Income Elasticity

Income Elasticity. Deluxe Carpeting, Inc., is a leading manufacturer of stain-resistant carpeting. Demand for Deluxe products is tied to the overall pace of building and remodeling activity and, therefore, is sensitive to changes in national income. The carpet manufacturing industry is highly competitive, so Deluxe demand is also very price-sensitive.
During the past year, Deluxe sold 28 million square feet of carpeting at an average wholesale price of $16 per square foot. This year, GDP per capita is expected to fall from $57,000 to $51,000 as the nation enters a steep recession. Without any price change, Deluxe expects current-year sales to fall to 20 million units.
A. Calculate the implied arc income elasticity of demand.
B. Given the projected fall in income, the sales manager believes that current volume of 28 million units could only be maintained with a price cut of $2 per unit. On this basis, calculate the implied arc price elasticity of demand.
C. Holding all else equal, would a further increase in price result in higher or lower total revenue?

Correct Answer:

Verified

Unlock this answer now
Get Access to more Verified Answers free of charge

Access For Free