Chapter 2 Tutorial Notes

If was 05 as the marketing department pointed out

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Unformatted text preview: r inelastic. If η was -0.5 as the marketing department pointed out, then the demand is inelastic and price cuts would not help increase TR. b) No. Problem 5: a) Profit Maximizing Q & P is when MR = 0 This means the a price of $1 is too low. b) No. If P=1 Q=4 Hence η cannot be -1 Problem 7: a) Increase price by 15% Thus the quantity (consumption) would drop between -4.5% and -6% b) Income rises by 50% When ηI = 0.5, you would expect demand for cigarettes to increase by 25%. Given the income elasticity of other goods (non-cigarette items) being equal to 1, you would expect demand for non-cigarette items to go up by 50%, twice as much of demand of cigarette. Therefore it would not be a good idea to invest in other stocks. Problem 10: a) Disposable income increases by $5,000 b) Raise P to offset increase in per capita disposable income c) Suppose that before the income increase we are at point E0 and after income increases we are put at point E2. We are asked to compare the price elasticity between E0 and E2. As we can see, at E0 and E2 the output and the slope are the same. However, the price at E2 is higher, therefore E2 must have larger elasticity (in absolute) than E0....
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