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Elasticity of Demand: Inelastic, Elastic, and Unitary

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As the research starts to come in about your expansion opportunities abroad, the marketing department has discovered that the price elasticity for CPI's products in Brazil is expected to be much greater than in current markets served. Separately, your CFO sent you an e-mail earlier in the week stating that depending on how much business CPI does abroad, the firm would expose 5 to 20 percent of revenue to currency fluctuations (the Real and Euro are the currencies for Brazil and Germany respectively).

Both of these issues are of concern to you, so you decide to have a meeting with the VP of Marketing and the CFO. Explain the differences among inelastic, elastic, and unitary price elasticity to the VP and CFO. Then, what questions would you ask? What recommendations would you have for the CFO?

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Solution Preview

Price elasticity of demand gives you the responsiveness of quantity demanded to a change in price. The price elasticity of demand is inelastic when the percent change in quantity demanded is less than the percent change in price. The price elasticity of demand is elastic when the percent change in quantity demanded is greater than the percent change in price. The elasticity of demand is unitary when the percent change in quantity demanded is equal to the percent change in price.

Normally, the elastic of demand is ...

Solution Summary

The answer to this problem explains responsiveness of quantity demanded to a change in price. The references related to the answer are also included.

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Price Elasticity of Demand Overview

Details: You are a painter, and the price of a gallon of paint increases from $3.00 a gallon to $3.50 a gallon. Your usage of paint drops from 35 gallons a month to 20 gallons a month. Perform the following:

1.Compute the price elasticity of demand for paint and show your calculations.
2.Decide whether the demand for paint is elastic, unitary elastic, or inelastic.
3.Explain your reasoning and interpret your results.

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