Chapter 4 Elasticity A researcher estimated that the price elasticity of demand

Question

Chapter 4 Elasticity A researcher estimated that the price elasticity of demand for automobiles in the United States is -1.2, while the income elasticity of demand is 3.0. Next year, U.S. auto makers intent to increase the average price of automobiles by 5 percent, and they expect consumers' disposable income to rise by 3 percent. (a) if sales of domestically produced automobiles do expect U.S auto makers to sell next year? (b) By how much should domestic auto makers increase sales by 5 percent next year?

Explanation / Answer

the price elasticity of demand = percentage change in demand / percentage change in price so -1.2 = percent change in demand / 5 so percent change in demand because of change in prices = -6 now income elasticity = 3 = percentage change in demand / change in income = demand/3 so percentage chage in demand because of rise in income = 9 so net change in demand = +3 so the sales will increase next year the sales will increase by 3 percent

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