Suppose that country A's total exports are 10,000 units of good X at a price of $20 per Unit, meaning that country A's export earnings or receipts are $200,000. Suppose also That the foreign price elasticity of demand for country A's exports of good X is (-) 0.6. If Country A's prices for all goods, including its exports, now rise by 10% because of a gold Inflow such as in the Mercantilist model, then, other things equal, country A's exports of Good X will fall by __________ and country A's export earnings or receipts will become __________.
A) 600 units; less than $200,000
B) 600 units; greater than $200,000
C) 1,000 units; less than $200,000
D) 1,000 units; greater than $200,000

Question

Quizplus · Accepted Answer

The price elasticity of demand formula is percentage change in quantity demanded divided by percentage change in price. Given a 10% price increase and an elasticity of -0.6, the quantity demanded will decrease by 6% (0.6 * 10%). From 10,000 units, a 6% decrease is 600 units, leaving 9,400 units. The new price is $22 ($20 * 1.10). Therefore, the new export earnings are 9,400 units * $22 = $206,800, which is greater than $200,000.

Suppose That Country A's Total Exports Are 10,000 Units of Good