Calculate the elasticity for each variable and briefly comment on what information this gives you in each case
What will be an ideal response?
Based on the above figures, Q = 2,000
(Own) Price elasticity = -10(1,000/2,000 ) = -5. Demand is elastic at this price.
Advertising elasticity = 5(40/2,000 ) = 0.1. A 1% increase in advertising expenditure will lead to a 0.1% increase in sales.
Cross-price elasticity = 4(800/2,000 ) = 1.6. Because the cross-price elasticity is positive, the goods are considered substitutes. A 1% increase in the competitor's price is expected to produce a 1.6% increase in the firm's sales.
Income elasticity = 0.05(4,000/2,000 ) = 0.1. The good is most likely a normal good because the income elasticity is greater than zero and also a necessity because the income elasticity is less than one. This good is not likely to be particularly responsive to income changes.
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By selling products in both retail stores and outlet stores, firms can increase their profits by charging ________ prices to consumers with a low price elasticity of demand and ________ prices to consumers with a higher price elasticity of demand
A) higher; lower B) lower; lower C) higher; higher D) lower; higher
If the entrepreneur is also the manager of the firm, we would expect
A) the manager to work hard because he or she is also the residual claimant. B) the manager to not work hard since there is no possibility of further advancement. C) the firm to operate poorly because the specialization of labor is not adequate. D) the firm to operate poorly because the entrepreneur is not as good at managing workers as a professional manager would be.