Elasticity — practice questions

PED = −15% ÷ +20% = −0.75 (inelastic, |PED| < 1)

Revenue before: 10 × 1,000 = **$10,000**$ Revenue after: 12 × 850 = **$10,200**$

Advice: Demand inelastic — price increase raises revenue short term. Caution: Longer term competitors may attract customers; brand loyalty may weaken — monitor market share (3.1.6).

1. State the formula: YED = % Change in Quantity Demanded / % Change in Income

2. Calculate % Change in Quantity Demanded: %ΔQD = [(New QD - Old QD) / Old QD] x 100 %ΔQD = [(5,000 - 4,000) / 4,000] x 100 = +25%

3. Calculate % Change in Income: %ΔY = [(New Income - Old Income) / Old Income] x 100 %ΔY = [($55,000 -$50,000) / $50,000] x 100 = +10\%$

4. Calculate YED: YED = +25% / +10% = +2.5

5. Interpretation and Advice:

• The YED is positive (+2.5), so the handbags are a normal good.
• The value is greater than 1, which means they are a luxury good with income-elastic demand.
• Advice: The company's sales are highly dependent on the economic cycle. They should plan for increased production and marketing during periods of economic growth. However, they are vulnerable to recessions and should consider strategies to mitigate this risk, such as building cash reserves or developing a more affordable product line (see 3.3.1 Product Portfolio).