Question.3360 - After reviewing the material in Chapters 3, please post and respond to the following topic on the course discussion board. Discussion assignments require that you post your contribution first, read the answers posted by your classmates, and reply to at least one posting. In order to see other students' posts, you must first submit your initial post to each forum. You must contribute to each discussion within the deadline. Please note that the discussion board participation will serve as a means of evaluating your participation in the course. Please be courteous and professional. You are the manager of a successful automotive dealership. You have estimated the income elasticity for your automobiles to be 0.9, while the price elasticity of demand for your automobiles is -1.25. Would you cut the price to increase your revenue? Discuss. You read in the newspaper that the Federal Reserve is estimating the economy will expand by 10% in the next quarter. What would be expected to happen to the total quantity of cars sold?
Answer Below:
Yes, I would cut the price to increase revenue. Since the price elasticity of demand is -1.25, demand is said to be elastic. In this case, we can see that the income elasticity increases by 9%, and the price elasticity decreases by 1.25 (Baye, 2002). Revenue is calculated as Price * quantity. Therefore, in order to maximize revenue, we lower the price of automobiles, which will lead to a larger increase in the quantity demanded. Since our income elasticity is 0.9, a 10% increase in income will increase the quantity of cars sold by 9%. There exists a positive relationship between income and car sales. As the consumer's income rises, the ability to purchase a car also increases, leading to a large quantity of cars being sold. Therefore, the Federal Reserve's projection of a 10% economic expansion indicates an increase in overall economic activity in the next quarter. References Baye, M. (2002) Managerial Economics and Business Strategy. McGraw-Hill/Irwin.More Articles From Economics
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