The following calculator shows the demand curve for sedans (for example, Toyota

Question

The following calculator shows the demand curve for sedans (for example, Toyota Camrys or Honda Accords) in New York City. For simplicity, assume that all sedans are identical and sell for the same price. Initially, the calculator shows market demand under the following circumstances: Average household income is $50,000 per year, the price of a gallon of regular unleaded gas is $4 per gallon, and the price of a subway ride is $2.00. Use the calculator to help you answer the following questions. You will not be graded on any changes you make to the calculator. Tool tip: Use your mouse to drag the green line on the graph. The values in the boxes on the right side of the calculator will change accordingly. You can also directly change the values in the boxes with the white background by clicking n the box and typing. When you click the Calculate button, the graph and any related values will change accordingly.

Explanation / Answer

Solution :

Suppose that the price of a sedan decreased from $ 25,000 to $ 20,000 . This would cause a right ward shift in the demand curve .

A decrease in average income causes a leftward shift of the demand curve ; therefore , you may conclude that sedans are normal goods .

Suppose that the price of a gallon of gas falls from $ 4 to $ 3 . Because sedans and gasoline are complementary goods , a decrease in the price of a gallon of gas shifts the demand curve for sedans to the right .

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