Discuss how the concepts of cross-price elasticity of demand and income elasticity of demand can help businesses plan production and pricing.
What will be an ideal response?
Cross-price elasticity measures how the sales of one good can change with a change in the price of a substitute good or complementary goods. With substitute goods, like Coke and Pepsi, Coke Inc. will observe the price changes that Pepsi is making. Estimating cross-price elasticity of these two goods will help it estimate a change in the sales of Coke with a change in the price of Pepsi. With complementary goods, such as SUVs and gasoline, producers will want to scale back production if gasoline prices stay high. Certain products are particularly sensitive to changes in income, and income elasticity is relevant in that case. Income elasticity measures the percentage change in quantity demanded for SUVs divided by a percentage change in income. During a recession, incomes falls, and goods that have a high and positive income elasticity, such as cars, luxury goods, and foreign vacations, will experience a steep decline in sales.
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The market for maple syrup is perfectly competitive. Suppose that the market is in long-run equilibrium when the market demand for maple syrup increases. What happens in the short run?
A) Firms will enter the market. B) Some of the existing firms shut down. C) The firms decrease production. D) The firms increase production.
The maximum price pipelines can charge for distributing gas:
a. is determined in a monopolistic market. b. depends on the market demand and supply. c. is set by the federal government. d. is always above the legal minimum.
Which of the following equations represents the expenditure approach?
a. GDP = C + I + G + (X – M) b. GDP = C – I – G – (X + M) c. GDP = C + I + G x (X – M) d. GDP = C – I + G x (X + M)
The supply curve for loanable funds would decline due to
A) an increase in wealth. B) an increase in the expected return on bonds. C) an increase in expected inflation. D) a decrease in the riskiness of bonds relative to other assets.