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

Answer 1

Answer:

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

Explanation:

Income elasticity of demand measures the change of quantities demanded for a particular good to a change in its income.

It is therefore calculated as the ratio of the percentage change in quantity demanded to the percentage change in income.

Price elasticity of demand is a measure of the change in the quantity demanded or purchased of a product in relation to its price change.

Mathematically:

Price Elasticity of Demand = % Change in Quantity Demand / % Change in Price.

From the above definitions stated about income and price elasticity of demand, the income in that year increased but the quantity of goods demanded decreased further by 5% from the predicted 7% (12 %)