Suppose that the current market price of VCRs is $300, that the average consumer

Question

Suppose that the current market price of VCRs is $300, that the average consumer disposable income is $30,000, and that the price of DVDs (a substitute for VCRs) is $500. Under these conditions, annual US demand for VCRs is 5 million per year. Statistical studies have shown that for VCRs the own-price elasticity of demand is -1.3. The income elasticity of demand for VCRs is 1.7. The corss-price elasticity of demand for VCRs with respect to DVDs is 0.8. Use this information to predict the annual number of VCRs sold under the following conditions: 1) Increasing competition from Asia causes VCR prices to fall to $270 with income and the pirce of DVDs is unchanged. 2) Income tax reductions raise average disposable personal income to $31,500 with prices unchanged. 3) An inventor in Menlo Park invents a cheaper way to produce VCRs and income unchanged. 4) All of the events described in parts 1-3 occur simultaneously

Explanation / Answer

2) Income tax reductions raise average disposable personal income to $31,500 with prices unchanged.

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