Question

Q1. What effect will each of the following have on the demand for small automobiles such as the
Mini Cooper and Smart car? Write your answer in the second column of the table!
Case (Event) Answer (effect on demand of small
automobiles)
a. Small automobiles become more fashionable.
b. The price of large automobiles rises (with the
price of small autos remaining the same).
c. Income declines and small autos are an
inferior good.
d. Consumers anticipate that the price of small
autos will greatly decline in the near future.
e. The price of gasoline
substantially drops.

Answer 1

Solution:

The effect of different events on the demand for small automobiles are illustrated in the below table:

S.No	Events	Answer (Effect on Demand of small automobiles)
a)	Small Automobiles become more fashionable	The demand for small automobiles will increase. Reason: Once the small automobiles become more fashionable, the consumers will start preferring the fashionable item and hence the demand for small autos increases.
b)	The price of large automobiles rises (with the price of small autos remaining the same	The demand for small automobiles will increase. Reason: When the price of a good (in this case, the larger automobiles) increases their demand will decrease. While the price of small autos remain constant with reference to the larger autos, there will be a shift in demand from larger automobiles to smaller automobiles. Hence there will be an increase in demand for smaller autos
c)	Income declines and small autos are an inferior good	The demand for small automobiles will increase. Reason: When there is a decline in income of the consumers, then the consumers will start preferring low priced products. In such a scenario, the demand for small autos will increase since they are low priced because they are an inferior good when compared with larger cars.
d)	Consumers anticipate that the price of small autos will greatly decline in the near future	The demand for small automobiles will increase. Reason: When the consumers aniticipate that the price of small autos are going to decrease in the near future, they will start using their existing small autos more frequently. This is because they believe that they can buy new small autos at reduced price in the future. Hence due to the increased use of small autos in the current scenario, will increase the demand for small autos.
e)	The price of gasoline substantially drops	The demand for small automobiles will decrease. Reason: The price of gasoline decrease will enable the consumers to buy larger cars instead of small automobiles. Fuel expenses in larger cars will reduce substantially which otherwise would have increased their fuel costs. Therefore the consumers will start opting for larger cars and hence the demand for small autos will decrease.