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 (noncigarette items) being equal to
1, you would expect demand for noncigarette 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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 Winter '08
 Salmasi
 Price Elasticity, Supply And Demand

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