An economic question?

the income elasticity of demand for a firms product is estimated to be .75 a recent report in wall street journal says that national income is expected to decline by 3 percent this year
a) what should you do with your stock of inventories

b) what do you expect to happen to your sales

economics is fun

the formula is change in quantity divided by change in income

Q / I = E

Q/ 3% = .75

Q = 2.25%

So for b) Sales are going to fall by 2.25%

Thus in a) you would let your stock of inventories slightly decline, or maybe let them decline by 2.25%

c) Q/5% = .75

Q = 3.75%
Sales will increase by 3.75% and you will increase your inventories accordingly

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