A researcher has estimated that the price elasticity of demand for cars in the U

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A researcher has estimated that the price elasticity of demand for cars in the United States is -1.2 and the income elasticity of demand for cars is 3.0. Next year U.S. car makers intend to increase the price of cars by 5 percent and they expect consumer disposable income to rise by 3 percent.

(a) If sales of domestically produced cars is 8 million this year, what will the quantity of sales be next year as a result of the price and income change? Please calculate the net amount after price and income have changed. You may assume that the income changes first and then price changes. You must show your calculations.

(b) By how much should car makers increase the price of cars if they wish sales to increase by 5 percent next year, assuming that income still increases by 3 percent? Assume that income changes first and then price changes. Please show your calculations.

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