Final answer:
The new price of mattresses after a 15% increase in demand with ED of 1.8 and ES of 2.5 cannot be determined precisely without initial price and quantity. Additionally, for the pharmaceutical company example, pricing strategy depends on elasticity: prices should be lower if demand is elastic (e.g., ED is 1.4), higher if inelastic (ED 0.6), and remain the same if unit elastic (ED 1). Gasoline price elasticity of supply impacts operational costs for companies like UPS or FedEx, and bread is considered an inferior or normal good depending on whether consumption decreases or increases as income rises.
Step-by-step explanation:
If the demand for mattresses increases by 15% due to COVID, the new price can be estimated by considering the price elasticity of demand (ED) and the price elasticity of supply (ES). In this case, with ED being 1.8 and ES being 2.5, we need to find the equilibrium where the percentage change in quantity demanded equals the percentage change in quantity supplied. As demand increases by 15%, suppliers would need to increase the price to a level where the quantity supplied meets this new demand level. The exact new price cannot be determined without the initial price and quantity data.
To explain this further, for products with an elastic demand, such as the hypothetical new pharmaceutical drug with an elasticity of 1.4, it would be advisable for the company to lower the price, as the percentage change in quantity demanded would be higher than the percentage change in price, increasing total revenue. If the elasticity were 0.6 (inelastic demand), the company should raise the price, since consumers would not reduce their quantities purchased by much, leading to higher revenue. If elasticity were exactly 1 (unit elastic), changing the price would not affect the total revenue.
The price elasticity of supply for gasoline would be crucial for companies like UPS or FedEx as it affects their operational costs. A highly elastic supply would mean that small changes in price would lead to large changes in quantity supplied, potentially reducing costs for these companies when prices drop. Conversely, inelastic supply would not provide much relief in costs when prices decrease.
As incomes rise and bread consumption falls, we calculate the income elasticity of demand to determine if bread is a normal or inferior good. If the elasticity is negative (quantity demanded falls as income increases), bread is an inferior good. If positive (quantity demanded rises as income increases), it's a normal good.