Question

A recent study determined the following elasticities for Volkswagen Beetles:Price elasticity of demand = 2Income elasticity of demand = 1.5The supply of Beetles is elastic. Based on this information, are the following statements true or false? Explain your reasoning.a. A 10% increase in the price of a Beetle will reduce the quantity demanded by 20%.b. An increase in consumer income will increase the price and quantity of Beetles sold. Since price elasticity of demand is greater than 1, total revenue will go down.

Answer 1

Answer:

A) TRUE

As the price elasticity of the demand is 2 this means that for every percentage increased in pric, the consumers will drop their demand 2% twice as much.

B) TRUE

The supply is elastic threfore it can respond to increase in demand with more production (if it wasn't inelastic it wouldn't)

C) TRUE

As the decrease is quantity is more than proportional of the increase in price an increase in price reduces the total revenue.

Explanation: