Last year, Alice bought 40 CDs when her income was $ 20,000. This year, income i
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Question
Last year, Alice bought 40 CDs when her income was $ 20,000. This year, income increased to $25,000, and she purchased 48 CDs. We can conclude that: A. Alice's price elasticity of demand for CD_s is equal to 1. B. CD_s are a normal good. C. Alice's demand for CD_s is price-inelastic. D. Alice's demand for CD_s is price-elastic. E. The income elasticity of demand for CD_s is negative. Answer Question 9 If the price elasticity of demand is equal to 4, a 1 percent increase in price will cause the quantity demanded to by percent. A. IUncreae;0.25 B. Decrease; 0.25 C. Decrease; 4 D. Increase; 4 Answer: Question 10 A monopolist mximizes profit A. By charging a price that equals its marginal cost.Explanation / Answer
8. Income Elasticity = ( Change in Quantity demanded / Change in Income) x Q / Y
dY= 25000 - 2000 = 5000
dQ = 48 - 40 = 8
Ei = (5000 / 8) / (20000 / 40) => 625 / 500 => 1.25
CDs are normal good because income elasticity is positive. This means increase in income increases demand for CD.
9. Elasticity of Demand = Percentage in Demand / percentage in price
Percentage in Demand = Elasticity of Demand x percentage in price
= 4 x1 = 4%
Decrease in Q by 4%
Answer is C.
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