From 1982 to 1986 retail sales of furs in yhe U.S.rose from $0.4 bililion to $1.

Question

From 1982 to 1986 retail sales of furs in yhe U.S.rose from $0.4 bililion to $1.9 billion.After this time,there was no additional growth until 1989 when sales increased slightly to $2 billion. Subsequently there was a plunge in fur sales which dropped 40% in 1992. In 1992 a spokesperson for fur industry blamed the sales decline on the recession.

a) if income elasticity of demand for furs is 3,how much of the decline in furs sales in 1990 can be attributed to change in consumers'income?(adjusted for inflation, total income increased 1% in 1990) explain

b)in 1990 the government imposed a 10% tax on furs.If rhe price elasticity of demand for furs is 1.5,how much of the decrease in fur sales can be attributed to this tax?(assume that the price of furs rose by 10% after the tax was imposed)

Explanation / Answer

1) Given the income elasticity of fur = 3 = percent change in qty demanded / percentage change in income .

Thus 3 = percent change in qty demanded / 1%.Thus only 3% of change in quantity demanded can be attributed to change in income of the consumers.

2)Increase in tax by 10% increases price by 10%.Thus according to equation for price elasticity ep = percent change in qty demanded due to price change / percent change in price .Thus according to this only 15% of change in quantity demanded can be attributed to increase in taxes.

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