A Researcher estimated that the price elasticity of demand for automobiles in th

Question

A Researcher estimated that the price elasticity of demand for automobiles in the US is -1.2, while the income elasticity of demand is 3.0. Next year, US automakers intend to increase the average price of automobiles by 5%, and they expect consumers’ disposable income to rise by 3% (a) If sales of domestically produced automobiles are 8 million this year,how many automobiles do you expect US automakers to sell next year?   (b) By how much should domestic automakers increase the price of automobiles if they wish to increase sales by 5% next year?

Explanation / Answer

Ans a)

If average price increases by 5% , and elasticity is -1.2 , demand will decrease by 6% . If income increases by 3% , income elasticity is 3 so demand will increase by 9% . So net change in demand will be increase of 3%

if sales were 8 million last year than this it will increase by 3%.

Expected sales= 8 *103/100= 8.24 million

B) if auto makers want to increase their sales , they have to decrease price and not increase price

Elasticity = % change in demand/ % change in price

-1.2 = 5/% change in price

% change in price = -5/1.2. =4.17%

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