Assume that the income elasticity of a basic microwave oven is 4.8 and the price elasticity of the same product is 1.2.In a small town,where a recession hit hard and the average income fell by about 5%,would a 5% price cut in microwave ovens help producers get rid of a new shipment of inventories?

Question

Quizplus · Accepted Answer

The income elasticity of the product is higher than the price elasticity, indicating that changes in income have a greater impact on demand than changes in price. Therefore, even if the price is cut by 5%, it may not be enough to offset the decrease in demand caused by the recession and the fall in average income.

Assume That the Income Elasticity of a Basic Microwave Oven