matter of opinion and can be based on many factors that we are unaware of. First of all, a 10 percent reduction in revenues may not be a big deal for this company, we do not know. Also, Mr. John Thompson may have a soft spot for well educated, attractive blondes and may

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