Question

A manager receives the following information from a consumer survey relating to her company’s product. It is estimated that, on average, consumers spend 1% of their annual income on the product. When asked, consumers said that if they had an additional 1,000€ per year to spend they would spend 20€ of it on the product.

1. Based on this piece of information alone, can you come up with an income elasticity figure for the company’s product? (Mark: 1.2)

2. What does the income elasticity figure tell you about the nature of the product? (Mark: 0.3)

3. Economic forecasts suggest that next year consumers’ income in the country is expected to decrease by 2.5%. What is the appropriate pricing policy required in order to, ceteris paribus, get a net increase in the quantity sold by 1% in case that the own price elasticity of demand is -1.5? (Mark: 1.5)

Answer 1

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