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An Irish firm which sells its product in both the EU and US markets provides you with the following information: Price elasticity of demand EU US -0.8 -2.4 Income elasticity of demand +0.72 +2.8 (i) Explain whether you consider this good to be normal or inferior? (ii) Suggest one reason for the difference in the price elasticity of demand for this product in each market - Leaving Cert Economics - Question c - 2020
Question c
An Irish firm which sells its product in both the EU and US markets provides you with the following information: Price elasticity of demand EU US -0.8 -2.4 I... show full transcript
Worked Solution & Example Answer:An Irish firm which sells its product in both the EU and US markets provides you with the following information: Price elasticity of demand EU US -0.8 -2.4 Income elasticity of demand +0.72 +2.8 (i) Explain whether you consider this good to be normal or inferior? (ii) Suggest one reason for the difference in the price elasticity of demand for this product in each market - Leaving Cert Economics - Question c - 2020
Step 1
Explain whether you consider this good to be normal or inferior?
Answer
This good is classified as a normal good since it has a positive income elasticity of demand (+0.72 in the EU and +2.8 in the US). This indicates that as consumer income increases, the quantity demanded for this good also increases.
Step 2
Suggest one reason for the difference in the price elasticity of demand for this product in each market.
Answer
The difference in price elasticity can be attributed to brand loyalty. In the EU, consumers may exhibit greater brand loyalty and are less responsive to price changes, resulting in a lower price elasticity of demand (-0.8). In contrast, consumers in the US may have access to more substitutes, making them more sensitive to price changes, hence the higher price elasticity of demand (-2.4).
Step 3
If the firm wishes to maximise total sales revenue advise the firm in which market a higher price should be charged. Explain your answer.
Answer
The firm should charge a higher price in the EU market due to the inelastic nature of demand there. A price increase will lead to a smaller percentage decrease in quantity demanded, thus increasing total revenue. Conversely, in the US market, where demand is elastic, a price increase would significantly reduce the quantity demanded and potentially decrease total revenue.