You are the owner of a firm that makes generic paper products. You estimate the income elasticity for your paper towels to be - 1.5. An upcoming economic expansion is expected to increase consumer income by 3 percent. As a result of the economic expansion, you should expect which of the following to occur?
A)the demand for your paper products to increase by 4.5 percent
B)the demand for your paper products to increase
C)the demand for your paper products to decrease by 4.5 percent
D)The demand for your paper products will be unaffected by the economic expansion.

Question

Quizplus · Accepted Answer

Since the income elasticity for paper towels is -1.5 (inelastic), a 3 percent increase in income would result in a 4.5 percent decrease in the demand for paper towels. Therefore, the demand for generic paper products is expected to decrease by 4.5 percent.

You Are the Owner of a Firm That Makes Generic