Question

The wrist watch industry in a country is not very competitive. There are limited brands available and the existing firms use their market power to keep prices high. Envy, one of the leading brands in the market, is planning to increase the price from $1,000 to $1, 100 per watch. The firm is expecting the quantity demanded to fall by only 7 percent. However, after the price is increased to $1, 100, quantity demanded actually declined by 12 percent. Sonia, a student of economics, knows that the average income level in this country has increased over the last year When actual sales of Envy watches turn out to be lower than anticipated, she concludes that the income elasticity of demand for Envy watches is negative Her conclusion is flawed because
A. she is confusing between consumer and producer surplus.
B. she is confusing between price elasticity of demand and income elasticity of demand.
C. she is assuming that rival firms have reduced the price of their watches.
D. she is assuming that the government of this country does not import watches.
E. she is ignoring the fact that the cost of production of Envy watches could be high.

Answer 1

Answer:

B. she is confusing between price elasticity of demand and income elasticity of demand.

Explanation:

Envy miscalcualte the price elasticy whhich from 1,000 to 1,100 was 12% not the 7% forecasted

The increase in income is a different factor. An increase in income will make the people in the country to consume and/or save more

but they will decide on each product market considering the price/elasticity

In this case, it was -0.12