The Owner of a Kayak Tour Business Has Been Looking

question 364

Multiple Choice

The owner of a kayak tour business has been looking over the latest data from the Census, which reported that income in the area where she is based has increased by 20%. If the owner also observed that her sales increased by 10% during the same period, what is the income elasticity of demand and how would you interpret it?

• A) E_Y = 2; for a 1% increase in income, the owner can expect to see a 2% increase in her sales.
• B) E_Y = 0.5; for a 1% increase in income, the owner can expect to see a 0.5% increase in her sales.
• C) E_Y = 2; for a 1% increase in income, the owner can expect to see a 0.5% increase in her sales.
• D) E_Y = 0.5; for a 1% increase in income, the owner can expect to see a 2% increase in her sales.

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Definitions:

Game Theory

A branch of mathematics and economics that studies the strategic interactions among rational decision-makers, aiming to predict their choices of action given the rules of the game and the actions of others.

Oligopoly

A market structure dominated by a small number of large firms, leading to limited competition and potentially collaborative behavior that influences prices and production.

Nash Equilibrium

A concept in game theory where no player can benefit by changing strategies while the other players keep theirs unchanged, indicating an optimal strategy set for all players.

Positive-Sum Game

In game theory, a game in which the gains (+) and losses (−) add up to more than zero; one party’s gains exceed the other party’s losses. A strategic interaction (game) between two or more parties (players) in which the winners’ gains exceed the losers’ losses so that the gains and losses sum to something positive.