5.20 explain. 5.20. Orange tail. Suppose that Orange tail, an Australian-basedvineyard, sells in two different markets: Australia and the US. It isestimated that the price elasticity of demand in the US is −4, whereasthe price elasticity of demand in Australia is −2.(a) Why would the value of the price elasticity of demand behigher (in absolute value) in the US?5.3. OUTPUT LEVEL AND PRICE211(b) If Orange tail wants to maximize total profits, should theUS price be higher or lower than the Australia price?(Hint: this is a trick question; the answer depends on thecost of producing and delivering to the US vis-à-vis thecost of producing and delivering to Australia.)(c) Based on the previous answers, explain in words some ofthe main factors determining the relation betweendomestic prices and export prices.

Answered: ■5.20. Orange tail. Suppose that Orange…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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5.20 explain.

5.20. Orange tail. Suppose that Orange tail, an Australian-based
vineyard, sells in two different markets: Australia and the US. It is
estimated that the price elasticity of demand in the US is −4, whereas
the price elasticity of demand in Australia is −2.
(a) Why would the value of the price elasticity of demand be
higher (in absolute value) in the US?
5.3. OUTPUT LEVEL AND PRICE
211
(b) If Orange tail wants to maximize total profits, should the
US price be higher or lower than the Australia price?
(Hint: this is a trick question; the answer depends on the
cost of producing and delivering to the US vis-à-vis the
cost of producing and delivering to Australia.)
(c) Based on the previous answers, explain in words some of
the main factors determining the relation between
domestic prices and export prices.

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Step 1: Introduction

The elasticity of demand refers to the responsiveness of quantity demanded with respect to a change in price. It is calculated as the ratio of the percentage change in quantity demanded and the percentage change in the price of a commodity.

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