Question

2) (4pts.) The own price elasticity of a good sold by a firm, when the price of the good is 4 TL/unit, is -2. The firm would like to increase its sales by 2%. Should the firm increase or decrease the price of the good and (approximately) by how much? 3) (4pts.) A 5% increase in the income of an individual resulted with a 1% increase in the quantity of bread that a consumer demanded. Based on this information find an approximate value for the income elasticity of demand for bread? Is bread a normal or inferior good for the consumer (at the given income level)?

Answer 1

2. PED = % change in quantity demanded / % change in price

% change in price = % change in quantity demanded / PED

                              = 2% / -2

                              = -1%

So, the price should decrease by 1% to increase sales by 2%.

Decrease in price = 4 * 0.01 = 0.04 TL/unit

Thus, price should decrease by 0.04 TL/per unit

3) IED = % change in quantity demanded / % change in income

           = 1% / 5%

           = 0.2

The approximate value of income elasticity of demand is 0.2. Since IED is positive, bread is a normal good for consumer.