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Principles of Economics- Mankiw (5th) 99

Principles of Economics- Mankiw (5th) 99 - CHAPTER 5 E L A...

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CHAPTER 5 ELASTICITY AND ITS APPLICATION 103 Income elasticity of demand . As we discussed in Chapter 4, most goods are normal goods: Higher income raises quantity demanded. Because quantity demanded and income move in the same direction, normal goods have positive income elasticities. A few goods, such as bus Percentage change in quantity demanded Percentage change in income H OW SHOULD A FIRM THAT OPERATES A private toll road set a price for its ser- vice? As the following article makes clear, answering this question requires an understanding of the demand curve and 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 r B Y S TEVEN P EARLSTEIN All businesses face a similar question: What price for their product will generate the maximum profit? The answer is not always obvious: Raising the price of something often has the effect of reducing sales as price- sensitive consumers seek alternatives or simply do without. For every product, the extent of that sensitivity is different. The
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