4. Determinants of demand Aa Aa The following calculator shows the demand for se

Question

4. Determinants of demand Aa Aa The following calculator shows the demand for sedans (for example, Toyota Camrys or Honda Accords) in New York City. For simplicity, we'll 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 $3 per gallon, and the price of a subway ride is $1.50 At any time in this problem, you may click the Reset to Initial Values button to return the demand curve to its original position. You will not be graded on any changes to the calculator; it's just here to help you answer the questions that follow 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 in the box and typing. When you click the Calculate button, the graph and any related values will change accordingly CALCULATOR PRICE (Thousands of dollars per sedan) 50 Price of a Sedan Thousands of dollars 20 Quantity Demanded Sedans per month) 40 400 30 DEMAND SHIFTERS Current Values Initial Values 20 Average Income Thousands of dollars Price of Gas Dollars per gallon] Price of a Subway Ride 50 50 10 Dollarsl 0 100 200 300 400 500 600 700 800 900 QUANTITY (Sedans per month) Reset to Initial Values Calculate Suppose that the price of a sedan decreased from $25,000 to $20,000. This would cause a the demand curve Suppose that the price of a subway ride rises from $1.50 to $2. Because driving a car and taking the subway are , an increase in the price of a subway ride shifts the demand curve for sedans to the

Explanation / Answer

If the price of sedan decreases from $25,000 to $20,000 then it would cause a movement along the demand curve. The price decrease, while all other determinants of quantity demanded remain constant, that will cause a movement along the curve because price is not a determinant of demand.

Driving the car and taking the subway are substitute of each other, i.e. both are used in place of the another, therefore an increase in the price of subway rides decrease the quantity demanded for subway rides and therefore demand for sedans will increase, shifting the demand curve for sedans to the right.

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