Business 1 is a hardwood flooring company. The demand is sensitive to changes in new home construction
Question:
Business 1 is a hardwood flooring company. The demand is sensitive to changes in new home construction which is ultimately tied to national income. Business 1 performed 600,000 installations at an average price of $10,000 per installation during the past year. The median income is expected to fall from $55,000 to $45,000 as the nation enters a recession. Without any price change, Business 1 expects current-year sales to fall to 400,000 installations. A. Calculate the implied arc income elasticity. B. With the projected fall in income, some believe that 600,000 installations could be maintained by means of a $2000 reduction in the average price. Calculate the implied price elasticity of demand. C. Based upon the price elasticity calculated in part B, would you expect an additional price cut to increase or decrease total revenue. (Assuming that the price elasticity remains constant). Can you determine definitively whether an additional price cut would be advised? Explain