2.5. CArs. Table 2.2 gives the \"own\" and cross-price elasticities for selected
ID: 1147922 • Letter: 2
Question
2.5. CArs. Table 2.2 gives the "own" and cross-price elasticities for selected auto- mobile models.8 Specifically, each cell corresponds to the demand elasticity of the car model listed in the row with respect to changes in the price of the car model listed in column. (a) Why are the "own" elasticities so high? (b) Are the Accord and Taurus complements or substitutes? (c) What are the Taurus's closest competitors? (d) If GM lowers the price of its Chevy Cavalier, does it "cannibalize" its Buick Centurv sales? (e) Why is the direct elasticity for the Mazda not lower than the elasticity for more expensive models (as the rule of thumb would suggest)? (f) Suppose Honda sold 300k Accords in 2001. In 2002, the price of the Accord decreased by 2%, whereas the price of the Taurus decreased by 3%. What is the likely change in Accord sales? TABLE 2.2 Automobile demand elasticities Model Mazda 323 Cavalier Accord Taurus Century BMW 735 323 Cavalier Accord Taurus Century BMW 0. 0.2 0.1 0.0 0.0 0.0 4 0.2 0.1 0.1 0.0 0.0 8 0.0 0.0 0.0 0.1 0.2 2 0.0 0.0 0.0 0.2 0.1 6.8 0.0 0.0 0.0 0.0 0.0 0.0Explanation / Answer
A) Own price elasticity of automobiles are generally higher because automobiles are considered to be luxury and luxurious are expected to have an elastic demand. A slight increase in the price usually lowers the sales dramatically for an automobile.
B) Accord and Taurus are substitutes. This can be seen from the cross price elasticity of demand between Taurus and Accord which is positive.
C) The closest competitor of Taurus is Accord. The reason is that the cross price elasticity is 0.2 which suggests that a 1% increase in the price of Taurus will increase the quantity of Accord demanded by 0.2%. The number of Cavalier demanded will increase by 0.1%. Other competitors will also experience an increase in the number of cars demanded by 0.1% only. Therefore Accord is its most important and significant competitor.
D) Yes. If General Motors lowers the price of a Chevy Cavalier it will increase the sales and therefore people will buy fewer Century. The elasticity is 0.1 and this indicates that the two are substitutes. a decrease in the price of one will reduce the quantity demanded of the other.
E) Mazda has a higher own price elasticity at -6.4 which indicates that its consumers are more prone to the price change than for the consumers of other automobiles and therefore has a higher elasticity
F) when the price of Accord is reduced by 2%, its quantity demanded is increased by 9.6%. when the price of Taurus is reduced by 3% the quantity demanded of a cord is reduced by 0.6%. Therefore the final increase in the quantity demanded of Accord will be 9%.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.