1. The ECON6450 company was considering a price increase and wished to determine the price elasticity of demand (arc elasticity of demand). An economist and a market researcher, Sandy and you, were hired to study demand. In a controlled experiment, it was determined that at 8 cents, 100 pencils were sold while at 10 cents, 60 pencils were sold, yielding an elasticity of 2.25. However, Sandy and you were industrial spies, employed by the EF Pencil Co. and sent to ECON6450 to cause as much trouble as possible. So Sandy and you decided to change the base for their elasticity figure, measuring price in terms of dollars instead of pennies (ie., $0.08 for 8 cents and $0.10 for 10 cents). How will this sabotage affect the results? Provide a full explanation with a breakdown of the formula as well and be sure not to skip any steps.
2. Why is it that a profit-maximizing businessman would always raise prices when facing an inelastic demand curve, but might or might not raise prices when facing an elastic demand curve? Explain and justify your answers in detail.