Write a small paragraph (2 or 3 sentences) to explain each of your answers Boein

Question

Write a small paragraph (2 or 3 sentences) to explain each of your answers

Boeing estimates the elasticity of demand for new commercial jets is –1.25. Explain why the following statements are either true or false (i.e., state whether true or false and explain why.)

1. “The price effect dominates the quantity effect.”

2. “A 4 percent increase in the number of jets sold will require a 5 percent decrease in the price of jets.”

3. “A 5 percent decrease in the price of jets will increase Boeing’s total revenue.”

Explanation / Answer

Elasticity of demand = - 1.25, which means that if price changes by 1%, quantity demanded changes by 1.25% in the opposite direction.

(1) False

As explained above, the elasticity indicates that change in quantity demanded is higher than change in price. So the quantity effect dominates the price effect.

(2) True

As price increases by 4%, quantity will decrease by (4% x 1.25) = 5%

(3) True

Here, demand is elastic (since absolute value of elasticity is higher than 1). With elastic demand, a decrease in price will increase total revenue (while with inelastic demand, an increase in price will increase revenue).

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