Question

‘Prompted by the recession in Europe to search for promising wealthy new markets, the German Luxury Goods Exhibition in Dubai attracted top German designer names supplying perfumes, silverware, crystal and jewellery. The response to the exhibition was extremely positive.’ (Gulf News, 3 November 2016)

1. Explain the Terms (i) Income elasticity of demand (ii) cross-elasticity of demand.
2. How can these terms be applied to the market for German luxury goods, and (given that Dubai is a rich Middle Eastern Estate) how might they be used to explain the success of the exhibition?
3. What are economies of scale and why are such economies available only in the long run?
4. Since economies of scale exist, why do long-run marginal costs increase, ultimately, as output increases?

Answer 1