MBA Managerial Economics Harvard Case Solution & Analysis

MBA Managerial Economics

Estimates (Expressed as Ranges) For the Short and Long Run Price Elasticity of Demand

According to Krueger, it is expected that change in price of gasoline affectsits demand differently in short term and long term. According to him, theUS is the largest user of gasoline and about 45% of the total production of gasoline used in the US. Moreover, as per the estimates of Krueger, in the US less number of people react towards change in price of gasoline in short term and it is expected that increase in 10% in gasoline prices would result in decrease of only 1-2% in demand, which means in short term the demand of gasoline is less elastic with respect to change in price.

However,according to the estimates of Krueger in long term this phenomenon is slightly different and it is expected that 10% increase in price would result in decrease of 5-10% in demand of gasoline. It is expected that in long term people usually do less travel or shift towards fuel efficient motors, which would result in decrease in demand of gasoline.

Total Expenditures on Gasoline as Gas Prices Rise in Short term

It is expected that the price of the gasoline was $1.87 per gallon in September 2004. Price of per gallon of gasoline rises to 2.9 dollar per gallon in a year and it reduces the demand of the gasoline from 9.15 million barrels to 8.83 barrels. Instead of a decrease in demand, the total expenditure on gasoline increased by 50% due to the increase in prices as the demand is less elastic to price in short term.

Implied Short-Run Price Elasticity

According to Krueger, it is expected that 10% increase in gasoline price will result in decrease of 1-2% in demand of gasoline. However,by taking the figures of the year Sep 2004 and Sep 2005,it is clear that gasoline prices increased by 55% and consumption of gasoline decreased by 3.5% only.

Therefore, by dividing the percentage change in demand with the percentage change in prices of last year will give the figure of 0.06, which means that in actual the demand is highly inelastic to change in price.

Inaccurate Estimate of the True Short-Run Elasticity Regarding the Effects of Hurricane Katrina

Krueger estimates that 10% increase in price of gasoline will reduce its consumption by 1-2% which means that the demand of gasoline is 0.2 times elastic to its price.However,the change in price and demand estimates from Sep 2004 to Sep 2005 show that demand of gasoline is only 0.06 time elastic to its price.
According to Katrina, there are certain other factors, which could affect the price elasticity of demand like thumb role, lack of self-control, addiction, income level of individuals and taxation policy on gasoline could also affect the price elasticity of demand. In addition, it is expected that Krueger does not incorporate these factors, which results in inaccurate estimates.

Why “Today’s Smartphone Business is less about Specific Devices than About “Ecosystems”

Ecosystem is a combination of hardware, operating system and applications. In the early 20s Nokia, Blackberry and HTC were the most demanding devices however, they are not compatible with current ecosystem like iOSand Android with respect to the users,who are more sophisticated and demanding nowadays................

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