92107 - companies’ total rev rise or fall the fall in P...

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Econ 9/21/07 ‘catholic girls start much too late, but when they start they don’t stop.’ “’thunder road’ is the best song of all time.” elasticity ?TR= inc P x dec Q if demand is elastic, then price elasticity > 1 % change Q > % change P revenue falls if elasticity of demand > 1, drop in price makes revenues increase if demand is inelastic, then price elast. of demand < 1 if price is increased, it will exceed decrease in demand, total rev. goes up. ex. a) parhma cies raise the price of insulin by 10%. does total expenditure on insulin rise or fall? expenditure rises b/c inelastic ex b) as a result of fare war, the price of a luxury cruise falls 20%. does lux cruise
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Unformatted text preview: companies’ total rev. rise or fall? the fall in P reduces rev, but rise in Q increases demand. TR increases b/c Q > P. interdiction reduces the supply of drugs since demand for drugs is inelastic, P rises proportionally EDUCATION for normal goods, income elasticity > 0 for inferior goods, income elasticity < 0 THE CROSS-PRICE ELASTICITY OF DEMAND measures the response of demand for one good to changes in the price of another good. ∆ % Q0 of oranges ∆% P of apples incr. = cross-price elast of demand. ‘substitutes generally.’ cross-price elast. < 0, compliments. for substitutes, CPE > 0...
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