AICPA每日一练之BEC【2016-1-8】

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Tower Inc. sells a product that is a close substitute for a product offered by Westco. Historically, management of Tower has observed a coefficient of cross-elasticity of 1.5 between the two products. If management of Tower anticipates a 5% increase in price by Westco, how would this action by Westco’s management be expected to affect the demand for Tower’s product?

A. A 5% decrease.

B. A 7.5% increase.

C. A 7.5% decrease.

D. A 5% increase.

Answer:B

B is corrent. A coefficient of cross-elasticity of 1.5 would mean that a 5% increase in the price of the substitute would result in a 7.5% (5% X 1.5) increase in demand for Tower’s product.

A is incorrect. This would result in an increase in demand.

D is incorrect. This would be true if the cross elasticity was 1.0.

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