Question

An entrepreneur has an idea for a new product. As she researches her market she finds that the income elasticity of her consumers to be 4.13. Through market research she finds that two related goods, automobiles and airplanes have cross price elasticities with her product of -0.39 and 0.22 respectively. Finally she finds the price elasticity of demand for her product to be quite inelastic at 0.15.

In sentence form, answer the following questions to explain what these values actually mean:

1. What two things does this say about her consumers?

2. Who would she be competing with (i.e. a potential substitute)?

3. What does this say about potential opportunities and threats from automobile and/or airplane manufacturers?

Answer 1

income elasticity of her consumers to be 4.13

automobiles have cross price elasticities with her product of -0.39

airplanes have cross price elasticities with her product of 0.22

price elasticity of demand for her product to be quite inelastic at 0.15

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1. What two things does this say about her consumers?

From the above information we can can say that the income elasticity is quite high(4.13) and as the income of consumer increases a larger percentage of the commodity is demanded. if income elastity is > 1, the good is superior or a luxary good

The price elasticity is very less less 0.15 (inelastic) this means even if the price rises the fall in quantity demanded will be very less as compared to the rise in price. Consumers are price insensitive.

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2. Who would she be competing with (i.e. a potential substitute)?

The cross elasticity of demand for substitute goods is always positive because the demand for one good increases when the price for the substitute good increases. And, the cross elasticity of demand for complementary goods is negative.

So she would be competing with airplanes as the cross elasticity is positive for airplane

similarly automobiles are complementary goods as cross elasticty is negative.

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3. What does this say about potential opportunities and threats from automobile and/or airplane manufacturers?

Potential opportunity from the automobile sector: if automobile manufactures lower the price of its good this would lead to an increase in demand for her good. as they are complementary goods.

Potential opportunity from the airplane sector : if the airplane manufacture raises the price of its good this would lead to an increase in demand for her good. as they are substitute

Potential threat from the automobile sector: if automobile manufactures raises the price of its good this would lead to an decrease in demand for her good, as they are complementary goods.

Potential threat from the airplane sector: if airplane manufactures lowers the price of its good this would lead to an decrease in demand for her good, as they are substitute.

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