Final answer:
The income elasticity of demand helps identify if a good is a normal or inferior good.
For boxes of nails with an income elasticity determined by the coefficient in the demand equation, bread's income elasticity,
and strategies for pricing pharmaceuticals would all depend on whether the elasticity is greater or less than 1, or exactly 1. Gasoline price elasticity of supply has implications for companies like UPS or FedEx with significant fuel expenses.
Step-by-step explanation:
The income elasticity of demand for boxes of nails can be calculated by the coefficient of the income variable in the demand function, which is 3 in the equation Q = 185 - 10p + 3Y.
The demand for boxes of nails is estimated to be Q = 185 - 10p + 3Y, where income (Y) is measured in thousands of dollars.
If the price (p) is set at 5 and the income (Y) is 30 (which reflects an income of $30,000), we can substitute these values into the equation to find Q, and then calculate the income elasticity.
For the drug with an elasticity of demand of 1.4, you would advise the company to lower the price, because an elasticity higher than 1 signifies that the quantity demanded is responsive to price changes, and lowering the price will increase total revenue. If the elasticity were 0.6, raising the price is advisable since the demand is inelastic.
If the elasticity were exactly 1, changing the price would not affect overall revenue, so keeping the price the same could be recommended.
For UPS or FedEx, understanding the gasoline price elasticity of supply is crucial as it affects their operational costs. Gasoline is a significant input cost for shipping companies,
and an inelastic supply means that price changes could significantly impact their costs without the ability to easily substitute for another fuel source.
The income elasticity of bread consumption can be calculated using the formula for percentage change in quantity demanded over the percentage change in income.
Using the provided figures where the income rises from $25,000 to $38,000, and the quantity of bread falls from 30 loaves to 22 loaves, we can find the income elasticity. If the calculated elasticity is negative, bread would be considered an inferior good; if it's positive, it would be considered a normal good.