Question

Suppose you are a supplier and you are currently charging a price of $60 per unit for your product. You have estimated that when price = $50, the demand for your product is unit- elastic. If you decrease price to $55. Revenue will increase. Revenue will decrease. Revenue will stay the same. We do not have enough information to answer this question Question 6 10 pts If the income elasticity of demand for "good A" is 2.15, we can conclude that A is a normal good and demand is income-inelastic. True False

Answer 1

Answer

The correct answer is (a) Revenue will increase

It is given that Demand is unit elastic at price = 50. According to properties of elasticity of demand as there is upward movement along demand curve the elasticity of demand increases(Note one measure of calculating elasticity of demand is lower segment / upper segment and as we move upward along demand curve lower segment increases and upper segment decreases).

So Price = 60(and 55) > 50 and thus at this level of price demand is elastic because at price = 50, demand is unit elastic.

According to Total outlay method, If demand is elastic then decrease in price will result in increase in revenue and decrease in price will result in increase in Revenue.

So decrease in price from 60 to 55 will result in increase in Revenue.

Hence, the correct answer is (a) Revenue will increase

6)

The correct answer is (b) False

A good is a normal good if increase in income results in increase in demand and decrease in income results in decrease in demand. As income elasticity of demand = % change in demand / % change in Income.

Thus, If income elasticity of demand is positive then a good is a normal good.

Here Income elasticity = 2.15 and thus Good A is a normal good.

demand is income elastic when absolute value of Income elasticity > 1 and demand is income inelastic when absolute value of Income elasticity < 1.

Here Income elasticity = 2.15 => Demand is income elastic.

Hence, the correct answer is (b) False