Eco 365 Final

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Final Exam
University of Phoenix

Question One
What is the most important determinant of price elasticity of demand? Why is this so?  
Price elasticity that relates to demand is determined by many factors. Price elasticity is measured by the change in price and the response from consumer demand. The demand of a good or service will vary the price in the item. The most important factor to determine the price elasticity of demand is necessity. If a good is a necessity, the demand will seldom change and the price is able to be adjusted. The demand is the most important due to the freedom it provides for price adjustment and inventory control. With necessity comes an inelastic price. Other factors such as the price of a good and competition are also important but demand is what drives sales and removes the barrier of lost profits to create demand.

Give an example of a firm that price discriminates for its product or service.

An example of a firm that discriminates for a service is Starbucks. Starbucks offers regular coffee for a low price up to a specialty coffee that can be 50 to 100% greater in price. Starbucks also has more expensive products than other coffee providers due to the image of superiority or premier products. Starbucks uses the multiple sizes as well to determine how much customers will pay based on their specific taste and consumption.

Question Two
Give an example of the income effect and the substitution effect in regards to the supply of labor. What is the opportunity cost of work in this case?

An example of when the income effect will affect the supply of labor is when pay is lowered or raised in a company. If a company tells its employees that every employee below management will receive a pay cut there will be a few reactions. Employees will have the choice of continuing to work for the lower pay, work more hours to remain at the same pay for each check, or quit and look for other work. The...
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