Ironsides Industries, Inc., is a leading manufacturer of tufted carpeting under the Ironsides brand. Demand for Ironsides products is closely tied to the overall pace of building and remodeling activity and, therefore, is highly sensitive to changes in national income. The carpet manufacturing industry is highly competitive, so Ironsides demand is also very price-sensitive.
During the past year, Ironsides sold 30 million square yards (units) of carpeting at an average wholesale price of $15.50 per unit. This year, household income is expected to surge from $55,500 to $58,500 per year in a booming economic recovery.
A. Without any price change, Ironsides marketing director expects current-year sales to soar to 50 million units because of rising income. Calculate the implied income arc elasticity of demand.
B. Given the projected rise in income, the marketing director believes that a volume of 30 million units could be maintained despite an increase in price of $1 per unit. On this basis, calculate the implied arc price elasticity of demand.
C. Holding all else equal, would a further increase in price result in higher or lower total revenue?

  • CreatedFebruary 13, 2015
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