Answered

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The Gondwanaland Chairman of Production reported that the new Altair chariots (most modern, horse drawn family chariot) had a PRICE elasticity of 3 and an INCOME elasticity of 2. The supply of these Altair chariots is elastic. Evaluate the following statements and explain why you think they are true, or false.

a. A 20% increase in the price of the Altair chariot will cause the quantity demanded to fall by an astounding 60%.
b. An increase in Gondwanaland consumers' incomes will cause prices to rise, but the total quantity demanded will also increase.

Sagot :

Answer:

a. true

The statement is true because the price elasticity is 3 .

Price elasticity = percentage change in quantity demanded / percentage change in price

= 60% / 20% = 3

This corresponds with the price elasticity given. Demand is elastic so a rise in price would lead to a greater change in quantity demanded

b. false

Income elasticity measures the relationship between income and quantity demanded. The income elasticity for luxury goods is usually greater than 1. If income of  Gondwanaland consumers' increases, the quantity demanded increases. Prices are not affected

Explanation:

Price elasticity of demand measures the responsiveness of quantity demanded to changes in price of the good.

Price elasticity of demand = percentage change in quantity demanded / percentage change in price

If the absolute value of price elasticity is greater than one, it means demand is elastic. Elastic demand means that quantity demanded is sensitive to price changes.

Demand is inelastic if a small change in price has little or no effect on quantity demanded. The absolute value of elasticity would be less than one

Demand is unit elastic if a small change in price has an equal and proportionate effect on quantity demanded.

Income elasticity of demand measures the responsiveness of quantity demanded to changes in income.

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