Deluxe Carpeting a leading manugacturer of carpeting sold 28 million square yard

Question

Deluxe Carpeting a leading manugacturer of carpeting sold 28 million square yards of carpeting at a price of $16 per yard. This year, GNP per captia is expected to fall from $19,000 to $17,000 as the nation enters a recession. Deluxe expects that current-year sales to fall to 20 million square yards.

a. Calculate the implied arc income elasticity of demand.

?I =?

b. Given a price elasticity coefficient of -2.5, to what level would price have to be lowered to maintain there sales at a level of 28 million square yards. New Price =?

Explanation / Answer

income elasticity = % change in qty / % change in income ;

= ((20-28) / 28) / ((17000 - 19000) / (19000)) = 2.71

price elasticity is defined in same way ;

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