What is the definition of price elasticity of demand?
the responsiveness of quantity demanded of a product to a change in income of consumers
the responsiveness of quantity demanded of a product to a change in the price of a complementary product
the responsiveness of quantity demanded of a product to a change in the price of that product
the responsiveness of quantity demanded of a product to a change in the price of a substitute product
C
A German car producer estimates the price elasticity of demand (PED) for its cars is -2.0 . What can be concluded from this information?
its cars are price elastic
its cars are price inelastic
its cars are unitary elastic
its cars take time to produce
A
A Swiss multinational food manufacturer increased prices for its products by an average of 8% in 2022. It increased its prices in the USA by 11.6%. This multinational company (MNC) is one of the world's oldest MNCs. It started as a small firm but has grown over the last 160 years. Over this period, its decisions have always been influenced by opportunity cost.
Explain two reasons why a firm may charge a different price for the same product in two different countries.
Logical explanation which might include:
- demand may be higher / lower in one country (1) resulting in higher / lower prices (1)
- supply maybe higher / lower in one country (1) resulting in lower prices (1)
- higher income / GNP per head in one country ( 1 ) means more able to afford to pay higher price (1)
- price elasticity of demand may vary (1) more power to raise price where demand is inelastic (1)
- greater competition in one country / more substitutes (1) leads to lower prices to be competitive (1)
- indirect tax rates may vary e.g. higher GST / VAT / import tariffs (1) will lead to higher price (1)
- government subsidies may be given in some countries (1) lowering price (1)
- local material costs / wages may be lower in one country (1) lowering costs of production mean lower prices (1)
- different transport costs ( 1 ) may be cheaper to transport to countries close by (1)
- quality of good may be higher (1) enable firm to charge a higher price (1).
4
One mark each for two reasons identified and one mark each for two explanations.
If more than two reasons are given, consider the first three.
Note: There will be other relevant reasons. To get the development mark there must be a justification of why that factor will affect prices.
Do not accept answers based on foreign exchange rate.