CHAPTER 5ELASTICITY AND ITS APPLICATION103Income elasticity of demand .As we discussed in Chapter 4, most goods are normal goods:Higher income raisesquantity demanded. Because quantity demanded and income move in the samedirection, normal goods have positive income elasticities. A few goods, such as busPercentage change in quantity demandedPercentage change in incomeHOWSHOULD A FIRMTHATOPERATES Aprivate toll road set a price for its ser-vice? As the following article makesclear, answering this question requiresan understanding of the demand curveand its elasticity.F o r W h o m t h e B o o t h To l l s ,P r i c e R e a l l y D o e s M a t t e rBYSTEVENPEARLSTEINAll businesses face a similar question:What price for their product will generatethe maximum profit?The answer is not always obvious:Raising the price of something often hasthe effect of reducing sales as price-sensitive consumers seek alternatives orsimply do without. For every product, theextent of that sensitivity is different. The
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