According to a study, the price elasticity of clothing in the United States is 0.6, and the income elasticity is 1.4. Would you suggest that the ABC clothing company cut its price to increase its revenue? (5 points) What would be expected to happen to the total quantity of clothing sold in the united stated if income rise by 10% (5 points) Solution Price Elasticity =Percentage Change in Quantity/Percentage Change in Price=0.6 . This means the quantity will change at a lower percentage than the price and hence the revenue will fall. So ABC should not cut price. Income Elasticity=Percentage Change in Quantity/Percentage Change in Income=1.4 , so if there is a 10% increase in Income , the Quantity will increase by 14%. (1.4x10) .

1. According to a study, the price elasticity of clothing in the United States is 0.6, and the income
elasticity is 1.4.
Would you suggest that the ABC clothing company cut its price to increase its revenue? (5
points)
What would be expected to happen to the total quantity of clothing sold in the united stated if
income rise by 10% (5 points)
Solution
Price Elasticity =Percentage Change in Quantity/Percentage Change in Price=0.6 . This means
the quantity will change at a lower percentage than the price and hence the revenue will fall. So
ABC should not cut price.
Income Elasticity=Percentage Change in Quantity/Percentage Change in Income=1.4 , so if there
is a 10% increase in Income , the Quantity will increase by 14%. (1.4x10)