Elasticity

Elasticity. The demand for Penn's Oil motor oil can be characterized by the following point elasticities: price elasticity = -2.5, cross-price elasticity with Value Lean motor oil = 1.5, and income elasticity = 0.75. Indicate whether each of the following statements is true or false, and explain your answer.
A. A price increase for Penn's Oil will decrease both the number of units demanded and the total revenue of sellers.
B. The cross-price elasticity indicates that a 2% increase in the price of Value Lean will cause a 3% increase in Penn's Oil demand.
C. Demand for Penn's Oil is price elastic and the motor oil is a cyclical, normal good.
D. Falling Value Lean prices will definitely increase revenues received by manufacturers of both brands of oil.
E. A 0.9% price reduction for Penn's Oil would be necessary to overcome the effects of a 3% decline in income.

Correct Answer:

Verified

Show Answer