firm has a demand curve given by:
Quantity sold = 100 – 4*Price - 2*Average Household Income
Where Price is in dollars and Average Household Income is in thousands of dollars. Base your answers
on these numbers.
a) The firm currently charges $10. What is the elasticity of demand when Price = $10?
b) If the firm raises price to, say $11, will profit increase or decrease? Or is it uncertain?
Explain your reasoning.
c) If a recession occurs, reducing Average Household Income, will the demand for this firm’s
product increase or decrease? Explain.