Setting: U.S. Auto manufacturers are trying to develop a multivariate function w

Question

Setting: U.S. Auto manufacturers are trying to develop a multivariate function with which to estimate the demand for their gas-electric hybrid compact cars. Here is one that Motors General developed for its Jolt: Where Qthe number of Jolts demanded per week. Pithe price of each new Jolt (in S) Pf- the price of each new Ford gas-electric hybrid (in $) Pt- the price of each new Toyota gas-electric hybrid (in $). Pb- the price of replacement batteries for the Jolt (in $) Tc = the amount of tax credit incentive offered with the purchase of a new hybrid (in $). Y-average weekly disposable income of a typical Jolt purchaser (in $) Mg- the miles per gallon of gas rating of the Jolt (in miles per gallon) A average weekly Jolt advertising expenditure (in $) 6. If all variables remain unchanged except that the price of the Toyota hybrid (Pt) decreases by $500, then the demand for Jolts will: a. decrease by 20000 b. decrease by 10000 c. increase by 10000 d. increase by 20000 e. increase by 17500 f. decrease by 17500

Explanation / Answer

Right answer is (e)

These firms produce substitute products. Hence, cross elasticity of demand is positive in this case.

Decrease in demand shall be = 35*500

= 17,500

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