Summary: With the rate of inflation at a 40-year high, companies that have raised prices to offset higher costs have encountered resistance from consumers. Unit sales of merchandise, such as apparel and footwear, have declined in nine of the weeks from Decembers 26th to March 5th compared to the same period a year ago. A survey found that 43 percent of consumers would delay less-important purchases if prices continue to rise.

The law of demand states that, holding everything else constant, when the price of a product decreases the quantity demanded increases and when the price of a product increases the quantity demanded decreases. The price elasticity of demand measures the response of quantity demanded to a change in the price of a product. The law of diminishing marginal utility is the principle that consumers will eventually experience diminishing satisfaction when they consume more of a product over a certain period of time.

Questions:

A) The price elasticity of demand is measured by dividing the percentage change in the quantity demanded of a product by the percentage change in the price that caused the change in quantity demanded. Briefly explain why percentage changes, rather than absolute changes, in price and quantity are used to measure the price elasticity of demand.

B) From the article: "Clothing brand Bella Dahl raised prices on its T-shirts by about $20, then sales fell and the company rolled back the price increase. 'There was a revolt,' said Steven Millman, its chief brand officer. 'If we go any higher, we'll do half the sales.'" If a 50 percent decrease in quantity demanded results from an $20 increase in the price of T-shirts, how would you describe the elasticity of demand for this product (you may use the numbers given)? What factors might explain the elasticity for this product?

C) From the article: "The pushback from consumers varies across categories and brands. Luxury...[companies] have been jacking up prices with no visible collapse in demand." What would this suggest about the price elasticity of demand for luxury products? What factors might explain the elasticity for luxury products?